Thomas Pippos and Joanne McCrae: Business tax review has 'plenty of puff, no detail'

Australian super funds are being used to buy Kiwi companies from willing sellers.

Under any objective standard the Business Tax Review document doesn't live up to expectations regarding depth of analysis and the destination of the journey. But the document itself isn't the real issue.

More important is that we have a signal of a considerable softening to the current tax rates, explicitly in relation to corporates and implicitly in relation to individuals. In that respect it is a material and welcomed movement from the status quo which is a credit to those involved that have driven it to where it currently is.

The sentiment is also right around initiatives "designed to enhance productivity and boost New Zealand's international competitiveness and increase our competitiveness with Australia". The detail however is just not there.

Where to from here? Rates are likely to be the key issue followed by some initiatives around R&D. Missing somewhat from the document, but also materially relevant to the current debate, is attracting people and capital to New Zealand.

Competitiveness with Australia can not really be ascertained from what is in the document and will only be able to be ascertained when the full raft of actual measures are announced, presumably in the next two years and certainly before the next election.

If Australia has shown us anything, it is that it will compete aggressively, to grow its economic base domestically and internationally.

There are clear differences in the tax regimes as between the two countries. Sure, one can highlight the ways in which New Zealand could be considered better than Australia, particularly having regard to the broader base of tax collection measures that exist across the ditch, including payroll tax, stamp duties, compulsory pension contributions and of course a publicly acknowledged capital gains tax. But not all of the differences work in our favour.

They have generous R&D rules, rates are generally better, they have an active passive exemption to make life better for domestic Australian businesses that operate globally through subsidiaries, they have considerably more generous rules around non residents coming in and residing in Australia, they also have lower withholding tax rates operating in material Double Tax Agreements recently entered into, and in terms of capital gains tax, they have just moved to largely take non residents out of that tax net.

The Business Tax Review touches on some of these areas of difference and indicates movement from the current status quo, whether stated as being part of the Business Tax Review or not - that is positive. Time will tell what will materialise from these positive indications.

Competitiveness is not static and it is as much about a state of mind that tax rules cannot operate in a theoretical vacuum, particularly when other jurisdictions do not feel as constrained.

The end result shouldn't be about the wholesale inclusion of incentives in the tax system but a more competitive tax environment and, in terms of global participation, the attraction of individuals and activity not currently here.

Time will tell whether this is achieved. Until then the tax pendulum for many taxpayers does not swing towards New Zealand.

* Thomas Pippos is managing tax partner (Deloitte) and Joanne McCrae specialises in providing transtasman tax advice.

NZ - BECOMING A STATE OF AUSTRALIA?

Australian private equity firms are on the hunt for prime NZ assets as the 'Australianisation' of this country quickens and headlines - seemingly weekly - publicise the sale of yet another NZ 'icon' into Australian ownership.

At the 'big end of town' most CEOs surveyed (64 per cent) are sanguine about the 'Aussie buy-up' reckoning it is inevitable given the impact of globalization and our low savings rate.

"There is an increasing wealth gap between New Zealand and Australia - economically New Zealand is becoming more and more a 'state' of Australia," said an Auckland transport sector CEO.

" New Zealand's critical mass is such that globalisation will force even Australianisation to become Asia-Pacificisation," said a leading car industry player.

"You will find that Australia is worried about the Americanisation of its business sector," a banker noted. "It is an inevitable consequence of being a small nation and we need to learn how to manage the situation."

Many of the 36 per cent who are concerned about Australianisation point to the potential loss of entrepreneurial ability in New Zealand.

"It's important to maintain the New Zealand identity - more needs to be done to understand how to grow businesses and keep them here," said an agriculture exporter.

A major risk from Australianisation is the concern that with no ownership New Zealand will end up (if not already) in a poverty trap."

"The current asset grab is a direct result of wealthy Australian superannuation funds which have cash to invest and the willingness of Kiwis to sell," notes a capital markets player.