'Unfair' tax system due for change

Top personal tax rates could fall but homeowners may pay higher rates under the latest proposals from the Government's advisory group on changes to the tax system.

In its final deliberations before reporting to the Government, the Tax Working Group says the current system is "not sustainable" and there are "major growth, fairness, and integrity issues".

The group's latest report says it has considered a range of scenarios including a mix of tax cuts and base-broadening options such as land taxes, changes to the taxation of investment property, and raising GST.

The working group will stage a public conference in Wellington on Monday, but has already agreed that the tax base needed to be broadened.

Among the proposals is a cut in the top personal tax rate from 38c in the dollar to align it with the corporate rate, currently 30c, combined with changes to property taxes.

That option is supported in a paper by the Treasury, which says that distortions in the system by people trying to avoid paying the top rate could be ended by either cutting the rate, or raising the income threshold, or legislating to close loopholes.

The Inland Revenue Department estimates the Government misses out on $300 million a year because wage earners divert income into trust accounts or use tax shelters.

This year the Government lowered the top rate from 39c to 38c on income over $70,000, but it has placed proposals to lower taxes further on hold.

Though Finance Minister Bill English and Prime Minister John Key have voiced doubts about imposing a capital gains tax on property or raising GST, both options remain in the working group's final report. So does a proposal to ring-fence losses on rental properties so that taxpayers cannot offset them against their wage or salary income.

A Reserve Bank submission to the group makes a series of potentially controversial proposals including increasing rates to drive down house prices and lower the gains to be made from investing in property.

The bank says a capital gains tax is an obvious solution but if "administrative and other difficulties make this approach unattractive" options include cutting taxes on investments such as shares or cash deposits.

The working group is also considering a proposal that would create KiwiSaver-style tax havens for investors, to help wean Kiwis off property. Under the proposal, an employee would be able to put a portion of earnings into the schemes without paying any tax on the income.

A spokesman for Mr English said the Government had made no decisions about the mix on offer. But Mr English had made it clear he would take convincing that either raising GST or introducing a capital gains tax on property was a good idea.

There was no plan to raise extra tax revenue overall. "It's not about raising taxes or cutting taxes."

Labour's finance spokesman, David Cunliffe, said Labour agreed the current tax system was unfair. The party was opposed to a capital gains tax on a first home but would enter in "good faith" discussions on any other proposals.

TAXING TIMES: THE OPTIONS

* Cut top personal tax rate in line with corporate and trust tax rates

* Cut taxes on capital income and remove ability to offset wage and salary income

* Close tax shelter loopholes

* Raise property taxes and/or GST

* Adjust tax rates on interest payments for inflation

* Increase rates to push down property prices and ring-fence losses on rental properties

* Make income on capital investments tax-free until money is withdrawn