IRD examines idea of reducing tax rates on interest income to compensate for inflation costs

IRD examines idea of reducing tax rates on interest income to compensate for inflation costs

The government-appointed Savings Working Group has released a number of background papers from Inland Revenue on the relationship between tax and savings, including a look at cutting tax rates on net interest income to compensate investors for the effects of inflation.

It estimated the cost of such a tax cut on interest earnings at NZ$1 billion per annum.

All of the papers are available here.

In a paper titled "Taxation of savings - partial exclusion option", the IRD pointed to one of the recommendations from the recent Henry tax review in Australia that there should be a 40% savings income discount for non-business releated net interest income, net residential rental income, capital gains (and losses), and interest expenses related to listed shares held by individuals as non-business investments.

"In other words, only 60% of these forms of net capital income would be taxable. This discount was also intended to apply if the income was earned through trusts and partnerships, but would not generally apply to dividends and business income. Marginal tax rates would remain unchanged," it says in the paper.

"The key reason for applying partial exclusion to net interest income would be to adjust for the effects of inflation so that only the real return is taxed. Inflation can increase taxes on savings accumulated for long periods and increase tax biases between different forms of savings. The effective tax rate on accumulating interest income is higher than the statutory rate in these circumstances."

However the paper notes the partial exclusion system would be very expensive and would introduce opportunities for arbitrage when interest expenses are fully deductible.

"Partially excluding interest income has an immediate impact – it would lower revenue materially," it says in the paper.

"The fiscal cost of applying partial exclusion to the net interest income of individuals, trusts and partnerships is estimated to be around NZ$1 billion per annum. There are, however, significant risks associated with this estimate given the size of the interest base (which is around NZ$60 billion), the limitations of the data sources, the underlying variability of interest rates and the fact that there has been a major financial crisis."

Savings working Group member Andrew Coleman has previously advocated adjusting net interest income tax for inflation on interest.co.nz. See here.

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I don't see this being taken up. Too many pointy heads needed to police it. Too many unknown unkowns. Far better to keep cutting paye rates even if only by small amounts. National need to be careful they don't set up a tool that the progressive socialists would quickly use to steal what they want from those who saved and grew their wealth. Make no mistake, the Party with the promises will be a threat to this economy for the next twenty years.

i'm proud of you Wolly..you're starting to make sense!

Gosh thanks Rob...we're all proud of the progress you have made in understanding basic economics and politics!...hope you're getting enough food in that rest home....

Without you and Warren Buffet ..I am nothing, Wally?Wolly !

I hope they do this.....    

It would be a change that would have a strong impact on a number of fronts.

As John Key mentioned... One of the best ways to take the pressure off our high dollar, is to decrease our reliance on credit from offshore...  ie. increase saving rates and decrease our thirst for credit.

It would also help to rebalance/ realign the bias towards certain asset classes.

AND... more importantly it would simply bring the treatment of investment savings to the same level as other asset classes.

It is kind of ironic that we have allowed depreciation asset classes that appreciate in value but we have not allowed depreciation for investment savings which actually decreases in value....  It just ain't fair.!

They have addressed property ... now maybe this.

Lets hope they do it....

 

Let's go right back to the start Roelof. Long time ago business was expected to pay for costs out of revenue...this encouraged productivity and enterprise....now tell me why "depreciation" was allowed in as a cost any business could claim thereby reducing the tax to pay....once this scam started it became a snowball. In truth it is a business benefit.

Imagine if Noddyland gradually did away with all depreciation claims as costs. Business would have to adapt to saving or borrowing. They would also be forced to be better managers of capital instead of relying on being able to hide their blundering mistakes in the balance sheet depreciation claims.

So an Olly buys property to rent and earn revenue. Why should they be able to claim depreciation on the property...why?...it's just BS. The landlords are receiving a benefit. No different to WFF.

Then we have the landlord rort. Is it a subsidy to the landlord or the tenant when the state tops up the tenant's ability to pay the rent?......is it not true that were the top ups removed, the landlords would be forced to drop their rents...otherwise they would have fewer potential tenants! It's a bloody scam.

Great idea, but it would open a rather large loophole.

If it comes in, all I have to do is have my trust lend my company some money and charge interest on it to reduce the profits of my company to nil and hey presto - I get all my income through my trust with a 40% discount on the tax!

Awesome, can't wait

Both company tax and tax on interest, are economically destructive taxes that could have been designed by enemies of the West, to undermine their superior efficiency. But in truth, it is probably that the great number of people are simply too thick to see that these envy-driven taxes are merely slower way of killing the goose that lays the golden eggs, than actual Communist revolution would have been.

Kafka or Orwell or someone might have written a book decades ago, where governments start to tax interest, savings rates drop to zero eventually, and then the governments "solution" is to start special savings scheme where you entrust THEM with your money, and they subsidise you with your own and other taxpayers money. Is no-one else as sickened by this charade as I am?

Both dogmas were formulated when resources and energy were on the up-and-up.

Neither have anythig to do with what has hit us.

http://www.odt.co.nz/opinion/opinion/46074/topsy-turvy-politics-herald-l...

But it does suggest that you are either very old, or incredibly socially back-watered, to still refer to them.

They were a scrap over who got what part of the cake, and neither addressed the actual size of the cake, of which we're starting into the last half with ever-bigger bites.

Far better to just have a flat 20% tax on all income and let those that can make real money get on with the job, as everyone tends to benefit. The Government would collect so much tax it wouldn't be funny! Mind you a few lawyers and accountants make go broke in the process!