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Crackdown on rental property loopholes and a higher GST tempt Key

Tuesday 19th January 2010

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Prime Minister John Key has given his strongest signal yet that the massive tax loophole around residential rental property investment is a prime target for reform, a day before the Victoria University Tax Working Group releases its final report.

Speaking at the first post-Cabinet press conference of 2010, Key singled out the fact that not only are rental property investors, as a group, paying no tax on their $200 billion of assets, they are actually costing the taxpayer around $500 million a year in refunds created by write-offs against other income that are currently legitimate.

"In terms of the area of property, it's certainly identified, but you wouldn't to jump to conclusions about possible responses," Key said, citing as options capital gains taxes, land taxes, and an end to depreciation on housing assets because they historically rise rather than fall in value.  The only action definitively ruled out is a capital gains tax on the sale of the family home.

Key was also more definite than in the past about the potential for a higher rate of GST to be part of the tax reform mix, which is expected to be a centrepiece of the 2010 Budget.

Asked whether he would rule out an increase from the current 12.5%, Key said: "No", and ended the press conference.

A major complicating issue is the Australian review of the federal tax system, known as the Henry Review, which may recommend a lower Australian corporate tax rate, and is also considering whether to retain the dividend imputation system which New Zealand also operates.  Changes to either would almost certainly have impacts on the relative attraction of Australia versus New Zealand as a place to invest.

However, whether the Henry Review will be completed early enough in 2010 to inform a May Budget in New Zealand remains unclear.

"Competitiveness with Australia is important, especially the company rate," said Key.  "Hypothetically, if New Zealand moved before Australia, it would give us some competitive advantage."

 The main thrust of tax reform was to make the system fairer, more robust, and sustainable than it is at present, he said.  The Government has previously acknowledged that changes to the rate of GST would require offsetting tax adjustments to ensure it was fair to people on low and average incomes, who spend a greater proportion of their income on consumption than high income earners.

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