budget 07

Freight rates will rise about 1.4 per cent because of the regional fuel tax proposed in the Budget, the Road Transport Forum estimates.  The increase is on top of the 11 per cent to 18 per cent increase in heavy-vehicle road user charges from April 1 which has already begun to force freight costs up.

"This is a 1.4 per cent tax on freight to fund passenger transport in Auckland," said chief executive Tony Friedlander. He said the tax was "lunacy".

Because so many imports and exports went through Auckland, people well outside Auckland would end up paying for passenger transport they would never use.

Wellington economist Gareth Morgan is calling on the Government to clean up the fund management sector and make KiwiSaver "safe" to invest in.  "This government has to clean up the industry before it hands the heads of four million Kiwis to it on a platter," Dr Morgan said.

Savers might be seduced by tax breaks and employer levies in the form of KiwiSaver announced in last week's Budget, Dr Morgan said.  Dr Morgan called for government regulation to protect savers from fund managers contracting out of their fiduciary positions of trust and creating reserves that might be lost to some savers.

He is offering his own KiwiSaver scheme and has pointed out that money in KiwiSaver schemes is not government-guaranteed.  "There is no guarantee as to the safety of your money, no undertakings whatsoever as to the returns you can expect, and it is delivering you holus-bolus into the arms of the long-term savings sector."

Finance Minister Michael Cullen confirmed last week that KiwiSaver would not be government-guaranteed, and a spokesman pointed out yesterday that there was no government guarantee in Australia either.

The spokesman for Dr Cullen said no one was being forced to save.  "If you have a guarantee, that would surely reduce the incentives for the fund managers to perform."

The Government had added requirements that KiwiSaver schemes be registered with the government actuary, and have certain disclosure and reporting conditions consistent with international standards.

Dr Morgan said if KiwiSaver underperformed, lost people's money or even took it, then that was "tough - buyer beware".

Fund managers have rejected Dr Morgan's recent criticism of the sector, saying KiwiSaver would be governed by strict regulations putting considerable onus on fund managers to operate in the best interests of investors.

KiwiSaver schemes were reviewed by the government actuary before approval, to ensure all fees and charges were fully disclosed and were not unreasonable.  The six default providers (AMP, AXA, ASB, ING, Mercers and Tower) have been reviewed by an independent, government-appointed panel.

The KiwiSaver Act contains provision for the government actuary to apply for cancellation of registration of a KiwiSaver scheme that fails to operate in an acceptable manner.

KiwiSaver products will be managed in accordance with a trust deed.  Several fund managers said recently that any suggestion that the sector would not be working in the best interests of investors and consumers or that it offered KiwiSaver products and service that were not best practice did not stand up to scrutiny.

Dr Morgan said yesterday that the Government had to make KiwiSaver safe to invest in, but that did not involve a government guarantee.

The life insurance sector should be forced to accept a fiduciary duty to its investors through KiwiSaver and should not be allowed to contract out of that through trust deeds.  The companies should not create reserves from savers' money that savers would never see again if they left the scheme or changed provider.

Farmers and the freight industry have come out swinging following the government's decision to allow regional fuel taxes of up to 10 cents per litre in Auckland and Wellington.

The fuel taxes, unveiled at last week's Budget, are intended to provide additional funds to build roads and improve public transport. In Auckland, this will include the electrification of the city's rail network - estimated to cost over $1 billion.

The Road Transport Forum, which represents the freight industry, says it should not have to subsidise public transport, because it does not use it.

Chief executive, Tony Friedlander, says a diesel tax of 10 cents per litre will increase freight rates by 1.4 per cent on average.

Federated Farmers vice president Don Nicolson is also joining the attack, saying it is totally inappropriate for farmers to subsidise public transport. He says it is a service the vast majority of rural people never use or derive any benefit from and a lot of diesel is used off-road for agricultural machinery. "While refunds will be available the refund process will be onerous and yet another compliance cost," Mr Nicolson says.

Mr Nicolson says that the fuel tax question is likely to affect the entire country. "Not only is it likely that other regions will implement the tax, but in the 1990s fuel companies averaged the short-lived regional petrol tax meaning that everybody paid. "There is nothing stopping a repeat this time around," Mr Nicolson says.

But the government argues a tax at the 5-10 cent level will be significant enough for petrol companies to implement regionally, rather than spreading a lower 1-2 cent tax across regions as companies did under the previous regime.

However, the fuel tax does have some supporters. The Auckland Chamber of Commerce says trucking will be more efficient once the tax is imposed because fewer cars will be clogging the roads.

It says the freight industry needs to accept fuel taxes as part of the cost of doing business. Nevertheless, chief executive Michael Barnett acknowledges that businesses will need to pass on some costs to consumers in order to remain competitive.

Save now - spend later. Finance Minister Michael Cullen's eighth Budget has turned an economic necessity into a political gamble, with a promise of sweeteners to workers if they save for their retirement and the hint of a carrot next year in the form of tax cuts.

But employers will have to carry some of the weight. The Government rushed legislation into Parliament last night to force businesses to contribute to workers' KiwiSaver accounts. Those contributions start at 1 per cent of each worker's wage next year, rising to 4 per cent by 2011.

The KiwiSaver pill will be sugared by a 3 per cent cut in the corporate tax rate and a Government subsidy to business of $20 for every worker who signs up to the savings scheme.

It will be matched by a $20 top-up from the Government, straight into workers' accounts, more than doubling the retirement nest eggs of those who make the minimum contribution - and doubling what they can expect to get from the state pension now.

The changes will deliver about an extra $60 a week to someone on a salary of $50,000 and about $100 a week to someone on $100,000.

But the stick is that workers will have to forgo income now to become eligible for the subsidies.

They also face local government petrol levies to fund road and rail projects in Auckland and Wellington, and pressure from the Government and employers to limit wage demands as a tradeoff.

Dr Cullen has raised the stakes even further by whipping away his 2005 "chewing gum" tax cuts - which were to be worth between 67c and $10 a week and were pencilled in for next year.

Senior Labour ministers are touting the Budget as the Government's boldest yet. But it is a huge political gamble that fixing the country's savings crisis will not spark a backlash over the Government's failure for the eighth consecutive year to deliver tax-rate cuts.

The last attempt to legislate for compulsory savings was roundly rejected by voters in 1998.

But Dr Cullen has laid the groundwork for an announcement on tax cuts before the next election. He has admitted that the long run of large government surpluses - worth an estimated $22 billion over the next four years - is unsustainable.

He said tax cuts now would only stoke an overheated domestic economy and housing market.

Meanwhile, bold action was needed to reverse New Zealand's dismal savings record. "In my view, the choice was not a difficult one. Every dollar saved today is worth more in the future. A small tax cut now would be spent and then gone."

Dr Cullen today told Radio New Zealand there did not need to be a "huge tradeoff" between wage bargaining and employers' compulsory contributions to Kiwisaver.

He said the Government expected to contribute about 2 per cent of the 4 per cent compulsory contribution employers would make to their workers' Kiwisaver schemes after four years.

A "fairly ambitious" 50 per cent take-up rate would mean an employer's "total wage and salary bill would be 1 per cent higher after four years than it otherwise would be".

So, if there was just 0.5 per cent foregoing a total wage increase over that period, that would halve again the net cost to employers, Dr Cullen said. "So we're not talking about dramatic foregoing of wage increases and I think there's some sort of hysteria around industrial confrontation that's just getting a little bit silly."

Employers would get a lot out of Kiwisaver, Dr Cullen said. "Employers get structurally lower interest rates, they get stronger capital markets in New Zealand, they get greater employee loyalty and I think they'll also get a great tendency for New Zealanders to stay in New Zealand once they're saving into Kiwisaver and locked into savings," he said.

"Even a small trade off at the margin will mean that this is a fairly small net cost to employers and out of that they get a great deal over the long term."

Dr Cullen said it was likely that few low income would opt in to Kiwisaver but when someone took on a new job, their Kiwisaver contributions would be automatically deducted.

"The question at that point is whether they can stay in that position and continue to forego that income, not having had it in the first place, given now the enormous advantages. "Because for a person on a low income their savings effectively can be trebled by means of the change in Kiwisaver."

National Party leader John Key said the Budget was a cruel hoax on business and a blow to those on the breadline. "Fifty per cent of New Zealanders will not take this up and I'll tell you who (they) are - they are the people who can't afford to, who don't earn enough," he said.

"And ... they're now being told, `Don't ask for a pay rise'. The lower-paid workers of New Zealand have to give up their pay rise so higher-paid workers can get a cut from KiwiSaver."
- With NZPA

While many moaned about what it lacks, some business owners think after eight consecutive budgets Michael Cullen is finally starting to learn.

Lower Hutt fire alarm manufacturer Pertronic managing director David Percy said a 3c cut in the business tax rate showed New Zealand was starting to "play catch up" with the rest of the world.

"The number one thing in terms of growing a business is retained earnings. It's a move in the right direction," he said.

New Zealand's per capita income was just more than half of the US, and the only way to increase it was to build successful businesses, he said. "Most countries recognise this and it has taken New Zealand a while to focus on having successful businesses."

More tax cuts would further increase New Zealand's global competiveness, Mr Percy said, a point Business New Zealand chief executive Phil O'Reilly agreed with. "We can't compete with Australia if you are just doing the same stuff, it's important that we move that downwards rapidly over the next two years," Mr O'Reilly said.

An extra $630 million in research and development funding was going to be positive for a lot of businesses too, Mr Percy said. However the positive gloss was immediately tarnished by the flip side of the Budget - compulsory KiwiSaver contributions and an obvious lack of commitment to tightening Government purse strings, Mr O'Reilly said.

"The positive things they are doing are likely to be less than they might have been otherwise, because you're still seeing government spending squeezing out private sector spending. It's a pretty negative point."

The compulsory contribution to KiwiSaver was an "unwelcome surprise" for employers, Mr O'Reilly said. Even with tax credits to dull the pain, the forced contribution was going to increase payroll costs already hit by extra holidays and higher minimum wages, he said.

Even worse, it seemed the Government was forcing employers to start doling out money for nothing. "Employers will be most unhappy that something that is nothing to do with them employee savings they have been roped into," Mr O'Reilly said.

But even with 50 staff in his Wingate factory, Mr Percy said he was relaxed about the KiwiSaver changes. "Ultimately it is part of the salary package, so it just forms part of the backdrop in terms of wage negotiations," he said.

The positive windfall from a tax cut would still miss about 60 per cent of small businesses, Massey University's Centre for Small and Medium Enterprise Research Claire Massey said.

And the rest of Dr Cullen's package held little for the sector to get excited about, she said. "It's not a day for celebrating for New Zealand small business."

Comparing Dr Cullen's announcements to 50 paragraphs of small business highlights in last week's Australian budget, Dr Massey said New Zealand small business owners would be indifferent. "I don't think they will be pissed off because they didn't have high expectations."

But the lack of a positive message to the owner-operators and small enterprises from Government was very "underwhelming", Dr Massey said. "I'm not talking about the neighbourhbood dairy but the small firm who do have growth prospects, whose owners are ambitious, what do they get out of this?"

Economists are warning that KiwiSaver could pump up the already soaring housing market when employees start withdrawing money for their first home.

From July 2010, KiwiSaver members will be able to put their and their employers' contributions toward a first-home deposit. At the same time, they will be eligible for a Government subsidy of $1000 a year, capped at $5000.

Experts are warning that the scheme could cause a flood of money into the property market, boosting already high prices.

BNZ chief economist Tony Alexander said any subsidy such as KiwiSaver would put upward pressure on house prices, though the extent of this was impossible to predict.

Westpac economist Donna Purdue agreed. "Any kind of subsidy to housing is obviously going to push up house prices."

Mr Alexander said there was a school of thought that once people saw their savings grow, the desire to own a house would subside - but warned that had not happened in Australia, which had compulsory superannuation.

Finance Minister Michael Cullen said Inland Revenue would get $14.6 million to get tough on property speculators, ensuring they are paying tax in a bid to dampen their effect on the property market.

Property speculators who are reaping millions of dollars from the super-heated housing market are about to feel the heat from a tough new tax crackdown.

Finance Minister Michael Cullen said Inland Revenue would get an extra $14.6 million over the next three years to strengthen property transaction audits. Speculative activity was driving up house prices and household debt levels, he said. So giving IRD more money would help it enforce the law.

Property auditing gathered $100 million between 2004 and 2006, he said and it was important for IRD to have the resources it needed.  Of the country's 1.4 million houses, around 400,000 are owned by investors. If a landlord buys with the intention of selling, tax must be paid on any financial windfalls.

Sharon Cuzens from Inland Revenue in Wellington yesterday welcomed the boost.  "It will enable us to pursue further, in-depth investigations and education on a risk area we have been actively targeting for some years," she said.

IRD would improve information so people were more aware of their liability, monitor major developments to ensure accurate return of sales or profits, boost research and analysis of risk areas and increase audit activity in areas of identified risk, she said.

One housing investment expert also welcomed the Budget package. Andrew King, Property Investors' Federation vice-president, said speculators who evaded tax were taking high risks. He encouraged those people who were eligible to come clean, declare their profits and pay tax.  "It's like playing Russian roulette if you don't," Mr King said. But he also criticised existing tax law, saying it had too many grey areas.

Matthew Gilligan, an Auckland chartered accountant and specialist tax and legal structures consultant, also welcomed the package, saying IRD was too poor to do its job properly and the money would help.  "They're grossly under-resourced," he said, citing long waiting lists for taxpayers seeking rulings and waiting for investigations to be concluded.

Mr Gilligan, whose firm has 4500 property clients investing in residential housing, called for clearer rules on housing investment tax liability. Many IRD staff were excellent but it was not uncommon for staff to change so fast that some taxpayers were dealing with three IRD staff members over one issue, he said.  "That's not uncommon on an audit." Nor was it unusual for a taxpayer to be given conflicting advice by various IRD staff members, Mr Gilligan said.

Greg Haddon, a Deloitte tax partner, said the $14.6 million was not nearly enough to tackle the issue.  "This extra money won't make a big impact," he said, and failed to address the reasons for so many people investing in housing, because they regarded it as a surer bet than other forms of investment.

IRD has already announced the success of previous crackdowns.  Two years ago, it netted just under $11 million from a campaign in the Queenstown/Otago region. Its concentrated audit blitz on developers and speculators started in March 2004 and by November 2005, it had 120 cases either under investigation or heading for prosecution.

Auckland was also a target two years ago, when IRD said it was increasing resources to hunt down speculators and developers who had kept their profits a secret.  Senior Auckland department official Richard Philp said in January 2005 that an extra $106.6 million was gathered nationally within two years on property transactions, including $52.9 million from Auckland.

The rules

• If you invest for the long term, there is no tax on money when you sell the rental property.
• But if you buy with the main aim of selling for a profit, any money you make is taxable.

First-home buyers wait for Government handout.

Prospective first-home buyers hoping for help through a Government-run shared-equity scheme will have to wait a little longer.  Housing Minister Chris Carter said $1.4 million had been allocated in the Budget for work on the potential design of a such a scheme, but a pilot would not be funded until at least next year.

Mr Carter has said the most likely location for a pilot scheme is Auckland and it could involve the Government paying for a 25 per cent or 30 per cent stake in a house, effectively reducing the purchase price of a $400,000 property to about $300,000.

If the house was sold, the Government would take back its percentage share. The scheme is expected to be aimed at the lowest quartile of the housing market.

Mr Carter said the Government was keen to explore how much demand there was for a shared-equity scheme.  If the scheme "flew", it would be introduced as part of a suite of new measures including a possible Housing Affordability Bill. "Shared equity will also be introduced at the same time as the Government seeks to increase the number of houses in the price bracket affordable to first-home buyers."

Mr Carter yesterday also announced $43.6 million over four years for other housing initiatives.  That included $23.8 million to increase the life of the Healthy Housing programme and extend it into the Wellington region for the first time.

The programme targets overcrowded households and assists them into more appropriate housing.  The Housing Innovation Fund, which provides government assistance to local authorities and community groups to develop affordable housing, would also receive a boost of $19.8 million.- NZPA