McLeod aims to level tax playing field

A proposed home-ownership tax linked to risk-free rates of return has been dropped from the final report of the McLeod Tax Review.

But the final report, published today, recommends a risk-free formula be used to tax savings vehicles, which currently are taxed inconsistently.

It recommends that the four income tax bands be replaced with two rates - 18% on income up to $29,500 and 33% above that amount – and that the Government consider reducing the 33% company tax rate.

The review team also repeated its view, expressed in an earlier issues paper, that there should be no tax incentives for savings. There was no evidence New Zealanders had a poor savings record or that tax breaks would increase overall savings levels, it says.

An earlier recommendation that excise tax be dropped and the lost revenue recouped from a rise in GST was also confirmed.

Review chairman Rob McLeod said Finance Minister Michael Cullen had spoken positively about the application of the Risk-Free Rate Method (RFRM) to savings entities.

Under the RFRM model tax liability on savings would be calculated on the basis of the net asset value at the start of a year, times a statutory risk-free real rate of return, times the investor’s tax rate.

The statutory risk-free rate is currently estimated at about 4%.

McLeod says RFRM would address the current, inconsistent treatment of savings vehicles, both onshore and offshore.

Public submissions on the method were mixed, he said.

The main objection was that taxpayers might have cash-flow problems if assets did not generate enough cash flow to meet tax obligations. The method would also favour assets with regular income streams.

But McLeod said the review team still believed RFRM was preferable to a capital gains tax, which overseas experience showed tended to raise the cost and complexity of the tax system.

In a statement coinciding with the release of the review team’s report, Dr Cullen said Labour did not support the two income tax scale recommendation.

The Government would not abolish excise tax because it was a way to discourage certain behaviour. An increase in GST was also unacceptable, he said.

McLeod said GST would have to rise to about 16% to recoup revenue lost from abolishing excise.

Dr Cullen said the review team’s ideas on international tax and tax treatment of entities would be included in the Government’s tax policy programme, though design issued had to be worked through.

These ideas include reducing tax on income from new overseas investment in New Zealand to 18%.

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