Holding on to talent is the biggest challenge

Rob Fisher

Simpson Grierson chairman Rob Fisher believes that the war on human capital is one of the major challenges facing New Zealand.

Fisher has watched bright young lawyers head overseas - just like they've always done - once they've packed two or three years of work experience under their belts.

But it's harder now to get them to come back. It's not just the higher offshore pay rates or the more challenging work on offer that troubles Fisher.

"Taxation is a part of incentivising young people to stay here ... We're training up young lawyers, and just when they become useful, they're off overseas.

"If we gear our system to redistribute wealth and punish risk it will be harder to attract back the people we want."

Chief executives have plenty of tales to tell about their employees - or their children - who have decided to forge their careers offshore rather than return home.

They are disappointed that the Government's taxation review does nothing to address human capital - even though Finance Minister Michael Cullen implicitly acknowledges that personal income taxes will have to be considered if a 30 cent company tax is introduced.

National Leader Don Brash has made political capital out of the average 600 New Zealanders a week who have joined the Australian exodus in recent months.

So far, there's no open evidence of the Government's willingness to slash the top personal tax rates or to significantly shift upwards the $60,000 threshold at which the top 39 cent rate kicks in as a major incentive to persuade young Kiwis to come back.

All that's on offer are policies to allow New Zealanders who have been out of New Zealand for at least 10 years and then take up permanent residence again to qualify for a tax holiday on most overseas income earned up to 48 months after their arrival. Just two types of income do not qualify for the tax holiday: wages or salary earned from overseas employment during the 48-month period and business income relating to services performed offshore in the same period.

On paper that seems like an attractive option. But tax experts say the move is paltry when compared to Singapore's war on capital and talent which extends not only to considerably lower tax rates across the board but also to specific tax incentives around foreign companies, goods traders and manufacturers, start-ups, tourism promotions and ventures abroad.

Nearer to home, Australia has recently introduced a permanent tax exemption for overseas income for migrants who are only temporary residents of Australia. Australia has also largely taken non-residents out of their capital gains taxes.

In a recent visit to New Zealand, Singapore Prime Minister Lee Hsien Loong stipulated that his country was on the hunt for talented NZ companies to relocate to Singapore to form hubs for their Asian activities.

But what Australia is doing is clearly more relevant: "Not only can we compete with them but we need to," said a leading tax expert.

In last year's pre-election Mood of the Boardroom survey, 65 per cent of chief executives said they wanted the company tax rate to be less than Australia's 30 cent rate; 28 per cent nominated a 25 cent rate as their preferred option.

Michael Cullen says a "little reality check is needed".

"We are proposing to match Australia's corporate rate without burdening business with all the other onerous taxes Australians offer - namely a capital gains tax, stamp duties, payroll taxes and compulsory super-annuation. So if adopted, that must make us more competitive with Australia."

The message appears to be sinking in: 46 per cent of chief executives this year say that a comparable corporate rate with Australia would do fine. The number wanting a noticeably lower rate has dropped from 65 per cent to 50 per cent.

Thirty-five per cent believe the differential between the corporate rate and the top personal rate should not exceed 3 per cent.

Deloitte CEO Murray Jack believes that tax policy needs to be repositioned as part of a strategy to improve NZ's growth performance - particularly its international performance.

"It's time to move on from the dogma of level playing fields. Why not offer tax concessions to foreign businesses wanting to start up in NZ in key areas where we need investment to improve our competitiveness, such as R&D facilities, design centres, and software development capability?

"They don't pay us any tax now, so it's not as if we would be losing revenue, and we just might gain intellectual property and keep or attract smart people here."

ABN Amro chief executive Simon Allen says the quest for human capital is the major issue facing New Zealand.

On the company front, Allen notes, "We've missed the opportunity to bring tax rates down in the last five years - unlike our competitors - and now we're paying the price.

"You can't have a discussion on the corporate tax rate when the implications for personal tax rates are not on the table."

The Government calculates that a reduction in the company tax from 33 cents to 30 cents will cost $540 million on an annualised basis. If targeted tax credits are added - as advocated by the revenue minister - the cost will mount to between $800 million and $1 billion.

Shifting the personal taxation thresholds and cutting the top rate from 39 cents to 36 cents will quickly pump overall costs to the $2 billion mark.

A cut to 28 cents for the personal top rate and 25 cents for the corporate rate - as advocated by business lobby groups - is a step too far for the Government, which does not believe the dynamic efficiency gains from the move would offset initial tax flow losses.

Australian Treasurer Peter Costello has made an open pitch for talented New Zealanders to shift across to Australia as he lowers the personal tax burden for Australian taxpayers.

Air NZ chairman John Palmer - who is a member of the Australia New Zealand Leadership Forum - maintains that personal tax rates are fundamental.

But Fonterra chief executive Andrew Ferrier cautions that we should not get too focused on the Australian angle. "We seem to have an inferiority complex on our competitiveness in Australia.

"However, there is no need for that. The main thing for international competitiveness is to think in a market like the people who live in that market, not like New Zealanders"

Some chief executives believe that the finance minister will only agree to a significant cut in personal tax rates if compulsory superannuation is part of the policy mix. There is a strong view that compulsory superannuation is now inevitable - not just to underpin New Zealanders' retirement savings but also to provide a pool of savings for future investment.

Chief executives were open to the prospects of tax-trade offs. Unsurprisingly, given New Zealanders' love affair with property investment, 84 per cent were opposed to a comprehensive capital gains tax, but 29 per cent said they would support such a tax if there was also a meaningful reduction in other taxes.