Tax-rate fears overstated, says report

By VERNON SMALL deputy political reporter

Government officials have played down fears that lower company tax rates in Australia will harm this country's prospects, saying it will have only a marginal impact.

A joint Treasury and Inland Revenue report, released under the Official Information Act, says Australia's new corporate rate of 30 per cent is unlikely to make our key industries less competitive relative to Australia. New Zealand's business tax rate is 33 per cent.

The report found that lower rates in Australia, which took effect on July 1, were funded by a change from accelerated depreciation to "effective life" depreciation rates.

The change would improve tax efficiency and be good for Australia's overall welfare. But because about the same amount of tax would be raised, there would be little change in relative attractiveness of the two countries from a tax perspective.

Competitiveness would be affected differently in different sectors.

Australia would become slightly less attractive than New Zealand for investment in capital-intensive industries, such as manufacturing, and marginally more attractive for investment in less capital-intensive activities such as tourism and high technology industry.

"While a significant positive measure for Australia, the impacts of this reform on New Zealand can be overstated given tax is only one factor in investment decisions," the officials said.

Other important factors were labour market conditions, proximity to markets, the overall regulatory regime, monetary and fiscal policy stability, and non-economic factors such as history and individual preferences.

But National finance spokesman Bill English said there was a widespread view among businesses that New Zealand should match the Australian rate.

New Zealand was becoming less competitive on those other measures, such as labour flexibility, he said.

Officials had said that despite the negligible impact of the lower business tax rates, Australia could benefit from the perceptions a lower "headline" rate brought.

Mr English said perceptions determined whether New Zealand was "on the radar screen" for investors.

The Treasury and IRD analysts said Australia had a more complicated tax regime, with higher compliance costs, than in New Zealand.

New Zealand was likely to benefit from a more robust Australian economy as a result of the tax moves.

Finance Minister Michael Cullen has said he will not make significant changes to the tax structure without first seeking a mandate for them at the 2002 election.