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New set of tax issues raised

The government’s business tax review could open up more tax inconsistencies for savings vehicles.

Wednesday, August 2nd 2006, 7:05AM

by Rob Hosking

The review clearly spent more time on savings issues than the government previously let on.

Revenue Minister Peter Dunne told a Pricewaterhouse Coopers breakfast yesterday that the payroll tax option, considered and rejected, included a compulsory savings element.

The tax discussion document itself considers the issues for savings vehicles if the company tax is reduced to 30%.

The options then would be: tax all savings vehicles at the new company tax rate; or continue to tax all, or most, savings vehicles at 33%.

“Although a lower rate on savings vehicles appears attractive, there is an obvious concern with taxing all savings vehicles at the new company tax rate,” the discussion document says.

“Reducing the company rate only would increase the bias against direct investment for individual on the top marginal tax rate, and it would similarly distort the decisions for individuals on the 33% rate.”

The paper suggests that, keeping savings vehicles taxed at the 33% rate would “arguably…increase fairness because top marginal rate taxpayers investing through PIEs (portfolio investment vehicles) would be a closer tax burden to that of direct investors.

“However it would reduce the attractiveness of KiwiSaver relative to direct investment for taxpayers on the top personal rate.”

Pricewaterhouse Coopers chairman John Shewan says this is likely to be a thorny area.

“What does the government do about unit trusts, which are mostly now taxed at the company rate?”

The same paper talks of raising the tax on trusts to 36% as a way of dealing with tax sheltering.

“Superannuation funds usually operate through trusts. Do they get included or do they get carved out? And if they are carved out is it at 33% or 30%? These are all things that are going to have to be addressed.”

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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