Brakes go on tax rule changes

Vance Arkinstall, chief executive of the Investment Savings and Insurance Association

Two tax changes due on Wednesday are among a clutch of reforms being delayed as the Government struggles with a complex tax bill.

While personal tax cuts get the headlines, Revenue Minister Peter Dunne has announced that some amendments will be delayed.

National inherited the Taxation (International Taxation, Life Insurance and Remedial Matters) Bill, and says it will not become law before August at the earliest.

Two of the more contentious changes are a revamp of the tax on life insurance - which insurers say will push up premiums by as much as 25 per cent - and the "associated persons provisions", which mean people or groups associated with property developers could get hit with taxes they didn't expect.

Various groups are using the delay to ask the Government to rethink the changes.

Vance Arkinstall, chief executive of the Investment Savings and Insurance Association, said there was so much uncertainty around the complicated changes being proposed for life insurance that even the Society of Actuaries was unclear on how they would work.

There was a risk of the legislation being rushed. The industry wanted the changes delayed until 2011 because of the effect on the price of an essential financial service.

"Almost certainly premiums for risk-based life insurance will increase anywhere in the range of 15 to 25 per cent."

However the industry did concede that the present tax regime dated back to the days when the policies were savings products, he said.

Now they were mostly risk products, and Inland Revenue had said the shareholders in insurance companies needed to be more accurately taxed on the profits they earned from that business.

Meanwhile the Institute of Chartered Accountants is worried about changes to the associated persons provisions, which capture people and groups associated with those who deal in property.

The rules date from the 1970s and were designed to prevent property dealers or developers avoiding tax by putting everything in their spouses' names, for example.

The institute's director of tax, Craig Macalister, said taxpayers could "drive a bus" through the rules and the reforms were aimed at plugging the gaps.

However they went too far. "I call it 'Star Trekking', they're just floating off into the wild blue yonder on some of this stuff."

While some of it had been tidied up, as it stood the bill made no distinction between someone who deliberately tried to avoid tax and someone who got caught up.

For example, the ex-wife of a property dealer could be taxed if she sold a house she received in the divorce settlement within 10 years.

The institute was concerned about what other unintended consequences the law may have.

* While some tax reforms have stalled, Wednesday marks the start of other significant changes.

In a modification of KiwiSaver workers can drop contribution from 4 per cent to 2 per cent. Employers' contributions rise from 1 per cent to 2 per cent, but will go no higher. There will no longer be a government tax credit to employers and no fee subsidy for savers' accounts.

Small and medium businesses should benefit from new rules covering provisional tax, with a smaller amount payable early.


STALLED LEGISLATION

* Reform of tax on life insurance.
* Tightening up of 'associated persons' rules preventing tax dodging on property deals.
* Payroll giving regime, enabling employees to donate to charities direct.
* Tax exemptions for New Zealand companies offshore (controlled foreign companies, or CFCs).