Victoria University's Tax Working Group issued their much-awaited report today containing recommendations on what is needed to create a world-class tax system in New Zealand. The report (entitled "A Tax System for New Zealand's Future") will hold a lot of weight in shaping tax policy within the current Government, with some of the recommendations likely to be featured in May's Budget (though likely in a modified form).

The report contains 13 key recommendations in summarised form,along with around 70 pages of details and background information. The full report can be read here.

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Summary of the Tax Working Group's Recommendations

(From the point of view of a NZ salary or wage earner)

(1) The company, top personal and trust tax rates should be aligned to improve the system's integrity...

Assuming the tax alignment is at rates lower than the current ones this can only be viewed as a positive for salary earners. It will help to create a fairer system whereby there are less loopholes and incentives for richer Kiwis to lower their taxable income where ordinary New Zealander's are unable to.

(2) New Zealand's company tax rate needs to be competitive with other countries' company tax rates, particularly that in Australia...

Obviously a very important point in order to keep New Zealand companies competitive and to discourage companies from relocating overseas.

(3) The imputation system should be retained. However, this may need to be reviewed if Australia decides to move away from its imputation system.

A neutral recommendation for many salary earners, however dividend imputation does encourage more diverse investment (or specifically, it doesn't discourage investment in companies - and we need our companies to be strong if they are to be able to grow and pay internationally competitive salaries).

(4) The top personal tax rates of 38% and 33% should be reduced as part of an alignment strategy and to better position the tax system for growth. Where possible, the Group would like to see a reduction in personal tax rates across-the-board to ensure lower rates of tax on labour more generally...

An excellent recommendation for New Zealand workers. This would have the effect of increasing take-home pay for a large chunk of New Zealand's population.

(5) Base-broadening is required to address some of the existing biases in the tax system and to improve its efficiency and sustainability...

We all know that income tax cuts will have to be paid for somehow - and base broadening is one alternative (reduced Government spending is the other). From the point of view of a wage or salary earner, broadening of the tax base is likely a positive recommendation.

(6) The most comprehensive option for base-broadening with respect to the taxation of capital is to introduce a comprehensive capital gains tax (CGT)... most members of the TWG have significant concerns over the practical challenges arising from a comprehensive CGT...

A comprehensive capital gains tax would be politically very difficult to implement in New Zealand, and the Tax Working Group have recognised this.

(7) The other approach to base broadening is to identify gaps in the current system... The majority of the TWG support detailed consideration of taxing returns from capital invested in residential rental properties on the basis of a deemed notional return calculated using a risk-free rate.

This recommendation is neutral from a worker's point of view, though everyone is likely to be affected from the flow-on effects. We may see rents rise and house prices fall - a scenario that will disadvantage some people but provide a lot of opportunity and incentive for people to own their own home.

(8) Most members of the TWG support the introduction of a low-rate land tax as a means of funding other tax rate reductions.

Neutral from a worker's point of view, but sure to create some controversy in some sectors of the economy.

(9) The following targeted options for base-broadening should be considered for introduction relatively quickly:
- Removing the 20% depreciation loading on new plant and equipment.
- Removing tax depreciation on buildings (or certain categories of buildings) if empirical evidence shows that they do not depreciate in value.
- Changing the thin capitalisation rules by lowering the safe harbour threshold to 60% or by reviewing the base for calculating this measure.

The point here seems to be to encourage investment. Though this is not likely to affect workers much in the short term, over the longer term companies will rely less on the availabilty of cheap labour and more on new technology and highly skilled (highly paid) workers.

(10) GST should continue to apply broadly. There should be no exemptions.

This makes sense from an administrative point of view but does mean that lower-income families will feel more of a hit from increased GST rates, e.g. on food.

(11) Most members of the Group consider that increasing the GST rate to 15% would have merit on efficiency grounds because it would result in reducing the taxation bias against saving and investment...

As a consumer then any increase in GST is unwelcome - but if this is what is required in order to receive substantial personal income tax cuts then it is a positive as part of the big picture. Increased saving and investment will help everyone over the long term.

(12) There should be a comprehensive review of welfare policy and how it interacts with the tax system, with an objective being to reduce high effective marginal tax rates.

Working for Families has been controversal and not without reason. Although the tax credits are very welcome (even necessary) for many families there has been an unintended and perverse effect on marginal tax rates; Marginal tax rates can be in excess of 50% in some cases. This has created a disincentive to work harder and created a strong incentive to avoid tax by means of structuring ones income through companies, trusts and other methods. So a comprehensive review of welfare policy and how it interacts with the tax system sounds like a good idea.

(13) Government should introduce institutional arrangements to ensure there is a stronger focus on achieving and sustaining efficiency, fairness, coherence and integrity of the tax system when tax changes are proposed.

Agreed.

The 2025 Taskforce issued their first report today on recommendations towards closing the income gap with Australia by 2025.

The report seeks to advise the Government of the necessary steps required to increase incomes to a level comparable with those in Australia by 2025 - a task that would require a substantial and sustained lift in NZ's productivity growth considering that Australian incomes are on average 35% higher than New Zealand incomes.

There is some good background reading and a number of recommendations in the report (35 of them). If you've got the time then the full report can be read here. In order to catch the essence of the recommendations from the point of view of a New Zealand salary or wage earner we've included a selective summary of the key points below, along with our comments:

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Selective summary of 2025 Taskforce recommendations

(7) Ambitious welfare reform measures should be undertaken as a matter of priority to reduce the very large number of people of working age currently receiving welfare benefits.

If implemented this should increase the size of the working population and reduce the aggregate tax burden of welfare payments.

(8) Early steps should be taken to lower the actual and prospective costs (as a share of GDP) of New Zealand Superannuation.

Obviously this means that everyone should be putting away a larger percentage of their take-home pay into investments that will supplement their retirement income.

(9) Remaining KiwiSaver subsidies should be abolished.

Without the tax subsidies that are currently in place this will result in a lower net return on kiwisaver retirement investments - again meaning that each New Zealand taxpayer would need to make a greater commitment to private retirement savings.

(11.e) Market-based interest rates should be reintroduced for student loans.

This would have a dramatic effect on all student loan payers. At the minimum repayment threshold a salary of almost $40000/annum would be required just to meet the interest costs on a $30000 student loan. Recent graduates would therefore have a number of years of reduced cash-in-hand to look forward too, but at least they would have an incentive to pay back their loans sooner, and of course an incentive to move overseas in order to earn more.

(12) Average tax rates should be substantially reduced, as ambitious expenditure restraint permits. Cutting core Crown expenses to 29 percent of GDP would, for example, allow the maximum personal tax rate, and the company and trust tax rates, all to be reduced to 20 percent.

A 20% personal tax rate would have to sound very appealing to the majority of salary earners in New Zealand. Indeed anyone with an income over $44000 would be better off under a fixed 20% tax rate, and if the current 12.5% lower tier tax rate was also retained then anyone earning over $14000/year would receive a higher net income.

A higher net income would obviously be required though, as everyone would be expected to meet higher direct costs for services such as health, education, roading and retirement under this scenario.

(13) Serious reforms should be undertaken to reduce the high effective marginal tax rates facing many middle income taxpayers with dependent children as a result of the abatement provisions of the Working for Families tax credit scheme.

By reducing or eliminating welfare such as working for families there would be a large reduction in the marginal tax rate of medium income familes (the effective marginal tax rate can be more than 50% once benefits are factored in), however this will have the effect of reducing net incomes of families unless a corresponding reduction in income taxes or general child allowance is also implemented.

(14) Reductions in average tax rates should be achieved by reducing income taxes, and doing so having regard both to the importance of administrative simplicity and minimisation of tax avoidance on the one hand, and to the evidence that taxes on capital income can be particularly detrimental to economic performance on the other.

In other words, the 2025 taskforce recommend lowering average taxes in order to boost productivity and incomes, but by doing so through a reduction in personal (salary) income taxes rather than through capital gains taxes.

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In addition to the points summarised above, the report provides further recommendations in the contexts of regulatory changes, reducing Government spending, and privatisation of Government assets.

Maybe you're thinking about jumping ship to a more rewarding job and want to work out how much more cash you'll have in your pocket at the end of each month...

Or maybe you're eyeing up a job in New Zealand and want to get an idea of how much disposable income you'll have once you migrate here...

Either way we hope to aid you in your investigations with this easy to use tax-on-salary calculator.

Just enter your gross annual salary into the box and click Calculate - then we'll show you a breakdown of how much tax you'll be paying and what your kiwisaver and student loan contributions will be.

The Salary Tax Calculator

Statistics New Zealand's Quarterly Employment Survey to March 2009, shows a clear drop in employment over the last year, but the data also confirms that average hourly earnings continue to increase for those with jobs.

The recession is taking its toll on the employment scene with the statistics revealing a 2% drop in the number of full-time employees when compared with the previous quarter.

Average wages however are up around 1.3% from those in the December quarter, an increase which is in line with quarterly gains over the last two years.

Based on information from Statistics New Zealand, average earnings from wages and salaries in New Zealand in 2003 and 2008 were as shown in the table below. Wage inflation over this 5 year period was higher than that which occured during the period 2001-2006.

	2003	2008	% increase
Average weekly earnings	$655	$827
Average annual earnings	$34,062	$43,001	26.2%
Median weekly earnings	$587	$729
Median annual earnings	$30,498	$37,908	24.3%

The new National Government has put in place a revised set of personal tax rates to take effect as of April 01, 2009.

Most notably the middle tax bands have been changed to compensate for increases in the national average annual earnings. The top tax rate has also been reduced slightly to 38% and is scheduled to drop further in future tax years.

Further adjustments to tax rates and thresholds are also on the cards for the tax years beginning April 2010 and April 2011.

Tax rates effective as of 1 April 2009:
(excluding ACC and rebates)

tax	on annual earnings
12.5%	up to $14,000
21.0%	between $14,001 and $48,000
33.0%	between $48,001 and $70,000
38.0%	over $70,000

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For example, a specialist earning $100,000 per annum would pay tax as follows:

14000 * 0.125	=	$1750
(48000-14000) * 0.21	=	$7140
(70000-48000) * 0.33	=	$7260
(100000-70000) * 0.38	=	$11400
		$27550

Thus making a total tax bill of $27,550 or an effective income tax rate of 27.6% (which compares favourably with an effective rate of 30.3% a year earlier).

A new set of personal tax rates are to be introduced as of October 01, 2008.

An increase in the tax bands is also scheduled to occur from April 2010 and April 2011.

tax	on annual earnings
12.5%	up to $14,000
21.0%	between $14,001 and $40,000
33.0%	between $40,001 and $70,000
39.0%	over $70,000

Hays released their 2008 Salary Survey for New Zealand and Australia on monday, with salaries continuing to show strong growth in general.

According to the report, the majority of New Zealand employers surveyed reported 3% to 6% increases in average salaries paid, with the highest gains seen for roles where there is an abundant need for workers.

Hays is one of Australasia's largest specialist recruitment consultancies and a leader in recruitment worldwide. For full details of the 2008 Salary Survey, please refer to the Hays New Zealand website.