Showtime for tax system shake-up

Changes to rules on rental properties have already had some effect. Photo / Janna Dixon

Economists say today's tax changes - including a cut to the corporate tax rate that puts New Zealand below Australia - are an important step towards rebalancing the economy but will take time to deliver results for most businesses.

The Government, citing Treasury forecasts, says the impact of tax changes from last May's Budget could add 1 per cent to growth during the next "few years".

Income tax was cut and GST raised last October in the first part of the package but today's changes were aimed at encouraging savings and exports.

ASB's chief economist Nick Tuffley said cutting the corporate tax rate by 2 per cent to 28 per cent would help some struggling businesses survive and others to expand.

"The drop in the business tax should help at the margin over time and boost economic growth. Something might look viable now when it didn't in the past."

In Britain, where budget cuts have led to riots, Tuffley said the Government has cut business tax rates to help stimulate the private sector while in financially stricken Ireland the Government was clinging to low corporate rates as well.

He said changes to rules covering tax write-offs on rental property had already had some effect. Loss attributing qualifying companies had been abolished. A new structure ensures owners cannot claim a tax deduction on losses at a higher rate than they pay on profits.

While there were other factors contributing to a softer property market, including immigration falls and, for a time, higher interest rates, just the prospect of the changes had been effective.

"Anecdotally people have been more cautious about purchasing and lightening [rental property] portfolios. It's sending the right sort of signals."

The changes would help even out the perceived advantages that property had over other forms of investment.

"It's not the big bang policy. They're trying to gently tilt the economy in a direction that is deemed more desirable than where we've been and overly focused on property."

New Zealand Institute of Economic Research principal economist Shamubeel Eaqub said the corporate tax rate cut would smooth out the cashflow for businesses and made New Zealand more attractive, for the moment, compared to Australia.

He did not think it would necessarily help attract foreign business because New Zealand lacked the size and critical mass of other economies. While property tax changes were helpful and got rid of "black holes" they didn't necessarily mean the economy was going to be more efficient.

"The thing about taxes is they are meant to change behaviour over a long time," Eaqub said.

THE CHANGES AND WHAT THEY MEAN

PricewaterhouseCoopers tax partner Geoff Nightingale rates the revamp

* A reduction in company tax rate from 30 per cent to 28 per cent. Intended to promote economic growth, and keep us competitive with Australia where company tax rate is 30 per cent for now. Verdict: Will cost $1.2b over four years and is good news, should promote economic growth.

* Depreciation is removed from all buildings. Aimed at reducing bias towards property investment. Verdict: Raises $3.1b over four years. Should help remove general tax distortion favouring property investment, some issues around industrial buildings that do depreciate.

* Tighter tax rules for multinationals using debt to fund NZ operations. Verdict: Raises $600m over four years. Hopefully doesn't cut foreign investment.

* Removing LAQCs, (loss attributing qualifying companies), replacing them with LTCs (look through companies).Verdict: Raises $190m over four years. LAQC owners need to review position and make choices.

* Working for Families eligibility tightened by including more in the definition of income such as trust income, investment income of children, some PIE income and other income, plus removing the recognition of rental loss for WfF purposes. Verdict: Raises $32m Will make the system fairer and better targeted but also more complex.

* New GST rules for land transactions, compulsory zero-rating transactions between registered persons with a land component.