Why wait for the Aussies on tax? English

Wednesday 20th January 2010

New Zealand has an opportunity to cut company tax rates ahead of Australia, rather than waiting for the results of Canberra's fundamental tax system review, Finance Minister Bill English said.

His comments, in response to the Tax Working Group's final report, echoed hints thrown out by Prime Minister John Key yesterday that, with Australians going to the polls around the middle of the year, tax reform across the Tasman could be held up.

The main issue is that if Australia makes a deep cut to its corporate tax rate, from 30% now to perhaps 25% or lower, New Zealand would almost be forced to follow or risk a substantial loss of competitiveness with the country's largest trading partner.

The TWG report recommends aligning the top personal, trust and company rates at the same level, around 30%, but believes this principle should be sacrificed if Australian company tax rates are lowered substantially.

"We're certainly keeping an eye on the Australian working group," said English. "They're in an election year now so it's likely they'll be pretty cautious. We have the option now of considering whether we can come up with a better package sooner.

"Our ideal would be them following us, not us following them, so let's see if we can achieve that," he said.

Another key issue for New Zealand is whether Australia will retain its dividend imputation credit system to prevent double taxation of company dividends in the hands of shareholders. If not, New Zealand may also have to abandon that, although TWG members indicated today that Australia's review group is favouring retention, having earlier advocated abolition.

English signalled considerably less appetite for reform of the Working for Families income assistance scheme, which the TWG says needs a major overhaul along with the rest of the social welfare payments system because it exposes low and middle income families to very high rates of tax if the family's working income increases.

“We know from feedback from our members that Working for Families can act as a disincentive for workers to improve their income from employment,” said Business New Zealand's Phil O'Reilly. However, English said Working for Families was "a reasonably sound system."

"There are concerns about whether people are rorting it,"he said. "That's really a matter of tidying up the ways they can manipulate their taxable income. It's not so much about Working for Families...the tax system is where the weaknesses are."

The TWG said increasing numbers of taxpayers are able to claim WfF because income from sources such as trusts, fringe benefits, and tax treatment of residential property losses were not counted as income when calculating WfF entitlements.

English would not be drawn on which parts of the TWG report the government would act on, but indicated there were some areas where quick action was possible and that others could take a number of years.

(BusinessWire)

18:15:38

Businesswire.co.nz

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