Summary of the Tax Working Groups (TWG) key recommendations issued 20 January 2010
21 JANUARY 2010
On 20 January the long awaited Tax Working Group’s report to Government was released. The key elements of the TWG recommendations are discussed below.
The main emphasis of the report appears to be to keep the tax take constant but to change the way in which the tax is collected so that it is more equitable.
The TWG recommendations suggest aligning the income tax rates of Companies, Trusts (including investment entities like PIEs) and individuals. This alignment has a tax cost as demonstrated in Table 2 of the TWG’s report:
Table 2: Fiscal costs of a selection of aligned and non-aligned systems
| Fiscal Cost in 2009/10 tax year (in $ billion) |
Aligned
30-30-30
$1.6 |
Aligned
27-27-27
$3.1
|
Aligned
25-25-25
$4.1 |
Non-aligned
30-30-25
$2.3 |
Non-aligned
33-33-27
$1.1 |
| Note: 30-30-30, for example, refers to the top personal, the trust and corporate tax rates in that order. All examples are written in this order. |
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In order to pay for that tax cost the TWG report has looked at various alternative tax raising activities, to broaden the tax base. These are summarised in Table 3 of the TWG’s report:
Table 3: Revenue-raising and base-broadening options
| Option |
Indicative annual fiscal revenue ($ billion in 2009/10 prices) |
Comment |
Raising GST
• to 15%
• to 17.5%
|
up to $1.9
up to $3.7 |
These estimates include automatic adjustments to benefit levels and superannuation payments. Substantially less revenue if there is other compensation for lower income groups. |
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|
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Extending the tax on capital gain income –
|
|
Estimates are based on full implementation, accrual basis and 2% rate of real property inflation. Lower revenue would be expected with a realisation-based tax, particularly during implementation. Revenue generated will also depend on the particular design of the CGT. |
| • Comprehensive |
up to $9.0 |
| • Excluding owner Occupied housing |
up to $4.5 |
| |
|
|
| Land Tax |
up to $2.3
(for 0.5% tax rate) |
Based on an assumed limited fall in land prices due to tax; revenue reduced by about $0.6bn if land tax is deductible against taxable income for businesses. |
| |
|
|
| RFRM on residential investment property* |
up to $0.7
(plus up to $0.15 in tax saved on loss offsets) |
Based on 6% (nominal) risk-free return; rental property only. This estimate excludes other residential investment property (e.g. second homes). |
| |
|
|
| Remove depreciation on buildings |
up to $1.3 |
Based on no loss offset if buildings sold at a loss; estimated cost of allowing loss offset = $300 to 600 million. |
| |
|
|
| Remove 20% depreciation loading on new assets (excl. buildings) |
up to $0.3 |
Lower revenue gain if loading reduced rather than eliminated. |
| |
|
|
| Changes to thin capitalisation rules |
up to $0.2 |
Changes thin cap ‘safe harbour’ from 75% to 60%. |
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An example of how the RFRM method might work is included from the TWG report, Box 4:
Box 4: Illustrations of a RFRM tax on property*
A person owns an investment property that is valued at $300,000 and is financed by a mortgage of $200,000
and equity of $100,000. Suppose this person’s marginal tax rate is 38% (because their salary income is
in excess of $70,000). Suppose also that the annual risk free return (i.e. the annual return from a risk free
asset), is 4%.
The RFRM taxable income applied to this investment property is:
$300,000 less $200,000 = $100,000 x 0.04 = $4,000.
The additional annual tax liability for this person (i.e. the tax payable over and above their personal income
tax liability) is $4,000 x 0.38 = $1,520.
Suppose two people, person A and person B, have equal shares in an investment property that is valued at
$500,000 and is financed by a mortgage of $300,000 and equity of $200,000. Suppose person A’s marginal
tax rate is 38% and person B’s marginal tax rate is 21%. Suppose also, as before, that the annual risk free
return is 4%.
The RFRM taxable income applied to this investment property is:
$500,000 less $300,000 = $200,000 x 0.04 = $8,000.
And suppose this taxable income is split equally between these two people. Then
Person A’s additional annual tax liability is $4,000 x 0.38 = $1,520.
Person B’s additional annual tax liability is $4,000 x 0.21 = $840.
A summary of the TWG’s recommendations follows (source NZ Herald):
The group's key recommendations are:
- The company, top personal and trust tax rates should be aligned to improve integrity. “At the very least the trustee rate, top personal tax rate and rates for savings vehicles need to be aligned,” says the report.
- The company tax rate needs to be competitive with other country’s rates, particularly that in Australia. Balancing this factor against the integrity benefits of a fully aligned system will guide choices between an aligned and non-aligned system.
- The top personal tax rates should be reduced as part of an alignment strategy and to help growth. A reduction in personal tax rates across-the-board could be achieved as part of a package to compensate for any increase in GST.
- Increasing GST to 15 per cent would have merit on efficiency grounds, but any increase in the GST rate would require compensation to those on lower incomes, and the current GST base should be maintained.
- ‘Base-broadening’ is required to address some existing biases, to improve the system's efficiency and sustainability, and is necessary to maintain revenue levels if corporate and personal tax rates are reduced.
The majority of the TWG support detailed consideration of taxing returns from capital invested in residential rental properties on the basis of a ‘risk-free rate of return’ method.
Most members of the group ‘support the introduction of a low-rate land tax as a means of funding other tax rate reductions’.
- The Group also suggests a number of ‘targeted options for base-broadening’ should be considered for introduction relatively quickly.
These include: removing the 20 per cent depreciation loading on plant and equipment; removing tax depreciation on buildings if evidence shows they do not depreciate in value and; changing the thin capitalisation rules for foreign-owned companies.
Closing Comments:
Although a Capital Gains Tax option has been discussed in the report, current political comment indicates that such a tax would not be acceptable and would therefore be ruled out.
Please further note that Government will be evaluating the report over the coming months and as a result of this process, may decide to incorporate new tax initiatives in its 2010 Budget which will be released later this year.
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