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New Zealand Budget Contains Handful Of Tax Reforms

by Mary Swire, Tax-News.com, Hong Kong

19 May 2014


New Zealand Finance Minister Bill English has delivered a Budget that paves the way for a return to surplus next year but is light on tax reform.

According to English, this is the "first Budget in six years to focus on managing a growing economy rather than recovering from a domestic recession and then the global financial crisis." He forecast real gross domestic product (GDP) growth of between 2 and 4 percent in each of the next four years. The operating balance before gains and losses is expected to be in surplus by NZD372m in 2014-15, when government spending will fall to 30.3 percent of GDP.

If tax revenue comes in ahead of forecast, the Government will prioritize additional debt repayment until its 20 percent debt target is met.

The Treasury has agreed to the Government lifting the operating allowance for next year's Budget from NZD1bn to NZD1.5bn. It will grow at 2 percent with each Budget. "This moderate increase will provide the Government with future options around investment in public services and modest tax reductions," English explained.

As for Budget 2014, it was comparatively sparse as far as tax measures are concerned. One of the main decisions is to permit loss making start-up companies to cash out all or part of their tax losses from research and development (R&D) expenditure. In addition, all businesses will be allowed tax deductibility for R&D "black hole" expenditure that is currently neither deductible nor able to be depreciated.

The Government is targeting an increase in business R&D to 1 percent of GDP. These two initiatives are estimated to return a net NZD58.1m in tax to innovative companies over the next four years. They are expected to take effect from the 2015-16 tax year.

The other headline measure temporarily removes duties and tariffs on a range of building products, to boost competition and improve housing affordability. A three year suspension of anti-dumping duties on plasterboard, wire nails and reinforcing steel bars will take effect from June 1. From July, a zero concessionary tariff will be introduced on residential construction materials. It will be reviewed after five years and will cover around 90 percent of the materials used in a standard house construction. The necessary regulations will be finalized in consultation with industry.

The reduction in duties and tariffs will reduce Government revenue by NZD27.8m over five years. The savings to the residential construction industry are estimated at NZD75m a year.

Changes to the parental tax credit were also announced. The Budget included an increase from the current maximum of around NZD150 a week to NZD220 a week, and the credit will be paid for ten weeks following the birth of the child rather than the current eight. The abatement formula will be altered to better target the payment towards lower- and middle-income families, meaning that a couple having a second child will not receive any payment if together they earn more than NZD99,847.

Depending on the outcome of a public consultation on the levies charged by the Accident Compensation Corporation, the Government hopes to be able to provide levy reductions in 2015-16. The cheque duty, currently charged at NZD0.05 per cheque, will be abolished from July 1 at a cost of NZD15.5m over the next four years. The revenue raised from the duty has been in decline due to falling cheque use. It generated NZD17m in 1991-2 and NZD10m in 2001-02, but now raises a mere NZD4m a year. To seek a refund of cheque duty paid on any unused cheques, taxpayers are advised to speak to their bank before July 1.

Finally, the Budget confirmed the pre-announced allocation of NZD132m in additional funding to the Inland Revenue Department (IRD) over the next five years to bolster its tax compliance activities and help it chase unfiled returns. The funding is expected to yield a gross increase in revenue of almost NZD300m over the same period.

Closing his speech, English said: "This is a Budget that looks to the future and to the substantial opportunities New Zealand has earned. If we stick to the plan the Government has outlined, we can grasp those opportunities and deliver sustainable growth that all New Zealanders can share in."

This was the final Budget that the National-led Government will put before the country goes to the polls in September. Accountancy firm EY said that "when it comes to an election showdown over tax policy, this Budget does put a small stake in the ground," but anticipates that "it will be only Labour and the Greens that go into the next election promising new taxes."

The New Zealand Bankers Association welcomed the tax reforms that were on offer. Chief Executive Kirk Hope said that abolishing the cheque duty and adjusting tax deductibility for R&D expenditure were constructive steps that would aid economic growth, and described the temporary changes to duties on building products as innovative.

There was one area where the absence of a Budget mention garnered praise. In its round-up, Deloitte commented: "It is pleasing to see that no Budget announcements have been made with a Base Erosion and Profit Shifting (BEPS) focus. It is important to remember that New Zealand has a robust tax system and myriad regimes that are designed to protect the tax base from profit shifting by taxpayers."

"Therefore while we welcome the government's general support for the Organisation for Economic Cooperation and Development project, in our view it is very important to await the final outcomes of that project and in particular what measures our trading partners adopt, before introducing BEPS reforms in New Zealand.'

TAGS: compliance | Finance | tax | investment | business | tax compliance | tax incentives | revenue guidance | gross domestic product (GDP) | tariffs | anti-dumping | tax credits | tax planning | tax rates | New Zealand | tax breaks | revenue statistics | tax reform | construction | regulation | services | research and development

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