Reaction to John Key's tax comments (Update 3)

Here we will include reaction to John Key's comments on tax. For Bernard Hickey's report on Key's speech, which include his views, see here. (Update 1 includes NZICA comments. Update 2 includes Wellington Regional Chamber of Commerce, further KPMG comments. Update 3 includes comments on Agribusiness sector.) Watch Key's comments on tax on our video page here. The full speech can be found here. Here is what KPMG Senior Tax Partner John Cantin said on Key's GST comments:

All business will be impacted by any increase in GST. However, Tourism and Financial Institutions will be more affected than others. Financial Institutions cannot recover full GST so that a GST increase will either increase their costs or reduce returns to savers. This means the Government does need to properly model the effects of a GST rise on the incentive to save to make sure the effects it intends are realised. Close to the Prime Minster's heart as Minister of Tourism will be the impacts of any GST on this sector. With the GST rate in Australia at just 10 per cent, an increase to our rate would have a negative impact on New Zealand's competitiveness.. The sector would have to either increase prices and therefore demand, or absorb the impact and reduce profitability. Any increase in GST could result in a run on goods and services before the tax is increased so care must be taken, particularly by providers of goods and services, particularly retailers. When GST was last raised there was increased demand for goods and services in the lead up to the change. Some providers took it as a sign of future demand and increased their inventories which they found difficult to sell after the rise.

Here is a short relese from the New Zealand Institute of Chartered Accountants:

"The Government's announcement today represents a step in the right direction, yet really needs to go further in order to fully restore balance and equity to the system," Craig Macalister, Tax Director, New Zealand Institute of Chartered Accountants said today. "The focus of the Tax Working Group was to design a more coherent tax system that is fairer to all and collects taxes as fairly and efficiently as possible. We still have too much reliance on taxes such as PAYE and income tax," said Mr Macalister. "Altering this burden would mean a shift away from income taxes to more reliance on indirect taxes, such as GST. The under-taxation of capital assets in New Zealand also needs to be addressed."

This is from the Wellington Regional Chamber of Commerce:

The Wellington Regional Chamber of Commerce has congratulated the government for signalling a full programme of reforms for the year ahead including reform of the tax system. "The government has a lot of work to do and the Prime Minister's Statement to Parliament today gives the business community confidence that the government intends to grab the bull by the horns and do what needs to be done," said Chamber CEO Charles Finny. "We are pleased with the government's intention to rebalance the tax system and we strongly support the direction outlined in today's speech. We have long advocated of a low-rate, broad based tax system as the key to improving work incentives and boosting productivity. "A small rise in GST would be fully acceptable if it is accompanied by equivalent reductions in income tax. "The government's recommitment to infrastructure investment, better and less regulation, free trade agreements and the unlocking of mineral resources are also welcome," Mr Finny concluded.

KPMG Senior tax partner Paul Dunne said Key's silence on depreciation indicated this was very much the focus for the government in its tax reforms:

Statement made by Paul Dunne, Senior Tax Partner, KPMG The silence on depreciation today in the Prime Minster's speech on tax indicates that this remains very much a focus for the Government in its tax reforms. Property investors will be looking for clarity around parameters and definitions. Until detailed announcements are made, property investments decisions will be shrouded in uncertainty. We expect a lot of pressure will be applied by the property sector on the Government between now and the Budget in order to gain further clarity. A positive aspect of today's announcement is the indication that the Government is looking at a package of tax reforms. A range of options are available to Government to address the perceived "problem" with the total amount of tax paid by the property sector. Although ruling out land tax and RFRM, Government's silence indicates removing building depreciation remains on the table. Property investors need to ask - if depreciation is denied, then what level of tax rate cut would compensate?

Meanwhile, KPMG Chief Executive Jan Dawson welcomed the clarity provided by Key on the government's approach to tax reforms:

We welcome the clarity provided by John Key in his opening speech today on the Government's approach to New Zealand Tax reforms. The Tax Working Group generated much interest, concern and speculation and the Prime Minister has taken the opportunity to rule out some things and introduce a direction that will incorporate a broad range of measures. This signal of the direction of reform is welcomed. The temptation would have been to cherry pick revenue generating tax options. The Prime Minister's statement makes it clear that the Government is looking at the reforms as a broad package. This is the right way to go about tax reform to ensure a fair and coherent tax regime. While welcome clarity has been provided around some aspects of the tax system including the ruling out of land tax, no capital gains tax and no RFRM, questions still remain on other aspects of tax reform. Notably, no comment was made about corporate tax rates, the amount of GST increase and its impacts on various sectors or details around tax treatment of property investments. These areas will need clarifying. The ruling out of land tax and RFRM is a triumph of pragmatism over theory. Although economists like property taxes for their efficiency, the real world impacts of these two measures make them difficult to implement in a politically sustainable way. One thing is certain, the 2010 Budget is shaping up to be a major milestone in the New Zealand tax system. KPMG believes it is important that any package of reforms is sustainable politically and economically as New Zealand would not benefit from being lurched one way then another if Government changes tack.

KPMG's lead Agribusiness Partner, Ross Buckley, said the Agribusiness sector should be relieved at the ruling out of a land tax and RFRM:

The Agribusiness sector including Farmers and Maori Authorities will be relieved at the ruling out of a land tax and Risk Free Rate of Return Method (RFRM) today by the Prime Minister. Landowners stood to be significantly adversely affected if a land tax or RFRM was introduced. This was recognised by the Tax Working Group and options for exempting the Agricultural sector were mooted at the time. In a triumph of pragmatism over theory, the Government has ruled both options out completely. The implementation of RFRM would have had negative practical implications on cash flow for land and building owners in the agricultural sector. The sting however, remains in the tail for property investors as the Government has made it clear that tax on rental properties will change.