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English expands on tax package parameters

Wednesday 10th February 2010

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Tax threshold changes, a shift to a "bright line" test for the tax treatment of capital gains, and the ring-fencing of rental property losses are all on the table as possible parts of the government's Budget tax package, Finance Minister Bill English said today.

Speaking to reporters after a select committee hearing on last December's Budget Policy Statement, English confirmed Prime Minister John Key's estimate of a $3 billion to $4 billion tax package but said he was "not signalling today any particular conclusion the government might come to". 

However, the government did expect to gain more tax from the property sector as part of a package of measures intended to shift long term behaviour away from consumption and investment in unproductive assets.

"For the last 10 years, the export and investment side of the economy hasn't done well," English said.  "We need to rebuild it to have sustainable jobs and higher incomes.  We want to reduce the tax on those things that are going to help us develop better balance in the economy, which can be paid for by things like consumption, where we've had a bit of a binge."

While a comprehensive capital gains tax had been ruled out, "on the way through there are any number of less significant issues where there may be an opportunity to improve the transparency and fairness of the system."

Among suggestions is the replacement of the current capital gains tax test, based on judging the taxpayer's "intention" in selling a capital asset, to a "bright line" test setting firm, objective rules for taxing capital gains.  Previous official advice has suggested bright-line tests are difficult to formulate and administer.

"The government hasn't had advice from officials on any of these issues yet.  If the advice hasn't changed, we'll get the same advice," English said.

Among other issues raised by last month's Tax Working Group was the growing number of middle income earners pushing up into the higher tax thresholds of 33% for incomes above $48,000 and 38% for incomes above 70,000.

One way to relieve this so-called "fiscal drag" is to change the income at which higher tax rates apply, rather than changing the tax rates themselves.

"The package will include looking at (income tax) threshold changes," said English. "I can't guarantee there will be threshold changes but we haven't put them off the table."

However, one TWG proposal understood not to be finding favour is inflation-indexing income tax thresholds to permanently end fiscal drag. Fiscal drag is an important source of revenue growth for governments seeking to deal with ballooning Budget deficits, which English told the finance and expenditure select committee were still six years away from returning to surplus.

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