Govt still mulling over drop in company tax rate

Photo / Kenny Rodger

The Government's hope of aligning the top personal, trust and company tax rates may not be achieved as it might be necessary to further reduce the company rate, Finance Minister Bill English said today.

The Government is considering raising GST and closing property tax deductions to fund tax cuts across the board in May's budget. Mr English today gave his clearest indication that the top rate would come down to 33 per cent.

The Tax Working Group recommended aligning the top rates and National has wanted to set them all on 30 cents, but Mr English said the need to match any company tax rate cut in Australia meant this might not be possible.

Based on signals from the Government one possible tax cut design could possibly look like this:

* Moving the top personal rate on income above $70,000 down to 33 per cent alongside the trust rate.

* Dropping the current rate on earnings between $48,000 and $70,000 to 31 per cent.

* Cutting the middle personal rate for earnings under $48,000 from 21 per cent to 19 per cent and the bottom rate for under $14,000 from 12.5 per cent to 10.5 per cent.

This would cost around $2.1 billion.

The Government has estimated it could raise up to $3.6b from lifting GST to 15 per cent and changes to property taxation.

How affordable the possible personal tax cuts outlined above are will depend on changes to the company tax rate and the compensation for those on benefits, super and Working for Families for the increase in prices.

A one percentage point cut to the company rate costs around $180 million and the Tax Working Group said the compensation could cost around $200m.

Mr English today said no decisions had been made but gave more indications about his thinking on the subject, telling a business audience that a key issue was working out whether the company rate should drop below the current 30 per cent.

"We are still considering this issue - mindful that our company tax rate needs to be competitive internationally," Mr English said.

Aligning the company, trust and top personal rates remained the Government's medium-term goal. But it was considering whether it was affordable and whether it fitted with other equity considerations.

"Our early advice is that aligning the trust and top personal tax rates is the most important issue, because they are both final taxes. By contrast, company tax is an interim payment until a taxpayer's own personal tax rate applies."

Mr English said complete tax rate alignment may not be necessary to eliminate many of the integrity problems with the current tax system.

"For example, substantial gains could be made by aligning the top personal rate with the trust rate, and having a company tax rate not too far below this. Second, complete alignment may not be sustainable over time," Mr English said.

"Around the world, company tax rates are generally falling and, at 30 per cent, New Zealand's company tax rate is on the high side compared with many other developed countries.

"Remaining competitive with other countries may be more important than alignment - if not now, then at some point in the future."

It was important that New Zealand's company rate did not move too far out of line with Australia.

"Currently, they are both at 30 per cent, but Australia is reviewing its own tax system and may consider dropping its company rate. We will watch events across the Tasman with a great deal of interest."

Mr English also confirmed the Government would retain the imputation system for taxing company dividends in its tax reform package later this year.

"The Government agrees with both the Tax Working Group and the Capital Markets Development Taskforce that the current imputation system is worthwhile. Therefore, it will be retained. Both New Zealand and Australia have this system and imputation plays an important role in our overall tax system."

- NZPA