Key says NZ first with 28 per cent tax figure

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The Budget's best-kept secret, a cut in the company tax rate to 28 per cent, was decided by the Cabinet before Australia announced its intentions and released the Henry Review this month, Prime Minster John Key says.

He told a Trans-Tasman Business Circle lunch in Auckland yesterday that the fact that both countries had chosen a 28 per cent rate meant both had similar opinions on the balance between improving international competitiveness and finding the necessary revenue.

New Zealand's cut, from 30 per cent, will be three years before Australia's.

The Government has stressed the importance of reducing incentives for property speculation, pointing to the negative spillover effects of the last housing boom, between 2002 and 2007.

Speaking after the lunch, Key said he thought the tax change relating to investment properties - eliminating the depreciation deduction and changes to the LAQC regime - would be enough to prevent a repeat.

Lowering the top personal rate from 38 to 33 per cent also reduced the incentive to shelter income from tax. The Government had also looked closely at ring-fencing property investment losses so they could not be used to shelter income from other sources from tax.

"But both New Zealand and Australia had previous history of that and the advice we were given was that it wouldn't work," Key said.

Finance Minister Bill English, in an interview for this morning's TV3 current affairs programme The Nation, said it had proven very difficult to do ring-fencing in a way that had some integrity and did not just mean people would structure their affairs to avoid it.

Key said the Government got "reasonably close" to accepting a bright line test for whether a property investor is a trader and subject to tax on capital gains.

The existing test for which side of the revenue/capital boundary a transaction falls on, and so whether it gives rise to taxable income, depends on the slippery issue of the seller's intent when the asset was bought.

"It's very difficult for the IRD to administer because basically you have to prove what was inside people's heads when they bought a rental property."

So the option was examined of replacing it with the cut-and-dried test of how long the vendor had owned the property before it was sold, Key said.

"The problem was that if you did it for less than three years the advice was that it wouldn't make a lot of difference. Treasury's advice was at least five years and probably longer. Once you got into that, it would cause a lot of anomalies and the question was whether it essentially became a capital gains tax by stealth, when we had essentially ruled that out."