Budget To Crack Down On Working For Families Abuse.

Revenue Minister Peter Dunne says the Budget will reveal a crackdown on working for families recipients who have substantial assets.

Speaking today on TV3’s “The Nation”, Mr Dunne said there would l be no fundamental change to working for families in the Budget.

“But I think what we have signaled all along is the concern about people who are misusing some of their eligibility tests, or who are manipulating their incomes to qualify, and they may well find that a little bit more difficult to do,” said Mr Dunne.

“The government's well signaled the fact that looking at the whole way in which property investment is treated for tax purposes, is a critical part of the agenda, and clearly within that the Tax Working Group pointed out that there was something like 9,300 families who were manipulating their incomes in such a way to now qualify for Working for Families, and we've indicated that those sorts of situations will be closed off.”

And Mr Dunne also signaled that the Government would align company tax and rates paid by trusts.

“One of the reasons why we want to align the company rate and the trust rate is to get over what's been a huge explosion in trusts over the last decade,” he said.

“That’s created a whole lot of other distortions, you see it when you look at things like LAQCs in the property area, a similar relationship back to putting that top tax rate way out of line with the remaining parts of the system, just a decade ago. “

'THE NATION'

PETER DUNNE interviewed by STEPHEN PARKER

STEPHEN On Thursday afternoon the government will deliver its second budget and tax reform is likely to be central. Also this week the OECD published a report which claims New Zealand has the lowest tax burden in the developed world. Well to discuss this and other tax matters is the Revenue Minister, Peter Dunne, who joins us from our Wellington studio. Good morning Peter.

Good morning Stephen.

That OECD report did that surprise you, it was suggested in there that the average New Zealand total tax burden is the second lowest in the OECD.

PETER DUNNE – Revenue Minister
No it didn’t really come as a surprise, in fact we'd scored quite low in that report in previous years, and I think we'll continue to do so regardless of what might unfold later in the week. But I think the important point to remember is the way in which it's constructed also reflects the fact that wages and incomes in New Zealand, by OECD standards, are comparatively low.

STEPHEN It did trigger the greens though to launch an attack saying here is some data that suggests that our tax burdens aren't that heavy, and therefore tax reform not necessarily required.

PETER Yes I thought that was a rather extraordinary outburst, because I thought it actually missed the key point. The key point and this is really what underpins all the work that’s gone on around the budget as well this year, is about how you boost New Zealanders incomes, how you get us into a position where in terms of the money we've got to spend, it's equivalent to those in other OECD countries. If you take an example from the report, you can look at a much more favourable tax wedge between New Zealand and Australia, but in fact at certain income levels. Australians have far more disposable income than do their New Zealand counterparts. So I would have thought the focus should have been more on how you boost incomes, and the steps we need to be doing to achieve that, rather than as the Greens did, simply saying, oh you don’t need to make more tax reform.

STEPHEN Doesn’t it also make the point though about transparency of our tax system, because one of the reasons why the tax wedge might be different is where Working for Families fits in. Is that going to be one of the features of this Budget, a bit more transparency around that Working for Families scheme.

PETER Our tax system at the moment is pretty transparent as you say, and Working for Families does give a huge boost in terms of where we sit with the tax wedge. There will be no fundamental change to Working for Families in the Budget, but I think what we have signalled all along is the concern about people who are misusing some of their eligibility tests, or who are manipulating their incomes to qualify, and they may well find that a little bit more difficult to do.

STEPHEN Presumably that’s around property investments and gaining some advantage from depreciation?

PETER Well I'm not going to go into specific details obviously Stephen, but the government's well signalled the fact that looking at the whole way in which property investment is treated for tax purposes, is a critical part of the agenda, and clearly within that the Tax Working Group pointed out that there was something like 9,300 families who were manipulating their incomes in such a way to now qualify for Working for Families, and we've indicated that those sorts of situations will be closed off.

STEPHEN Well it certainly seems clear there's a rise in GST, why does GST have to go up?

PETER Well I'm not going to comment on whether there's going to be a rise or not, you'll find the answer to that in due course, but let me just make this point. One of the things the Tax Working Group identified was that New Zealand's tax system is very reliant on a few levers only, personal incomes, company taxes, GST, and when you get a situation as we have had in recent years of an international economic contraction, then it starts to hit all of those elements pretty heavily. So we do need to be looking at broadening our tax base, we do need to be looking at making sure that we're not as heavily reliant on one factor, as we have been, and obviously what the government's been looking at over the last few months in response to the report is how we can bring about a broader base, but also shifts away from an emphasis on taxing what people earn, but to looking at consumption, and that’s why we're looking for instance at the whole area about people with property investments as well.

STEPHEN But one of the problems it seems to me, a looming fear with this Budget is, it's clear that there'll be income tax cuts, it's well signalled, the lower rate would drop and there are indications that in the middle rate down 2% and the lower rate 2½%, but you look at the mixture of your GST going up and your income tax, and New Zealanders aren't necessarily that better off out of this Budget are they?

PETER I think you'll find when the full package is revealed that there are some quite significant gains for a large number of New Zealanders, and what we've also been able to do is rebalance the tax system in such a way so that a number of the distortions that have really crippled in recent years will have been eliminated. For instance one of the reasons why we want to align the company rate and the trust rate is to get over what's been a huge explosion in trusts over the last decade as a direct consequence of the Labour government putting up the top tax rate in 1999, there's a huge correlation between the explosion and the growth of trusts for income avoidance purposes, and that decision, and that’s created a whole lot of other distortions, you see it when you look at things like LAQCs in the property area, a similar relationship back to putting that top tax rate way out of line with the remaining parts of the system, just a decade ago. So what we're looking to do is to try and bring these things back into a better balance, so that we then actually get a system that’s got more integrity to it, that it doesn’t have the incentives to evade or to avoid, that there are in the system at the moment.

STEPHEN One of the key questions about balance though, of course income, is if you make those changes around those various mechanisms like trusts and investment properties to avoid tax, you're also giving a very big tax cut to upper income earners and we've obviously heard from Phil Goff saying there's an equity issue there.

PETER Well go back to what I said right at the beginning, what's important for New Zealand moving forward is that we have the opportunity to invest in growth that’s going to boost incomes all round, what we've got to do is get people out of consumption into savings and investment, and obviously the combination of shifts and personal tax rates, movements in terms of property investment will redress that balance, but start to see people also we think, encouraged to make much more productive investment, which in turn then creates jobs, then creates better productivity, then creates better incomes for all New Zealanders.

STEPHEN What about the low income earners, the superannuitants, who do seem to face a disproportionate burden from increase in GST? The increase in GST is going to hurt the older people and the low income earners, what do you do to protect them from this?

PETER What we've said was in the event of any increase in the rate of GST there will be full compensation applicable from the date that any increase would take place. That’s been the position that the Prime Minister's made clear right from the outset and if that is what eventuates then there will be full compensation available.

STEPHEN One final question is a home owner looks to the year ahead, they know the Reserve Bank's looking at interest rate rises, they know there's a prospect that there'll be an increase in GST, and they know possibly there'll be some form of tax cut, but can you give an assurance that they will actually be better off in a cash sense?

PETER I think when the figures come out most New Zealanders looking at their situation will say, we are certainly better off than we were before budget day dawned, and really what the government's objective has been, is a dual one to if you like leave people in that situation where they are better off or certainly in the worst situation no worse off, but more importantly to realign the tax programme, the tax policy mix in such a way that we deal with the issues that the Tax Working Group identified, but that we also position this economy better to be productive in the future.

STEPHEN Let's just pause there for a moment Peter and we'll continue this discussion with the panel.

PATTRICK SMELLIE – Business Wire
The Tax Working Group report when it came out said this is a broken tax system, it needs significant base broadening. All we seem to be seeing though is a change in the GST rate and a bit of tinkering around with the personal tax rates, you could really argue this doesn’t go to the whole broken fix does it?

PETER Well it certainly doesn’t do a number of the things that the Tax Working Group recommended, for instance there won't be a land tax, there won't be a capital gains tax, we're not going to have a risk free rate of return introduced on property investment either, and those decisions were made some time ago, but in terms of the fundamental issue about how we reposition the economy, the mix of personal tax changes, the changes that we're going to make in terms of investment property tax treatment, will start to make that shift occur. Bear in mind that over the last couple of years we've made a number of other changes as well in the corporate area, that programme will be ongoing, we'll be announcing some more moves in terms of international tax and so forth in due course, but if you're saying is this a one stop sort of one shot fix, no it's not, but then tax policy never is, you’ve gotta keep working at it, but you’ve gotta keep reorienting it in such a way that what you're doing is going to be effective.

STEPHEN You’ve gotta keep working at it, did I hear a bit of a suggestion that Working for Families will receive more work, are you going to make any alterations to it at all?

PETER There are no plans at this stage Stephen to make any fundamental alterations to Working for Families, we are looking at some of the issues around about – which have come up for criticism if you like in terms of people wroughting the system, but in terms of the fundamental, there are no intentions to change it at this point.

NOELLE McCARTHY – Columnist
Hi Peter, you talked about taking us out of consumption and into investment, but the GST hike that as you and Stephen discussed, that’s going to affect the lowest income families, because they're the ones spending money on necessities that incur GST, can you tell us a little bit more about what that compensation for them might look like?

PETER Well again Noelle you're assuming a decision that I'm not about to announce, that will be announced on Thursday one way or the other, but let's just for the sake of the argument run through in the event of a GST change what will happen. There will be compensation for low income people through changes to personal tax rates, there will be in the case of beneficiaries, superannuitants and others who receive state payments, there would also be full compensation from the date that any change took place. Now clearly in terms of the first part of your question we're not expecting those people to be in a financial position to invest more in terms of savings or productive investment, but by freeing up, resources at the other end of the scale, that’s where those changes are going to occur.

PATTRICK I spose the other thing I wonder is from a tax purity point of view, cos you can't give me a decision for the later in the week, do you see any argument for treating residential investment property differently from commercial property?

PETER Well we've taken to heart very much the advice the Tax Working Group has given on that score, the fact that we have this multibillion dollar – 200 billion dollars in property investment at the moment returning something like 500 million dollars in losses, on the face of it doesn’t stack up.

NOELLE Well we know that the tax system is creating the wrong incentive for people to get into the rental property market, will the changes go far enough in removing those Peter?

PETER Well you'll have to wait and see Noelle but I think they will, I think that they will create Australian where people who are investing reasonably and fairly will be able to do so, I fear some of the arguments you hear about people saying this is gonna push rents up I don’t think that’s gonna come to pass as much, but I do think that there will be opportunities for people who are going to make a productive decision to do so effectively but without the advantages that have been in the system to date.

STEPHEN Thank you very much for your time, Peter Dunne, Revenue Minister.

ENDS

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