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No Tax Cuts This Year

17 May 2006

No Tax Cuts This Year

Ahead of tomorrow’s Budget, the Government introduced legislation today confirming no change to the tax rates for 2007.

The Government’s confirmation of no tax cuts for 2007 is not a surprise and was signalled by the Prime Minister and the Minister of Finance, says Ernst & Young tax partner Geof Nightingale, however, the approach is in stark contrast to the significant reductions in personal taxes by Australia announced in its budget last week.

Also contained in the Bill is the detail on the radical changes to the taxation of investment and savings due to come into effect on 1 April 2007 in conjunction with KiwiSaver.

Mr Nightingale says the Government continues to be vigilant in protecting its tax base where it thinks there are holes. The Bill proposes measures to stop companies claiming foreign tax losses in New Zealand, reducing withholding taxes on dividends to foreign owners and to stop individuals from using salary sacrifice into superannuation savings to reduce personal taxes.

“In a sign that the battle with the minority of fraudulent taxpayers is heating up, Inland Revenue’s already broad powers of entry to premises and inspection of documents will be expanded to allow it seize original documents and retain them for purposes such as forensic examination. Inland Revenue will also be given the right to jump straight to a tax assessment and make tax collections without the normal dispute process if it has reasonable grounds to suspect fraud. Inland Revenue will need to use these new powers with great care and make sure that it does not apply them to ordinary honest taxpayers.

“On the other hand the Bill contains a number of taxpayer friendly measures,” says Mr Nightingale.

“It’s good to see some certainty proposed for the tax treatment of geothermal wells. This will remove a potential discouragement to businesses investing geothermal power generation.

“Barriers to attracting talented Australian workers to New Zealand will be further lowered by the proposal to exempt them from the taxing embrace of New Zealand’s foreign investment fund rules on their Australian superannuation schemes.

“Proposals to expand the zero-rating of financial services in the area of actively managed equity investments will be welcomed by the industry as it will remove another niggling GST cascade.”

The Bill highlights the need for further tax penalty and interest reform, according to Mr Nightingale.

“The Bill contains a large number of fix-ups arising from recent tax law changes and the rewrite of the income tax act. While it’s great to see the Government identifying and correcting these errors it brings home how complex tax law is these days. If the Government can make mistakes due to complexity when it writes the law, then it’s understandable that taxpayers can get it wrong from time to time when following the law. However, the big difference is that when taxpayers get it wrong they get penalised and charged high rates of interest.”


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