Tax: the bidding war heats up

Wednesday 24 August 2005

Tax has emerged as one of the most important issues facing voters in the upcoming election – and this is backed up by recent polls.  This sudden – but overdue – focus on taxation is creating fierce competition between political parties to formulate tax policies that are both distinctive and consistent with their party views.

The two key tax policies that have been released in the last week are Labour's revamp of its Working for Families policy and National's general tax policy, while the minor parties have already announced (in more or less detail) their own tax policies.  For your interest, we have prepared a brief overview of the key details of each tax policy.

Labour

Much of Labour's approach to taxation for the foreseeable future was announced in the Budget (to a lukewarm response).  Specifically, Dr Michael Cullen announced:

• Changes to taxation depreciation rates
  
  
• Tax simplification measures in relation to fringe benefit tax and tax payment dates
  
  
• Some exemptions for new migrants (or returning Kiwis who have been overseas for some years)
  
  
• A "look-through" regime, and exemption for tax on gains on domestic equity investment, for collective savings vehicles
  
  
• Triennial inflation-related adjustment of individual income tax rate thresholds, but only from 1 April 2008.

Last week Labour made a surprise announcement by promising a further Working for Families $1.4 billion "targeted tax relief" package to low and middle class families.  While previously the party's position had been that further significant tax cuts were not affordable, the positive figures in the Pre-election Economic and Fiscal Update were given as the basis for the move.

Labour's tax package will be implemented by increasing the income threshold at which payments are abated from $27,500 to $35,000.  The abatement rate itself will be reduced from 30% to 20%.  The changes will be gradually introduced over a three year period, starting in April 2006.

Labour considers that its tax policy will provide benefits to an additional 60,000 families on top of the 290,000 already receiving targeted tax relief.  However, on the other hand, this tax relief package does not provide any direct benefits for those without children.

National

The National Party has just released its long awaited tax policy and it involves a number of broader changes to the tax system.  The cost of the package has been estimated at $9 billion over three years. National says it is confident the money will be available and that there will be no adverse economic effects.

The policy's most significant feature is changes to individual tax rates and income thresholds, to be phased in by April 2007, including:

• Income up to $12,500 (previously $9500) to be taxed at 15%
  
  
• Income between $12,500 and $50,000 (previously $38,000) to be taxed at 19% (replacing the previous rate of 21%)
  
  
• Income between $50,000 and $100,000 (previously $60,000) to be taxed at 33%
  
  
• Income above $100,000 will continue to be taxed at 39%
  
  
• Tax on secondary income will be withheld by employers at a reduced default rate of 19%
  
  
• Tax on interest and other investment income will be withheld at a reduced rate of 18% (instead of 19.5%).

National is opposed to Labour's Working for Families programme, stating it will only retain the existing system as an interim measure until a replacement "system of family taxation" is introduced.  However, during this interim period the income level at which maximum family support rates are subject to abatement will be raised from $27,500 to $35,000, and the abatement rate will be reduced from 30% to 20%.

The National Party is also proposing other tax changes including:

• Reducing the company tax rate to 30% by at least April 2008
  
  
• Abolishing the planned carbon tax
  
  
• Making interest incurred on student loans tax deductible (whereas Labour will remove interest entirely for New Zealand resident borrowers)
  
  
• Making up to $5000 of pre-school costs per child tax deductible at a rate of 33%.

The Minor Parties

The tax policies of the minor political parties can be summarised as follows:

• The Green Party will remove tax on the first $5000 of income with the cost funded by introducing a number of "eco-taxes".  The overall intention is to push the burden of taxation from "workers to polluters".
  
  
• ACT has been campaigning hard on tax cuts and is fighting to differentiate itself from National.  It will replace the current tax system with just two rates – a top personal and company rate of 25% and a lower rate of 15%.
  
  
• United Future favours income splitting for families with children, will make the first $3000 of income free of tax and will increase each of the tax thresholds by $5000. It will also cut the company tax rate to 30% over three years.
  
  
• The Maori Party has proposed substantial tax cuts across the board, with further cuts as economic conditions allow.  It will review Government spending to seek greater efficiency and savings.
  
  
• New Zealand First will introduce various changes to the tax system, in particular a reduction in the company and personal tax rates once certain growth goals are met. It favours introducing tax incentives for selected industries and activities.
  
  
• The Progressive Party does not have plans to change the current personal income tax rates but will reduce the company tax rate to 30% and introduce incentives in selected industries to encourage job growth.

If you have any questions regarding how these policies may impact on you or your business, please contact your usual Bell Gully adviser or:

AUCKLAND

Niels Campbell 
Partner

David Simcock 
Partner

Willy Sussman   
Partner

John Bassett   
Senior Associate

Graeme Olding 
Senior Associate

Monique Mackie 
Senior Solicitor