Tax group welcomes changes

'I think [Key's] going along the lines of disallowing building depreciation,' Andrew King, Property Investors Federation. Photo / Michael Bradley

Members of the Tax Working Group support the Government's reaction - so far - to their recommendations.

"They have clearly broadly accepted our framework for the future direction of the tax system, which is that there should be less reliance on those taxes which are damaging for growth and a shift to those which are less damaging," chairman Bob Buckle said.

"In that respect [Prime Minister John Key] has accepted the argument about the merits of increasing GST and that this should be done with compensation, not just in terms of benefits and superannuation but in reduced tax rates across the board."

But Buckle does not expect to see deep cuts in personal tax rates.

"My guess is [the top rate] might get down to 30 per cent. It might only go to 33 per cent."

Cutting the top rate would in itself go some way towards addressing the use of rental property investments as a tax shelter, by reducing the incentive to shelter other taxable income, he said.

Buckle also found it significant that Key had only ruled out a "comprehensive" capital gains tax.

"It is still distinctly possible they are thinking about some more restricted capital gains tax, such as one applying to property sold within two years or three years of buying it."

He is confident the Tax Working Group has moved the Government's thinking on tax reform.

Deloitte tax partner Mike Shaw welcomed the decision to rule out a land tax, the risk-free return method for taxing residential investment properties, and a comprehensive capital gains tax - both on substantive grounds and as reducing the popular alarm about where reform might go.

Of the base-broadening options the working group put up, that only leaves changes to depreciation rules which Deloitte estimates could bring in $750 million to $1 billion in revenue.

PricewaterhouseCoopers' estimate is similar, $800 million to $1.1 billion, including dropping the depreciation deduction for buildings (apart from those like industrial buildings which clearly do depreciate) and the 20 per cent depreciation loading on plant and machinery.

"That would cover the cost of reducing the top personal rate to 33 per cent," PwC chairman John Shewan said. "But $1.1 billion is not a lot to play with in the context of wanting to confer material reductions in tax across all the rate levels."

Modelling undertaken for the working group found it would be possible to compensate those on lower incomes for a rise in GST to 15 per cent by cutting the lowest personal rate (on income up to $14,000) from 12.5 to 10.5 per cent, and by cutting the 21 per cent rate (up to $48,000) to 19 per cent.

Even though the lowest 40 per cent of households, ranked by income, on average receive more from the Government by way of transfer payments than they pay in income tax, cutting income tax rates from the bottom would compensate them by increasing the net amount they received, Shewan said.

KPMG tax partner Paul Dunne said for corporates any impact from changes to depreciation rules on property might yet be offset by a drop in corporate tax rates.

He took Key's silence on company tax as no more than an indication the Government was "keeping its powder dry" while it worked on the issue and kept an eye on developments across the Tasman.

Another KPMG partner, John Cantin, said the last time GST was raised there was a surge in demand for goods and services in the lead-up to the change.

Some businesses had misread that as a sign of increased demand and built up their inventories, only to find stocks difficult to sell after the rise.