Mood of the Boardroom: High marks for English assignment

Bill English's tax package struck the right note with business leaders. Photo / Mark Mitchell

Tax cuts announced in the May Budget as part of the Government's commitment to "make the tax system fairer" have drawn overwhelming support from the country's chief executives.

The New Zealand Herald Mood of the Boardroom survey, which canvassed 95 CEOs, reveals solid backing for cuts in personal and company tax and wide support for the broader principle of tax reform announced in the Budget by Finance Minister Bill English.

CEOs generally support the measures to fund the cuts, such as the hike in GST, removal of building depreciation deductibility, tighter tax treatment for qualifying companies and changes to the thin capitalisation rules that allowed foreign companies to avoid paying the true rate of tax on their New Zealand subsidiaries.

Seven out of 10 CEOs say their companies will still be better off with the lower company tax rate after allowing for the depreciation and thin-capitalisation changes.

Deloitte New Zealand CEO Murray Jack said New Zealand had come out of the global financial crisis better than others and the Government had played a role in that.

"Its first Budget response last year struck the right balance - enough stimulus without excessive borrowing. This year's Budget lays some important foundations that should encourage work, savings and productivity growth," he said.

"It's probably the best that could be achieved given continued constraints of current spending levels and the weak economic recovery."

Foodstuffs New Zealand managing director Tony Carter, reflecting the survey's cast-iron backing for the tax changes, said the Budget underscored the Government's intention to tax spending rather than income.

"The Budget signalled a clear change in approach. Up until then, while there had been a fair bit of talk, there was relatively little that the Government had implemented. The Budget changed that."

CEOs' responses to the survey reveal just how popular the tax changes are. More than four out of five support the cuts in company and personal tax rates but just one in three thinks the country can afford to reduce personal and trust tax rates to the company rate. Most, however, want the trust rate aligned to the top personal tax rate.

Overall, the cut in the company rate to 28 per cent - now two percentage points below Australia's - is the winner among CEOs and business generally. Nearly 60 per cent of small and medium-sized businesses polled in the Mood of the Boardroom survey say New Zealand's company tax rate should always be lower than Australia's.

BusinessNZ chief executive Phil O'Reilly said there was no question lower company tax was a winner with business.

"It is heroic talk that businesses are not interested in the tax rate. Of course they are," he said.

"My message from companies is that we do not need a 10c tax rate but what we do want is to be comfortably ahead of Australia. We have evidence that when the Lange Government reformed tax, more tax was paid."

Most CEOs are happy the Government did not take up the suggestions of the Victoria University Tax Working Group to impose radical taxes such as those on capital gains, land or a risk-free rate of return on residential property.

These were floated in late 2009 but ruled out by Prime Minister John Key in February, three months before the Budget.

CEOs have few problems with the Government's approach to fund the tax cuts. Four out of five survey respondents support the increase in GST and nearly all say the Government is right to close down loopholes that allow higher earners to exploit the Working for Families tax credit.

Four out of five respondents support the axing of depreciation on residential buildings and tougher tax treatment for qualifying companies and three in five back the controversial removal of depreciation on commercial buildings - a measure that is costing many companies, not least The Warehouse, dearly.

Respondents are slightly less enthusiastic about the long-term impact of the Budget on economic growth but nearly four out of five rate it as "business friendly" and "making the tax system fairer". Both were guiding principles of the Budget.

A communications sector CEO, who asked not to be named, said: "The Budget gave some indication of a coherent path forward; maybe not as radical as some would like but not too bad."

The Mood of the Boardroom survey showed little support for retaining the top marginal tax rate at 38 per cent - nine out of 10 chief executives say it would not have been a good option to retain it - although BMW Group New Zealand managing director Mark Gilbert said the higher paid would probably not have objected.

"The tax package is unprecedented in such times," he said.

"I even think higher salary earners would have been happy to stay at a higher level, and probably they could have hit the "Paul Reynolds sector" with a higher income tax rate - but not complaining!"

Chief executives are neutral on whether there should be significant tax measures in next year's Budget to help achieve long-term growth and prosperity.

RATING THE BUDGET
Solid foundation for future growth 3.63/5
Business friendly 3.80/5
Made the tax system fairer 3.92/5