Thomas Pippos: Economy faces taxing issues

The Government's tax policy so far mainly consists of some minor tinkering with tax thresholds to bring them in line with inflation, introducing a carbon tax and - in addition to dealing with certain tax anomalies in the funds management area - a plan to tax unrealised capital gains on overseas equities.

While all three areas are subject to varying degrees of debate, the move on international equities is sparking most debate.

The Government is insulated for the moment, because most of Labour's core supporters typically are not direct investors in the sharemarket. They will, however, feel the effects of the tax through their superannuation plans. It is also naive to think that the rules will stop at overseas equities. The boundary that will be created with other investments, be they domestic equities or property, will be seen by some as requiring further change. This may not be the current thinking of the Government, but then the capital gains tax on foreign equities was not on the agenda until recently. You would also think that such a broadening of the tax base would have meant some lowering of the rate.

Other tax changes announced recently are remedial in nature and are just as likely to have been introduced by any Government.

National has come out and said it would not support the introduction of these measures - possibly a point of differentiation that is understandable to the population, but possibly not.

National has yet to announce most of its income tax cuts package. But it has released the first phase of its widely anticipated policy by promising working parents a tax deduction for pre-school childcare costs.

Hardly the linchpin in any tax platform, with voters still waiting for the detail to back up National's promise of tax cuts for every working New Zealander.

It has also proposed tax deductions for student loan interest, a move trumped by Labour, which proposes to make them interest free.

Aside from the Government, there seems to be almost unanimous support across the political spectrum for a reduction on tax rates. Interest in the minor parties' tax policies seems almost non-existent, presumably because no one sees them as credibly leading this debate.

National's plans are expected to include a promise to lower the company tax rate from 33 per cent to 30 per cent. But what about trusts, superannuation funds and other investment vehicles that are not companies? Life was easier when all rates were pegged to the highest personal tax rate of 33 per cent.

In terms of personal tax rates, one feels that National will play the threshold game, not the rate one. The 39 per cent will not go, as that will be seen as a tax break to the rich.

The $60,000 could easily move to take out those people not viewed as earning enough to hit the maximum tax rate.

Similar pressure exists at the $38,000 threshold, where the 33 per cent rate hits. Both are easy targets. It maybe just a more glorified indexation- but maybe a more meaningful movement is all that is required by the voters, particularly those who view politicians' promises with scepticism.

Designing an effective tax policy for New Zealand is not just about tinkering with tax rates and thresholds.

While that can be news, the tax system can be a key component to creating a higher-performing economy as it can encourage investment.

To date we have seen very little from the parties about worthwhile initiatives in the tax arena.

There were some positive developments in the research and development chapter, with the Government announcing in the Budget that it would introduce improved access to tax deductions for research and development expenditure.

This relief is dependent on companies bringing in new investors after their initial development stage, as commonly happens in the technology sector.

However, the Government has yet to take the logical step of allowing deductions for capitalised research and development to complete the research and development package.

Dealing with this bastion of non-deductible research and development expenditure should be a no brainer, given that the present regime simply drives research and development underground or taken through the P&L so that a deduction can be secured.

Other matters that can be done to encourage companies to invest include:

* Upfront deductions for eligible capital investment or eligible business development expenditure. For example, either allowing a specific deduction for certain capital expenditure or implementing a 100 per cent depreciation rate on qualifying capital expenditure.

* Further research and development concessions, such as providing a 150 per cent deduction for eligible research and development costs (for example: for every $100 of qualifying expenditure, a taxpayer will be entitled to a deduction of $150).

* Deferral of depreciation recovery income on plant and equipment replaced by new capital assets.

Another glaring omission from the party tax policy line up is that there seem to be no exciting (transparent or even simple) initiatives designed to attract foreign capital into New Zealand. While foreign capital doesn't vote it's the next best thing in terms of stimulating real growth in incomes of everyday New Zealanders.

It is probably not surprising this doesn't feature, as this is a hard topic. However, for this country to stay economically competitive we cannot sit idle while jurisdictions around us provide "incentives" or actively seek to encourage either business or people to play in their sandpit.

Again, there is a lot more that can be done. In addition to reducing the headline corporate tax rate some initiatives that would encourage multinationals to operate in New Zealand include:

* The removal of non-resident withholding tax cost on repatriating overseas income by multinationals that choose to interpose New Zealand within their global structures. * Providing tax relief for new activities that would not otherwise come to New Zealand, including those that do not impact on domestic businesses.

* Transtasman competitiveness could also be improved if the Australian and New Zealand Governments introduced mutual recognition of each country's franking credits/imputation credits.

Another area that is a big issue, particularly for the many small and medium-sized enterprises that form the backbone of the New Zealand economy, is that of tax compliance costs.

New Zealand First has stated lowering compliance costs is a priority but any details as to how this is to be achieved are not surprisingly missing.

While Cullen has made some efforts to reduce compliance costs for small and medium-sized enterprises, his tinkering with the rules in some cases means they have a whole new set of initiatives to understand and administer.

Ultimately compliance cost savings would be best achieved if the Government adopted a less interventionist approach to business, and allowed small and medium-sized enterprises to take up what they would view as the pragmatic solution rather than a detailed set of rules designed to achieve tax purity.

With the coming weeks the parties should be refining and finalising their tax policies. Voters will then be better placed to make decisions.

* Thomas Pippos is the managing tax partner at accounting firm Deloitte.