Brian Fallow on the economy
Brian Fallow is the Herald's Economics Editor

Labour plan worries tax experts

By Brian Fallow

Revenue Minister Peter Dunne said Labour had learned nothing from the past decade. Photo / Neil MacKenzie
Revenue Minister Peter Dunne said Labour had learned nothing from the past decade. Photo / Neil MacKenzie

Tax practitioners have not leaped to their feet to applaud the Labour Party's tax policy package.

Reintroducing the top personal tax rate of 39 per cent, albeit at a much higher threshold of $150,000, is seen as creating both an incentive and an opportunity for tax planning - to exploit the wedge between it and the trust rate of 33 per cent and the company rate of 28 per cent - for relatively little additional revenue.

Revenue Minister Peter Dunne said Labour had learned nothing from the past decade. "Their 1999 top tax rate increase, which led to the explosion in trusts as tax avoidance vehicles, was the biggest single tax blunder of recent times."

Exempting the first $5000 of income from tax is seen as fiscally expensive - Labour estimates it will cost about $1 billion a year more than the new top rate will bring in - but not well targeted if the intention is to boost disposable incomes for the "battlers".

People on high incomes would benefit from it as well as those who needed it. The same could be said of exempting fresh fruit and vegetables from GST.

KPMG tax partner John Cantin said there were questions whether a measure should be targeted - which can create high effective marginal tax rates at the boundary of the target group - or made universal, which increases the cost.

PricewaterhouseCoopers chairman John Shewan said he was not opposed to a capital gains tax but all the exemptions would give rise to boundary issues.

"I'm still with the Inland Revenue view that the costs outweigh the benefits, because of all the carve-outs," he said.

"And the approach of valuing all assets on V-day is fantastic for firms like ours, but hugely complex."

Overall, the package was disappointing and at odds with the Tax Working Group's advice about aligning rates and moving away from the taxes which were most damaging to economic growth, Shewan said.

Deloitte tax partner Patrick McCalman said if it was a move to a broad base, low rate tax system that would be one thing. "But it is a move to a broad base, high rate one, which creates a lack of coherence in the

The proposed ring-fencing of losses from investment properties is seen as an ad hoc departure from normal tax principles.

Cantin said it had been tried in the 1980s and was difficult to design in a way that made it effective.

In Australia capital gains are part of the income tax system but it sounded as if the New Zealand version would be a separate tax, because of its flat 15 per cent rate, he said.

"So we wind up with a separate set of returns to be filed. Can the IRD's systems cope with it? And how will the two taxes relate to one another?

"For example, can ring-fenced losses [from property investments] be used to offset capital gains tax when those properties are sold? You would expect so."

To narrow the gap between the cost of tax cuts and the revenue yield of the capital gains tax, which takes years to build up, Labour is relying in part on increased revenue from anti-avoidance measures, building to $300 million a year.

It says that is a "target based on one-third of a per cent of tax revenue".

Shewan dismisses the figure.

"It is just a stab in the dark. That fruit has been picked heavily," he said, referring to the increased funding IRD received in last year's Budget to step up its compliance activities, which the Government is already counting on to deliver around $200 million a year in additional revenue.

McCalman sees a risk in targeting family trusts in the name of "anti-avoidance" - practices that have been seen as legitimate will be disallowed.

- NZ Herald

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