Between the lines: Yachties on a tax cruise but investors steered away

By JIM EAGLES

The Government has decided to give special tax treatment to the crews of superyachts visiting New Zealand.

Why won't it do the same for other foreigners whose presence might benefit the country even more?

The Minister for the America's Cup, Trevor Mallard, yesterday announced that superyacht crews will be exempted from paying income tax while they are in New Zealand.

That makes absolute sense. If the tax laws had been rigidly applied it would merely have succeeded in driving the yachts away.

As a result, New Zealand would have missed out on millions of dollars of income in yacht refits, provisioning and other spending.

Very sensibly, the Government will change the tax law and exempt the crews with effect from yesterday. What a pity it does not take the same pragmatic attitude to other parts of the tax system.

For instance, the McLeod Tax Review suggested that any individual's tax liability should be capped at $1 million a year.

The immediate revenue loss would have been minimal since few New Zealanders earn the $2.5 million a year required to reach that level and even fewer actually pay their tax in this country.

But the gains could have been significant. A tax cap would encourage wealthy New Zealanders who go overseas for tax reasons to stay put, and would provide a powerful incentive for rich foreigners to settle here.

The result would not only be a higher tax take but also the presence in this country of a bevy of successful global entrepreneurs, which we badly need.

But Finance Minister Michael Cullen has rejected the idea as "inequitable".

Really? It's hard to see why it is equitable to change the rules to allow yacht crews to stay here tax-free but inequitable to change the rules to allow rich people to come here and pay $1 million a year in tax.

The McLeod review also recommended introducing a special tax rate of 18 per cent for new foreign direct investment.

The aim was to overcome the disincentive to investors of our corporate tax rate being one of the highest in this part of the world.

Since most international firms have a fair degree of choice over where they pay their tax, and most pay little in high-tax countries such as New Zealand, the immediate revenue loss should again be minimal.

But a competitive tax rate might persuade overseas investors to look more favourably on projects in this country and encourage foreign companies already in New Zealand to pay more tax here.

It would represent a step towards reversing the decline in foreign investment shown in the latest report of the Overseas Investment Commission.

But Cullen says his advisers believe the idea is unworkable because it would be "impossible over the longer term to maintain the boundary between new and existing investment".

It's hard to see why it is workable to allow the foreign crews of superyachts to stay here tax-free for as long as they wish, but not workable to offer a reduced tax rate for overseas investors who put their money into new processing plants.

Of course, the issues involved in both the McLeod proposals are complex, but the potential benefits to the country could be huge.

Unfortunately, the Government seems less interested in changing the rules to attract wealthy people and their investments than it is in attracting their yachts.