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TAX NEWS - 2010

New Zealand Tax: Treasury, IRD butted heads over budget advice on company tax cuts

Officials at the Treasury and Inland Revenue Department were at a loggerheads over whether the government should have cut the company tax rate to 28%.

The two departments gave different recommendations to Finance Minister Bill English and Revenue Minister Peter Dunne, with the Treasury lobbying for a cut, and the IRD instead calling for depreciation changes to be scaled back to keep the tax rates aligned, according to budget advice documents published on the Treasury website.

The Treasury said the base-broadening measures taken by the government effectively increased what companies were paying and that tax relief was necessary, which the government ultimately agreed with.

Treasury officials said lower taxes would encourage increased foreign investment and they dismissed concerns over the 5 cent gap between the top personal tax rate and company rate, saying it would be an improvement on the status quo and historical arbitrage opportunities.

IRD officials called for the ministers to scale back changes to depreciation that saw property owners lose their ability to claim depreciation on buildings with a life of more than 50 years, and keep claims available for industrial property, rather than cut the corporate rate.

It argued the misalignment of tax rates created inefficiencies by creating a bias toward company structures, and reintroduced "incoherence into the taxation of savings vehicles," with different rates for direct savings, PIE investments, and investments in unit trusts, life insurance plans and other instruments.

IRD also said the removal of depreciation rates threatened to discourage investment, particularly from capital intensive industries.
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