Media Release - 30 September 2010

Clare Farrant
Senior Communications Manager
Ernst & Young
+64 274 899 700
clare.farrant@nz.ey.com

Tax cuts signify a major change to our tax competitiveness with Australia

 
30 September 2010

As 1 October approaches and the political positioning around the GST increase continues let’s not allow ourselves to be distracted by red herrings - like GST exemptions on fruit and vegetables - or we might miss the point entirely.

NZ’s personal tax cuts signify a major change to our tax competitiveness with Australia.  Over the last decade Australia has had a series of personal tax cuts that have eroded NZ’s tax competitiveness to the stage where anyone earning $240,000 or less would pay less tax in Australia.  

From 1 October that figure drops to anyone earning $50,000 or less paying less tax in Australia, and then only if they do not qualify for low income, or working for families, tax rebates, in New Zealand.

This does not alter the fact that our average wages are simply too low especially when compared with Australia. Although it is worth nothing that the OECD Taxing Wages Report in May this year showed a single income couple on an average wage in New Zealand with two children have a tax wedge of 0.6 per cent compared to the OECD average of 26 per cent. And thanks to working for families and other tax dispensations in New Zealand, people earning $50,000 or less pay some of the lowest taxes in the OECD with the only country who came out with lower taxes being Mexico.

For single income earners on the average wage the tax wedge is 18.3 per cent for New Zealanders while the OECD average is 36.4 per cent.  Single income earners in Belgium will suffer a tax wedge of 55.2 per cent. Germany comes in at 50.9 per cent and Australia at 26.7 per cent.

So the significance of NZ’s tax changes should not be clouded by distractions like the push for GST exemptions on fruit and vegetables.

The obvious holes in this type of political grandstanding have to be mentioned.   Where is the guarantee that the GST savings will in fact be passed on to consumers?   This cannot be achieved unless we are prepared to introduce price controls.  Even if we were prepared to do this, the added compliance costs of having exemptions to our GST system and in administering any price controls would no doubt be passed on to consumers, thereby undermining the potential benefit.

The other point that needs to be made is, any exemption for fruit and vegetables will disproportionately benefit those who are on higher incomes.

All things considered, our focus has to be on improving our average wage, and the measures introduced in the budget are designed to do that by encouraging savings and improvements in productivity.  The moves against residential rental investments are just part of this. The 28 per cent concessionary rate of tax for portfolio investment enterprises is also an important part of encouraging savings.

As we approach this dramatic change in our tax landscape we need to ignore political distractions. Our focus has to be on the serious challenge we face of improving our productivity and dramatically improving our average wages.

Joanna Doolan is a Tax Partner with Ernst & Young
joanna.doolan@nz.ey.com 
09 3007075 or 0274935627

Disclaimer: This article provides general information, does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information.

-ENDS-

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