Government confirms it will retain imputation

The Government has confirmed it will retain the imputation system for taxing company dividends in its tax reform package later this year.

However, it is still considering whether it is possible to fully align the top personal tax rate, the trust rate and the company tax rate in this year's Budget, Finance Minister Bill English said today.

"The Government agrees with both the Tax Working Group and the Capital Markets Development Taskforce that the current imputation system is worthwhile. Therefore, it will be retained," he said in a speech outlining the Government's economic priorities to an Auckland business audience.

"Both New Zealand and Australia have this system and imputation plays an important role in our overall tax system."

However, the question remained about what the company tax rate should be and how it should relate to the top personal tax rate and the trust rate.

"We are still considering this issue - mindful that our company tax rate needs to be competitive internationally."

Aligning the company, trust and top personal rates remained the Government's medium-term goal. But it was considering whether it was affordable and whether it fitted with other equity considerations.

"Our early advice is that aligning the trust and top personal tax rates is the most important issue, because they are both final taxes. By contrast, company tax is an interim payment until a taxpayer's own personal tax rate applies."

Two other considerations were important for the Government.

First, complete tax rate alignment may not be necessary to eliminate many of the integrity problems with the current tax system. For example, substantial gains could be made by aligning the top personal rate with the trust rate, and having a company tax rate not too far below this.

Second, complete alignment may not be sustainable over time.

"Around the world, company tax rates are generally falling and, at 30 per cent, New Zealand's company tax rate is on the high side compared with many other developed countries.

"Remaining competitive with other countries may be more important than alignment - if not now, then at some point in the future."

The Government had asked for more work to be done on these issues.

"What we do know is that New Zealand's company rate can't get too far out of line with Australia's," Mr English said. "Currently, they are both at 30 per cent, but Australia is reviewing its own tax system and may consider dropping its company rate.

"We will watch events across the Tasman with a great deal of interest."