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Key takes middle road in whacking residential investors

Tuesday 9th February 2010

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There will be no land tax and no tax on imputed rental property income, Prime Minister John Key announced in his scene-setting speech kicking off the parliamentary year, this afternoon.  

While Key spoke more about what taxes wouldn't be applied than those that would, it appears removal of depreciation on buildings and ring-fencing of losses from residential rental property investments are still on the cards. 

"We will ... be making changes to the way property is taxed, which will result in increased government revenue and more fairness for taxpayers. These changes will be announced in the Budget."

Removing depreciation allowances would advance the Crown's revenue flows by about $1.3 billion a year, last month's Tax Working Group report estimated.

An increase in GST from the current 12.5% rate to "no more than 15%" is also under consideration for announcement in the May 20 Budget, but only if accompanied by personal tax cuts and welfare benefit adjustments that make such an increase fair to low income earners.

While the government will make no changes to the Working for Families income top-up scheme for low to middle income families, Key is signalling a crackdown on high income earners exploiting company, trust and other tax minimisation structures to qualify for WfF entitlements.

Responding specifically to the TWG's proposals, Key said "we will not be developing any proposals for a land tax, a comprehensive capital gains tax, or a risk-free return method (RFRM) for tax residential investment properties".

While a land tax was attractive to economists, it was "effectively a lump-sum tax on people who own land at the time the tax is introduced, would only fall on people who hold their wealth in one particular form, and would create cashflow problems for many landowners, especially those on lower incomes".

"An RFRM is another tax that, while having some conceptual appeal, would also create cashflow problems for taxpayers," Key said. "A property owner could have a very sizeable tax bill each year under an RFRM, but little or no ability to pay it, except by putting up rents. These new taxes are therefore off the table."

With respect to GST, Key said "the government would not embark on a policy of increasing GST unless it would benefit the New Zealand economy in the long term and unless it saw the vast bulk of New Zealanders better off".

On Working for Families, Key said tinkering with the system would "run counter to the government's desire to reduce people's effective marginal tax rates", which can rise well above statutory rates if WfF recipients increase their paid incomes.

"Our main concern with WfF is the possibility that people can earn a lot of income, but do so in a way that means they are still eligible for WfF payments.

"That is contrary to the intent of the policy, which is aimed at supporting genuine low to middle income earners.  The government is looking at how to make WfF fairer in this regard."

The TWG identified a sharp drop in the number of people declaring themselves millionaires in their tax returns after WfF came into force, and a suspicious clustering thereafter of incomes around the $60,000 a year mark, where WfF entitlements are available.

"Most of the options discussed in the Tax Working Group still remain on the table," Key said.

In a wide-ranging speech, which he was unable to read in full in Parliament owing to time restrictions, Key earmarked science and innovation policy as one of the few areas that could expect new significant funding in the Budget, " with a focus on boosting business research and science capability".

He also announced the intention to create a new Conservation Fund, which would take a portion of the royalties earned from mining on conservation lands to fund "special conservation projects" so that an increase in mining would lead automatically to an increase in conservation funding.

Key also foreshadowed the release in the next few days of the government's response to the Capital Markets Development Taskforce, with many of the issues raised covered by the review of the Securities Act, already under way.

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