Tax reform proposal ludicrous - lobby group
Landlord representative Andrew King dubbed a financial sector plan to "inflation-proof" the way long-term savings are taxed a "ludicrous" move that would hit rental property owners.
The Financial Services Council, which represents fund managers, says New Zealand overtaxes retired New Zealanders living off interest income, as well as people saving for retirement.
And it is calling for tax on interest income from investments to be calculated after inflation is deducted. It argues that taxing the inflation portion of the return amounts to taxing investors' capital.
But business borrowers like leveraged property investors and multinational companies which fund their New Zealand operations using debt, would pay for the proposal, something FSC chief executive Peter Neilson acknowledges will spark opposition from many interest groups.
A paper on the proposal prepared for the FSC by Robin Oliver, former deputy commissioner for policy at the Inland Revenue, spelt out the mechanism by which business borrowers would fund the proposal. "If the inflation component of term deposit interest income is not taxed, then the inflation component of interest expenses should similarly not be deductible," Oliver wrote.
That would have far-reaching economic consequences, Oliver said. "Households would receive a substantial increase in after-tax income."
Based on official estimates, this would be around $400 million a year.
The FSC forecasts the average wage earner saving in KiwiSaver would receive more than $100,000 extra in retirement.
But reducing the tax deductions for business borrowers and landlords would "increase, not decrease overall government tax revenue by something in the order of $500m per annum."
Oliver acknowledged: "Non-financial business would have a higher tax cost as a result of restrictions on interest deductions," and added: "There would be a reduced incentive in general to borrow funds. For example, a person buying a rental property under current rules receives a deduction for interest payments that merely reflect the declining value of the loan while receiving a tax-free capital gain return on the rental property. This asymmetry would be removed."
And: "Foreign investors into New Zealand would be encouraged to equity fund rather than debt-fund their New Zealand investments and re-allocate costs offshore."
Neilson believes many households would support the plan, but King, executive officer of the New Zealand Property Investors Federation, said the proposal was an "incredible" plan to impose tax on one group of investors for the benefit of another.
"Effectively they want to reduce their own tax by increasing others' tax," King said.