Tax Review: Who wants to be Minister of Finance?
Business Tax Review: Who wants to be Minister of Finance?
Today the Ministers of Finance and Revenue asked New Zealand to play at the cabinet table. The long awaited business tax review provides a menu of options and asks for business’s view of which is best.
KPMG tax partner, John Cantin, observed: “The menu does not deliver on the bold moves the review was intended to unearth. The document is dull and boring and seems overly constrained by attention to the fiscal costs. That should be a second phase consideration: it would be better to have a vision of what is really possible and then to work out whether New Zealand can afford it or not.
“The options range from a modest company tax-rate change, to using the tax system to deliver grants for research and development, export market activities and skills development, to some tax-base and compliance changes,” he said.
The company tax-rate change, although costed at a significant $540 million, simply aligns the company tax rate with Australia’s. “This leaves Australia room to move ahead once more.”
Mr Cantin noted: “Unfortunately, the company rate discussion ducks the question of the impact on personal tax rates. The discussion document acknowledges a company tax rate will impact on the personal tax base. However, the document has no commitment to make sure personal tax rates are reviewed or the right signals are provided to business.”
For most New Zealand-owned and -operated businesses, a trust or partnership operates their business. They will not benefit from a company tax-rate change.
Instead, the gap between a 30% company tax rate and the top marginal (39%) and trust (33%) tax rates will provide a clear signal to operate a business through a company. There is no indication that Inland Revenue will accept that signal and allow business to operate that way. In fact, business is left with the message that Inland Revenue will continue to look with distrust on any entity which does not provide tax at the 39% rate.
It is important that the impact on personal tax rates and other entities, including the effect of the proposed savings tax rules, is clearly understood and accepted if the company tax rate reduction is to provide the benefits the Government expects. KPMG believes it is disappointing that the document does not provide a clear view on this.
Building losses and black hole expenditure, which the document proposes as an option, are items which taxpayers should be entitled to deduct in any case. On the other hand the depreciation proposals provide some further tinkering to the depreciation regime.
“One welcome omission is the possibility of a payroll tax. A payroll tax would increase the cost of employing staff which would be detrimental to an economy increasingly reliant on service industries,” said Mr Cantin.
The discussion document also considers the option of tax credits for research and development, export marketing activities and skills development. These are best seen as proposals for broadly targeted Government grants delivered through the tax system rather than tax-base changes. These are most likely to be attractive to service industry businesses.
Given the lack of compelling options presented, KPMG believes businesses must seize the opportunity to tell Government what will really work.