Fran O'Sullivan: Crunching tax rates not Dunne deed yet

Be wary of strong drink. It can make you shoot at tax collectors and miss.

Robert Heinlen's famous quip will no doubt resonate with plenty of businesses that have been shouldering an out-of-whack company tax rate for far too long.

The Business Taxation Review - urged on the Labour-led Government - by United Future leader Peter Dunne is expected to go some way to reducing that homicidal impulse towards governmental revenue plucking when the preferred options are finally unveiled. Submissions by the bucketful are pouring in.

Dunne has staked out his preferred position in a series of meetings with tax practitioners and business groups.

The general consensus among those privy to his briefings is that, if Dunne, the Revenue Minister, gets his way, the Government will:

* Cut company tax from 33c to 30c to match Australia's corporate rate;

* Reduce the top personal income tax rate to 36c and shift the thresholds at which progressive rates kick in;

* Raise the taxation rate on trusts from 33c to 36c to clamp down on the obvious tax avoidance that has been occurring as taxpayers re-arrange their affairs to protect their assets (and reduce their tax bills).

Tax concessions for exporters and R&D incentives are the other top items in Dunne's stated agenda.

So far so good. But when it comes to dropping the top personal tax rate, Dunne may be underestimating the depth of Labour's strong socialistic instincts and its determination to entrench its middle-class supporters at the 2008 elections by giving more back in the middle, than to top earners who are more likely to vote National.

Cutting the top rate to 36c for personal income tax will inevitably stick in the craw of Finance Minister Michael Cullen.

It was Cullen, after all, who argued the "rich" - those on over $60,000! - should be prepared to shoulder a higher tax burden in line with Labour's 1999 election commitments.

Both Cullen and Dunne say personal taxation rate changes will inevitably have to occur to avoid an avalanche of taxpayers re-engineering their affairs to form themselves into companies or trusts if the top rate is left at 39c, when the corporate drops to 30c.

But that reckons without Cullen's strongly ideological streak.

Business expectations may be more accurate if they focus on Cullen's intentions in his 2005 Budget to shift the threshold at which the 39c rate kicks in to a higher income level.

Purists would say Cullen should put the income threshold up to a level where only the 5 per cent, which Labour originally set out to pluck when it first came into office, are affected, instead of the 12 per cent of taxpayers now caught in his fiscal net.

In reality, this is exactly the debate that is going on behind scenes.

Business should ensure it does not leave it too late to open up debate on the personal income tax front by pushing for the highest threshold to cut in at say $150,000 instead of $60,000 to give New Zealanders an incentive not to cross the Tasman.

Cullen argues that any shift downwards in personal income taxes cannot really be contemplated seriously until it is clear which agency's forecasts (Treasury or Inland Revenue) is accurate in relation to this financial year. IRD predicts a tax flow some $1 billion more than Treasury, which leaves plenty of room for Cullen to put a dampener on early celebrations if Treasury turns out to be right.

My suggestion that Treasury was already gaming the result in its favour by altering the provisional taxation accounting rules to bring forward future revenue was slapped down by Beehive apparatchiks as just a bit too Machiavellian even for the Beehive.

The front between Cullen and Dunne is also murky on the proposed taxation of international shares.

Ernst & Young tax partner Geof Nightingale says Dunne is basically asking the tax community to come up with a solution on this score.

The legislation is deeply unpopular. There have been more than 3000 submissions to the Finance and Expenditure parliamentary committee. Dunne has acknowledged no tax bill ever emerges unscathed.

Dunne the rationalist is understood to favour re-implementing the grey list.

Many practitioners suggest the capital gains tax exemption should thus be extended to all international shares, not just Australian and NZX stocks.

But any solution will have to play out in a way that also enables Cullen to save face - one mechanism may be to shift the capital gains tax on such investments to a 50c discount instead of 85c.

The GPG manoeuvre has fired up other players.

Predictably, the Trustees Association is already up in arms about the proposal to lift the trust taxation rate to 36c - claiming children, who are often beneficiaries of trusts, will end up paying more tax than giant corporates.

The association has signalled it may form a fighting fund to tackle the Government and try to force a backdown, along the lines that Sir Ron Brierley's GPG Group has already achieved in respect of its own investment catchment with the international shares "capital gains tax".

My pick is that Cullen will not budge on this particular front as large numbers of wealthier taxpayers have been rorting the system and reducing their tax bills through trusts in a way not open to wage and salary earners.

Where the game gets more difficult is with KiwiSaver.

Chief executives responding to the Herald's annual Mood of the Boardroom survey suggested compulsory super was the missing element to NZ's economic transformation agenda.

The big question is whether KiwiSaver will ultimately morph into a compulsory superannuation scheme.

KiwiSaver is definitely Cullen's territory - and the capital gains tax on offshore shares plays into the mindshift he considers necessary to get his legacy policy in place.

Cullen's about-face on tax incentives for KiwiSaver investments is being read as simply a mechanism to make sure the scheme is an instance success and can't be undone by future governments or finance ministers without a public backlash.

The problem is it is unfair to the self-employed and taxpayers tied up in other schemes.

Widening the tax break for other New Zealanders will involve a fiscal cost.

But it is inevitable if the New Zealand tax system is to retain its reputation for neutrality and fairness, which is surely the type of legacy Cullen should be aiming for.