Media Release - 20 January 2010

Contact: Clare Farrant
Communications Manager. Ernst & Young
09 300 7065     0274 899 700
clare.farrant@nz.ey.com

Tax Working Group report creates uncertainty for taxpayers
Uncertainty for tax-payers

Given the mandate of the Tax Working Group and the diverse views of its members, it should come as no surprise that its report sets out the framework for reform and poses some interesting questions, but doesn’t provide many answers.

“The framework set out is sound, and we support the Working Group’s endorsement of the broad-base low-rate model of taxation, including reducing the marginal tax rates particularly on those factors most responsive to taxes such as capital and skilled labour,” says Aaron Quintal, a tax partner with Ernst & Young.  “However, it is important that Ministers quickly make clear to the public which options they want to pursue and which options are off the table”.

“The uncertainty about whether or not there will be a land tax and whether residential property investors will be entitled to depreciation deductions is likely to slow investment in an already sluggish property market” says Quintal.  “It would be a very brave investor that bought a rental property tomorrow given the uncertainty about how their investment will be taxed”.

“On the other hand, the Reserve Bank’s fight against inflation will not be helped if New Zealander’s rush out on a debt-fuelled spending spree on cars and flat screen TVs fearing an increase in GST at the next Budget.  The sooner any uncertainty can be resolved, the better” says Quintal.

Fiscal drag and the need for reform

Anyone who doubts the accuracy of the Tax Working Group’s comment that “the status quo is not a viable option” need only consider one of the most shocking and under-reported statistics in the report.  If the present personal tax bands are left unaltered, wage growth and inflation will mean that a decade from now the average wage earner will be on the top personal tax rate (currently 38%).  Clearly such an outcome is not sustainable and yet the government’s long-term fiscal forecasts, which show New Zealand will come out of fiscal deficits in 2018, are based on this happening.

If the government is not going to solve its fiscal problems by putting everyone on the top marginal tax rate it will need to find other sources of revenue.  Broadening the tax base by introducing a land tax on the $450b of land in New Zealand for example, or increasing the rate of GST, seems the only practical option.

ENDS

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