Home News Tax Reaction: KPMG reads between the lines in Key's speech

Reaction: KPMG reads between the lines in Key's speech

Jenha White,  Tuesday, 09 February 2010 18:28

KPMG says it welcomes the clarity and package approach delivered in Prime Minister John Key's opening speech to Parliament, however the silence on tax rates requires reading between the lines.

KPMG chief executive Jan Dawson says the temptation for the government would have been to cherry pick revenue generating tax options, however 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," she says.

Some clarity was also provided around property tax with land tax, capital gains tax and risk free rate of return (RFRM) all ruled out.

However the sounds of silence on tax rates has led to some reading between the lines.

KPMG senior tax partner Paul Dunne says statements from the speech indicate the government has accepted the Tax Working Group's integrity and coherence concerns, indicating the most likely policy is to align tax rates across entities and types of income.

Dunne believes the lack of an explicit announcement on company tax rates indicates that the government is keeping its powder dry while its works through the ramifications of it 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," he says.

"Which country will move rates first remains to be seen."

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

KPMG senior tax partner John Cantin says an increase in GST will affect Tourism and Financial Institutions more than other businesses.

"Financial Institutions cannot recover full GST so that a GST increase will either increase their costs or reduce returns to savers."

Cantin says 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.

He also acknowledges that 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."

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

Dawson says 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 back.

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