Tax break on agenda for Cullen

By BRIAN FALLOW economics editor

The Government is considering changing tax rules to allow faster depreciation of plant and equipment as a spur to business investment.

Finance Minister Dr Michael Cullen told the Business Herald yesterday that he had asked Inland Revenue and Treasury officials to look at the issue of whether the present definition of economic life accurately reflected commercial reality.

A firm might need to replace equipment in order to remain competitive even though it was still working fine.

"I think we need to look at that because, particularly for much of the manufacturing sector, it may be more important for reinvestment than changes in the corporate rate," Cullen said.

Faster depreciation encourages investment by boosting returns early in the life of an asset.

Employers and Manufacturers Association (Northern) chief executive Alastair Thompson said manufacturers had argued for some time that, especially in areas of rapid technological change, the competitive life of a Machine was its useful life.

But although a change to a more realistic regime would therefore be welcome, it was no substitute for a lower company tax rate.

PricewaterhouseCoopers tax partner John Shewan said there were many examples among his firm's clients for which economic lives prescribed in the tax regulations did not equate with their useful lives in practice.

Designing a more realistic regime would be easier said than done, however.

"It will be quite a complex thing to change without opening up the system to rorts. You don't want people to elect the period over which it can be depreciated," Shewan said.

Cullen has not laid down a rigid timeframe for the officials to do the work.

"But it is not the sort of thing you would want hanging out there for too long. You could create a perverse effect, by people delaying decisions and waiting for changes in policy," he said.

The Government would still have to consider the fiscal implications of any recommendations.

"The amount of money involved at the front end could be quite significant."

Australia scrapped accelerated depreciation as part of an overhaul of its corporate tax regime that included moving to a lower company tax rate.