Landlord breaks likely top target

John Key. Photo / Mark Mitchell

Prime Minister John Key is expected to target tax breaks for landlords in his first parliamentary speech of the year setting out the Government's plans.

Mr Key also suggested he would be looking at Working for Families, and that could mean both tax issues and eligibility.

He would not rule out an increase in GST from the present 12.5 per cent to 15 per cent, one of the options put forward in a smorgasbord of alternatives last month by the tax working group.

Mr Key strongly hinted yesterday that the Government would address the inequities arising from wealthy people arranging their affairs to avoid paying tax but who get all the benefits of taxpayers, such as education and health care.

"That's not fair," Mr Key said, "particularly if that is being paid for by low- and middle-income New Zealanders who can't afford it - so let's put a bit of fairness into the system."

The tax working group highlighted the fact that there are 9700 families with rental losses who claim Working for Families.

It also pointed to the use of trusts to lower tax obligations, such as a trading company owned by a trust. The distribution from trusts to a beneficiary of the trust is taxed at 33 per cent as trustee income is not counted as income for Working for Families purposes. The tax working group highlighted the advantages of having alignment in the top tax rates for personal, company, trust and portfolio investment entities and the distortions that occur when they are not.

The group said New Zealand's tax system was "broken" and it could not be fixed by tinkering around the edges.

Mr Key's speech will contain the Government's formal response to the tax working group's ideas for broadening the tax base in order to lower personal and corporate taxes, and encourage investment in away from housing.

But it is not expected to be a speech heavy on detail. That will be left for Bill English's May 20 Budget.

"There will be a clear indication of the pathway for tax change in New Zealand," Mr Key said. "It will spell out the areas we think some work is required. It will rule some aspects into the programme, it will rule other things out."

Mr Key begins the year under pressure from his own support base as well as Opposition parties to roll out some big policy initiatives.

Whanau Ora, which will overhaul how social services are delivered, is expected to be outlined in his speech.

But the real focus will be on how bold he is prepared to be on tax reform.

"2010 is important for implementing the Government's change agenda," he said.

Changes to the tax system would be a "serious step" in putting New Zealand on to a faster growth path.

He has already ruled out a capital gains tax on the family home, but the working group also proposed a way of taxing capital gain on rental property, and a more general low-rate land tax.

Reiterating some of the concerns about rental properties, Mr Key said there was about $200 billion invested in the rental housing sector and yet the Crown lost $150 million last year.

The Government's goal, he said, was "fairness in the tax system, equity amongst tax payers and a robustness and sustainability of the tax system".

On Working for Families, the group said that with the family tax credits, more than 40 per cent of households either pay no tax or get more in family tax credits than they pay in tax.

It also increases the effective marginal tax rate on extra income earned: the primary earner in a family on Working for Families on an income over $48,000 pays 58 per cent.

Revenue Minister Peter Dunne has hit out recently at the system that allows wealthy people to rearrange their affairs to qualify for the family tax credits.