KEY POINTS:
Consistent with recent Budgets, the 2007 one deals with a multitude of tax announcements.
From a business standpoint, the highlights are the drop in the corporate tax rate, the introduction of research and development tax credits and hints as to the direction of international tax reform. Budget 2007 is a business tax budget.
For individuals, the immediate pickings are a little slim, with the Government simply extending the tax savings to join and contribute to KiwiSaver.
Looking forward, however, the countdown to Budget 2008 (election year) begins, with the extent and nature of personal tax rate reductions to be set out then. Budget 2008 will be the people's tax Budget.
The 3 percentage-point reduction in the company tax rate will not come as a surprise for business but will be well received. It goes some way to driving a competitive situation with Australia (which also has a 30 per cent rate).
Businesses not benefiting from the rate reduction are those such as partnerships and sole traders that do not operate through companies.
However, on Michael Cullen's favourite topic - savings - tax rates have been addressed, with an announcement that the rate applying to portfolio investment entities will also drop to 30 per cent to ensure KiwiSaver remains as attractive as possible. As will the tax rate applying to widely held unit trusts, superannuation funds and life insurance products.
What's missing is the bigger picture - what's the plan, the ultimate destination, regarding tax-rate reduction?
R&D, the second major initiative of the Business Tax Review to see the light of day, will have effect from the 2008/2009 income year and will enable taxpayers to directly fund such expenditure out of the tax net.
It will be well received by businesses. It seems a winner relative to Australia. It has double the credits available across the Tasman (15 per cent compared with 7.5 per cent), has minimal caps, offers cash back when a credit is of minimal use and doesn't claw back distributions to shareholders.
An initiative of the business tax review which does not emerge relates to black-hole expenditure and this will be seen as a disappointment.
Budget 2007 clarifies the thrust proposed in relation to the international tax reforms that were the subject of consultation this year.
What will be of considerable concern to corporates is:
* The removal of the grey list for non-portfolio investments.
* The introduction of radical interest allocation rules for direct investment overseas.
* No clear mention as to reform on non-resident withholding tax relief.
* The proposition of base company rules, even if more limited than initially proposed.
* The repeal of the conduit regime and the proposed extension in the definition of debt to include non-interest-bearing debt and preference shares.
It's not clear as yet whether sense has prevailed overall in this space. For corporates with extensive international operations, this policy debate can be more important than a drop in their tax rate.
Personal tax rate reductions in Australia's Budget last week resulted in continued growth in the personal income tax wedge between Australia and New Zealand.
The wedge varies depending on the relevant income levels but is material in absolute and relative terms. But it's hard to ignore as it's anywhere from $1500 to $3500.
Budget 2008 has a lot to live up to.
In lieu of personal tax cuts, people are being enticed to join KiwiSaver on July 1 through the introduction of a new round of tax incentives.
Thankfully, Budget 2007 did not succumb to the pressure to use the tax system in a knee-jerk fashion to curb New Zealand's attraction to investing in rental properties. Rather Inland Revenue will receive additional funding of $14.6 million to police existing rules, which is the correct approach from a tax standpoint.
Budget 2007 also announces another round of consultation and analysis in terms of compliance costs but no real initiatives - great.
