Budget 2010: English unveils comprehensive tax reforms paid for by property investors and foreigners

By Bernard Hickey Finance Minister Bill English has unveiled the most comprehensive reforms to the New Zealand tax system in more than 25 years in Budget 2010. He argued a "once in a generation" package was needed to fire up long term economic growth by tilting the tax system back towards the productive sector and away from property investment. English said all household income groups would receive on average an increase in their real disposable income of around 0.5% to 1%. This would be paid for largely by a package of measures to stop tax avoidance by richer property investors and foreign investors. "This budget is about strengthening the recovery, helping New Zealand families get ahead and maintaining sound finances. It makes the tax system fairer, lifts income levels and addresses long standing economic weaknesses. It continues the Government's focus on getting long-term, sustainable growth and shifting the economy away from borrowing, consumption and government spending and back towards saving, investing in productive areas and exporting," English said. The key changes are: * Income tax cuts across the spectrum with the major change being the reduction in the top income tax rate from 38 cents to 33 cents, aligning it with the family trust rate. This was slightly broader and bigger than many expected. * Increasing the GST rate to 15% from 12.5%, in line with expectations. * Reducing the corporate tax rate to 28 cents from 30 cents from the 2011/2012 tax year. * Reducing the PIE tax rate to 28 cents, increasing incentives to save * Property investment losses can no longer be claimed by those looking to reduce their taxable income to claim Working for Families. * Removing the ability to claim depreciation on buildings with a useful life of more than 50 years. * Changing the rules for Loss Attributing Qualifying Companies and Qualifying Companies as they apply to property investors. * Changing the thin capitalisation rules for foreign companies who have loaded up their local subsidiaries with a lot of debt, meaning they will have to reduce their debts and pay more tax. My view This is the most comprehensive and coherent reform of New Zealand's taxation system in more than 25 years. It goes a long way to tilting the economy back towards productive investment and away from property investment. I would have liked to have seen more changes on property taxation. I would have liked a clean and broad land tax with a high per-hectare threshold, but this was ruled out by John Key in February. But it was good to hear Bill English say the government is looking at further measures on property taxation and the way cash is distributed by trusts. I like they way the package fits together. It is fair in that the benefits of tax cuts are spread across the board. Labour cannot accuse the government of delivering a budget for the rich because rich property investors and foreign investors will be most hit by this budget. The corporate tax cut is the big surprise in the budget and will give a real boost to business just when it is struggling out of the recession under the weight of tight bank lending. The aligning of the top personal income tax rate and the family trust rate will be a major factor undercutting the drive to avoid income tax by investing in property. I agree with the government that the property tax changes are unlikely to drive a big fall in house prices (more's the pity) or a big rise in rents. I'm no huge fan of the GST hike, but the way it has been balanced with income tax cuts and a corporate tax cut should be welcomed. Overall I'd give it 8.5 out of 10. Your view?