New Zealand's PM considers changes to tax system

New Zealand's Prime Minister considers changes to tax system

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Prime Minister John Key delivered his opening parliamentary address today in which he unveiled the direction of the government’s economic and tax policies. The government’s economic plan focuses on six main policy drivers: a growth enhancing tax system; better public services; support for science, innovation and trade; better regulation; investment in infrastructure; and improved education and skills.

Attracting most attention were the changes to the tax system being considered, given there has been a lot of uncertainty around these changes since the Tax Working Group (TWG) made its recommendations to the government in January. Mr. Key acknowledged that the current tax system, which the TWG said needs comprehensive reform, taxes labour and investment income at higher rates than consumption, and overly-rewards people when they invest in residential property.

The government is, therefore, currently considering, among other things:
• changes to the way property is taxed
• an increase in the rate of GST from 12.5% to “no more than” 15%
• reductions in personal taxes and increased benefits to compensate for higher prices

As the Prime Minister highlighted, the above changes would mean that workers’ take-home pay would increase and could be saved or used to make mortgage repayments without being taxed. This means savings and investment would be encouraged, rather than consumption

Some of the options discussed by the TWG are not, however, on the table. The government will not be looking at introducing a land tax, capital gains tax, or a risk-free return method for taxing residential investment properties. Taxing residential investment properties could mean that property owners face sizeable tax bills, which could trigger higher rents, which the government wants to avoid. One thing Mr. Key did confirm today is that there will be changes to the taxation of property in order to boost government revenue. As it stands, the government says it is losing revenue in this sector. “Income is being derived [from property taxes] but, in aggregate, no tax is being paid.”

It will interesting to see the details of the changes to property tax, in particularly, in the upcoming Budget on May 20. RBNZ Governor Alan Bollard recently said that buoyancy in the property market was “exacerbated by a tax system which favoured investment in housing”. He has been calling for some time for the government to remove tax incentives for home ownership and alleviate some of the pressure on monetary policy. The RBNZ may find comfort in the government’s efforts to boost savings and investment, which should essentially help mitigate against excessive debt-fuelled spending. The government announced its intention today to keep a lid on new spending, which will help to keep pressure off interest rates and NZD, assisting in the transition of New Zealand’s economic growth drivers away from consumption toward exports.

ENDS

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