Significant inequities remain in our tax system
Significant inequities remain in our tax system say Institute of Chartered Accountants
Some classes of taxpayer may be rejoicing the tax cuts announced by the Finance Minister today, but the differential between the company and top personal tax rate, and a raft of changes made to prop up the 39% rate, have left our tax system littered with inequities and additional compliance and deadweight costs, says Craig Macalister, Tax Director at the Institute of Chartered Accountants.
Interestingly, for many taxpayers, the changes announced by the Government today reduce the tax they pay to approximately the same levels they would have paid had the top tax rate not been lifted from 33% to 39% in April 2000. For example, using current tax rate thresholds and capping the top rate at 33%, a taxpayer with a taxable income of $100,000 would have paid $27,870 in tax, whereas under the rate that will apply from 1 April 2011 the tax payable is $27,400.
"This begs the question of whether the pain and agony of the increase in the top marginal tax rate was necessary or desirable in the first instance," says Mr Macalister.
"Because of the change to the top personal tax rate, there has been a significant change in taxpayer behaviour as people have sought to use companies, trusts and other structures to avoid the 39% rate."
"This has seen the bulk of the 39% increase borne by salary and wage earners, and a huge increase in company retained earnings as companies retain earnings rather than distribute them. In response, New Zealand has introduced a plethora of changes to its tax system to stop people avoiding the 39% rate."
This has included measures such as superannuation fund withdrawal tax, the minor beneficiary rules, the personal services income attribution rules, multi-rate fringe benefit tax rules, and changes to the taxation of savings and to certain lump sum payments.
"Further, it has given rise to a renaissance of Inland Revenue audit activity as IRD seek to ensure business structures do not amount to tax avoidance."
Mr Macalister says reducing the company tax rate to 30% was welcome, but by not addressing the differential between company and personal tax rates inequity and distortion remain in the tax system, and it's disappointing that nothing has been done to correct this.