‘Don’t Expect Major Tax Cuts In Budget’ Cullen Tells New Zealanders

by Mary Swire, Tax-News.com, Hong Kong

13 May 2005

New Zealand's Finance Minister Michael Cullen has advised taxpayers not to hold out hope for substantial tax cuts in next week's budget statement, despite recent evidence that the economy slowed significantly in the final quarter of 2004.

Speaking to manufacturers in the South Island city of Christchurch, Cullen warned that the country is heading for a period of economic slowdown that is likely to last through 2005 and into 2006.

However, in spite of this, Cullen argued that the government has little room to manoeuvre on the fiscal front, even with a budget surplus for the year to June 2005 of just under NZ$8 billion (US$5.8 billion). The finance minister is under pressure to follow the lead of his Australian counterpart, Peter Costello, who announced A$22 billion (US$17 billion) in tax cuts on Monday. Tax cut advocates in New Zealand have highlighted that this will merely increase the trans-Tasman competitiveness gap and accelerate the 'brain drain' of talent from New Zealand to Australia.

Last month, Cullen announced that a new package of reforms aimed at reducing the tax compliance costs of the nation's small and medium-sized businesses will form part of the forthcoming budget.

However, according to Liberal Party leader Rodney Hide, such reforms constitute mere tinkering around the edges. Speaking in parliament this week, Mr Hide asked Dr Cullen why Australia could afford across the board tax cuts in their budget with a government surplus of just 1% of GDP, while New Zealand’s surplus of over 4% of GDP wasn’t sufficient for a tax cut according to the government.

"The tragedy is that the government's NZ$8 billion surplus is so huge that decent tax cuts for workers are affordable. This will be a budget of missed opportunities," said Mr Hide.

"New Zealand could have just two rates of tax- 15% up to NZ$38,000 and 25% after that, and still be running a surplus," he noted.

According to Cullen, the proposed reform of small company taxation will include: a subsidy for small businesses with up to five employees allowing them to hire a payroll agent to deal with PAYE tax obligations; aligning GST and provisional tax payment dates to reduce the number of times businesses have to deal with the Inland Revenue (IRD); and giving firms the option of basing their provisional tax payments on their GST turnover to help match tax costs with cash flow.

In addition, there will be changes made to fringe benefit tax which will include: exemption of private use of work tools such as cell phones and laptops if they are primarily for business use and cost less than $5,000; an increase in the minimum value thresholds for unclassified fringe benefits, such as subsidised goods, from $75 to $200 per employee and from $1,800 to $15,000 across all employees; and the lowering of the valuation rate on motor vehicle fringe benefits from 24% to 20% of the vehicle's cost.

Dr Cullen also announced changes to the tax treatment of foreign superannuation schemes in a bid to remove barriers blocking a more open trans-Tasman labour market.

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