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KPMG welcomes clarity and package approach to NZ tax system but questions remain

9 February 2010

MEDIA RELEASE

Statement made by Jan Dawson, Chief Executive, KPMG

We welcome the clarity provided by John Key in his opening speech today on the Government's approach to New Zealand Tax reforms.

The Tax Working Group generated much interest, concern and speculation and the Prime Minister has taken the opportunity to rule out some things and introduce a direction that will incorporate a broad range of measures. This signal of the direction of reform is welcomed.

The temptation would have been to cherry pick revenue generating tax options. The Prime Minister's statement makes it clear that the Government is looking at the reforms as a broad package. This is the right way to go about tax reform to ensure a fair and coherent tax regime.

While welcome clarity has been provided around some aspects of the tax system including the ruling out of land tax, no capital gains tax and no RFRM, questions still remain on other aspects of tax reform.

Notably, no comment was made about corporate tax rates, the amount of GST increase and its impacts on various sectors or details around tax treatment of property investments. These areas will need clarifying.

The ruling out of land tax and RFRM is a triumph of pragmatism over theory. Although economists like property taxes for their efficiency, the real world impacts of these two measures make them difficult to implement in a politically sustainable way.

One thing is certain, the 2010 Budget is shaping up to be a major milestone in the New Zealand tax system.

KPMG believes it is important that any package of reforms is sustainable politically and economically as New Zealand would not benefit from being lurched one way then another if Government changes tack.

ENDS

THE SOUNDS OF SILENCE ON TAX RATES

Statement made by Paul Dunne, Senior tax Partner, KPMG

The silence by the Prime Minister today on tax rates requires reading between the lines to see where the Government is heading. From his statements, the Government has accepted the TWG's integrity and coherence concerns. This indicates the most likely policy is to align tax rates across entities and types of income.

The lack of an explicit announcement on company tax rates indicates that our Government is keeping its powder dry while its works through the ramifications of this and keeps an eye on the Australian Government's decisions in relation to its own tax system review.

The Government has been clear in its ambitions to remain competitive with Australia so we would expect the corporate tax rate to move in line with what is announced there.

Which country will move rates first remains to be seen.

What will be of more immediate interest to business is the expected increase in GST which will affect some businesses more than others.

Corporate businesses may also be affected by the possible treatment of depreciation on property. However a drop in corporate tax rates could offset any changes to depreciation. The important factor will be in businesses working out what level of corporate tax rate cut would be required to offset any changes in treatment to depreciation if changes to depreciation are implemented.

ENDS

GST INCREASE PUTS TOURISM AND FINANCIAL INSTITUTIONS IN THE TAX FIRING LINE

Statement made by John Cantin, Senior Tax Partner KPMG

All business will be impacted by any increase in GST. However, Tourism and Financial Institutions will be more affected than others.

Financial Institutions cannot recover full GST so that a GST increase will either increase their costs or reduce returns to savers. This means the Government does need to properly model the effects of a GST rise on the incentive to save to make sure the effects it intends are realised.

Close to the Prime Minster's heart as Minister of Tourism will be the impacts of any GST on this sector. With the GST rate in Australia at just 10 per cent, an increase to our rate would have a negative impact on New Zealand's competitiveness.

The sector would have to either increase prices and therefore demand, or absorb the impact and reduce profitability.

Any increase in GST could result in a run on goods and services before the tax is increased so care must be taken, particularly by providers of goods and services, particularly retailers.

When GST was last raised there was increased demand for goods and services in the lead up to the change. Some providers took it as a sign of future demand and increased their inventories which they found difficult to sell after the rise.

ENDS

PROPERTY INVESTMENT DECISIONS SHROUDED IN UNCERTAINTY

Statement made by Paul Dunne, Senior Tax Partner, KPMG

The silence on depreciation today in the Prime Minster's speech on tax indicates that this remains very much a focus for the Government in its tax reforms.

Property investors will be looking for clarity around parameters and definitions.

Until detailed announcements are made, property investments decisions will be shrouded in uncertainty.

We expect a lot of pressure will be applied by the property sector on the Government between now and the Budget in order to gain further clarity.

A positive aspect of today's announcement is the indication that the Government is looking at a package of tax reforms.

A range of options are available to Government to address the perceived "problem" with the total amount of tax paid by the property sector. Although ruling out land tax and RFRM, Government's silence indicates removing building depreciation remains on the table.

Property investors need to ask - if depreciation is denied, then what level of tax rate cut would compensate?

ENDS

Farmers and Maori authorities should welcome ruling out of land tax

Statement made by Ross Buckley, lead Agribusiness Partner, KPMG

The Agribusiness sector including Farmers and Maori Authorities will be relieved at the ruling out of a land tax and Risk Free Rate of Return Method (RFRM) today by the Prime Minister.

Landowners stood to be significantly adversely affected if a land tax or RFRM was introduced. This was recognised by the Tax Working Group and options for exempting the Agricultural sector were mooted at the time.

In a triumph of pragmatism over theory, the Government has ruled both options out completely. The implementation of RFRM would have had negative practical implications on cash flow for land and building owners in the agricultural sector.

The sting however, remains in the tail for property investors as the Government has made it clear that tax on rental properties will change.

For more information, or for an interview, please contact Sneha Paul on 021 243 8997

KPMG COMMUNICATIONS