Corporate tax cut in Oz gives NZ leeway

Yesterday the Australian Government said it would only drop the corporate tax rate from 30 to 28 per cent by 2014. Photo / Hawkes Bay Today

The New Zealand Government has been given some breathing space on the corporate tax rate after Australia yesterday took a softer approach than expected.

The Henry tax review had recommended the corporate tax rate be slashed to 25 per cent but yesterday the Australian Government said it would only drop the rate from 30 to 28 per cent by 2014.

KPMG tax partner Paul Dunne said it would still put some pressure on New Zealand, which currently has a 30 per cent tax rate, but the delayed change had given the Government time.

"It has given us time to think about where we want to go to be competitive."

Dunne said there were still more details to come out of the review and he expected the New Zealand Government to take a wait and see approach.

PricewaterhouseCoopers partner and member of the New Zealand Tax Working Group Geof Nightingale said the big fear had been a drop to 25 per cent.

"I don't think one or two percentage points is going to put a lot of pressure on New Zealand. If they didn't do it, it wouldn't be fatal," he said.

"I think there will be a sense of relief from [Finance Minister] Bill English and [Prime Minister] John Key."

Nightingale said there did not appear to be anything particularly threatening about the changes in Australia.

Aaron Quintal, a tax partner at Ernst and Young, said the Australian tax cut would put some pressure on but was unlikely to change anything for New Zealand's May 20 Budget.

"It will certainly keep the pressure downwards but it won't change anything in the Budget."

Quintal said New Zealand had a 3 per cent corporate tax gap between it and Australia between 2001 and last year, when the rate was dropped to match Australia.

English was tight-lipped over whether it would mean any changes in New Zealand.

"It's important that our tax system generally remains competitive with other countries, particularly Australia, given our close economic and trade ties with our transtasman neighbours.

"The Government will set out details of its tax package in the Budget later this month and I don't want to pre-empt that process today," he said in a statement yesterday.

The Australian Government also said it would impose a 40 per cent tax on the profits of resource companies and lift compulsory superannuation contributions from 9 per cent to 12 per cent.

The resources tax is expected to yield A$12 billion ($15.3 billion) in its first two years and will be used to create a A$5.6 billion infrastructure fund, cut company taxes to 28 per cent in mid-2014 from the current 30 per cent and boost retirement funds, now worth A$1.3 trillion.

"This will use super profits on resources owned by all Australians," Prime Minister Kevin Rudd said in Canberra, saying he's prepared for a backlash to the measures. "This will help convert Australia's strong economic position into enduring prosperity."

The Australian Government commissioned the tax review two years ago to create a simpler and fairer system to meet the needs of an ageing population.

One quarter of a projected population of 36 million Australians will be aged 65 and over by 2050, increasing pressure on hospitals in a country where six out of 10 people live in areas with too few doctors.

The resources tax, scheduled to begin on July 1, 2012, will be paid on the realised value of resource deposits, the government documents show.

That is the difference between the revenue generated from resource extraction and associated costs.

The Australian Government will also credit companies for resource taxes paid to the states.

The Government would also give a tax concession for resource exploration, including geothermal, affecting 4300 companies, Treasurer Wayne Swan said.

"A fair share of the proceeds of the boom should be dedicated to a stronger and broader economy," Swan said in Canberra.

"Australians have missed out on billions of dollars from the last boom and we can't make the same mistake again."

The company tax rate, reduced to 30 per cent from 36 per cent by the previous Liberal-National government, would be cut to 28 per cent by mid-2014, with 720,000 small businesses getting a one-year head-start.

The Australian Government might decrease the rate further.

- additional reporting Agencies