Wellington, Jan 20 NZPA - The Tax Working Group has recommended a range of comprehensive tax changes including a method of taxing capital gains on residential rental properties.

Options suggested in a report by the group today include a risk-free rate of return method for calculating capital gains on investment properties.

The report also has an option of a low-rate land tax.

The risk-free rate of return method works as follows: if someone owns a $300,000 property with a $200,000 mortgage and the annual risk-free return rate is set at 4 percent, taxable income is calculated at 4 percent of the $100,000 of equity in the property, giving a tax of $4000.

Someone on a personal income tax rate of 38 percent therefore ends up paying $1520 of tax.

"Put simply, the tax system is broken and needs to be fixed," group chairman Professor Bob Buckle said.

"We've suggested a number of ways this can be done."

There was a once in a generation chance for New Zealand to have a world class tax system, he said.

The report also recommends increasing GST to 15 percent, saying this would have merit on efficiency grounds, but any increase in GST would require compensation for those on low incomes.

The report also says that the company top personal and trust tax rates should be aligned to improve the integrity of the tax system.