The New Zealand Economy

The responsible management of the economy continues to be the focus for the government, highlighted by the delivery of another 'zero' budget.　

A return to surplus by 2014/15 is still predicted, although this is well within the margin of error, as well as a fall in the unemployment rate to below 5% by 2015.　

The delayed rebuild of Christchurch will be a cornerstone of the growth in domestic activity and will contribute about one percentage point to annual growth in each year from 2012 to 2016.

Apart from the focus on balancing the budget,  there is a limited amount of new targeted investment to improve New Zealand innovation, including the establishment of an Advanced Technology Institute, and a small increase in funding for science and engineering courses.

The most significant revenue moves are the increase in tobacco excise by 10% in addition to the CPI increase each year for the next 4 years and some changes to tighten the student loan rules, including the elimination of the early repayment discount from 1 April 2013, and an information match between Inland Revenue and the Customs Service for Student Loan borrowers in serious default, which could cause some excitement at airports in the future.

There are limited tax changes focussed on the targeting of loopholes, outdated regimes, and increased enforcement.

Mixed Use Assets

Concern for this tax loophole for the well-off was raised by the Government last year in a discussion paper that set out a method to restrict the tax deductions taken by those who had high value assets available for rent and, therefore, were partly used for business purposes.  Typically, owners would deduct costs associated with owning the asset for the full year except when that asset was actually used for private purposes.   The announced rules appear to be less restrictive than originally proposed and will apportion deductions based on the actual business use of the assets when compared to the total time the asset is used for any purpose.　 This effectively removes the 'available for rent' periods from the calculation.　 For example, if an asset is rented for 40 days and used privately for 80 days during the year the taxpayer will only be able to claim 33% of the expenses.  　 Further details as to the operation of these rules are not yet available and we will issue a further update once these are released.

Repeal of the $9,880 tax credit

The low income rebate was originally introduced to balance the effect of GST being introduced in1986, and will now be repealed with effect from the 2012/13 tax year. However, if individuals are currently claiming this via their tax code they will continue to receive this through the PAYE system for the current year.　　Interestingly, if this is  claimed via an individual's tax code via PAYE and they file a tax return (for example because they have income not taxed at source) they will forfeit the benefit of the credit for the 2012/13 tax year.

Children's Income

The tax credit for active income for children has been repealed from the 2012/13 tax year.　 Essentially, children can no longer file a tax return to receive a refund of tax deducted at source by their employer.　 Going forward, if an employer deducts PAYE from payments to children, the credit will not be available in respect of that income.  If they have active income of $2,340 or less which is not subject to PAYE (e.g. casual baby sitting, lawn mowing) then this income will be exempt.

Repeal of childcare and housekeeper tax credit

This has been repealed with effect from the 2012/13 tax year.  It provided a credit of 33% of the amount paid for a housekeeper or for childcare under specific circumstances up to a maximum of $310 per annum. 　The Government considered this to be a poorly targeted credit as only 11 per cent of claimants come from the bottom 30 per cent of households.

Livestock valuation changes

The livestock changes were originally announced as a part of Budget 2011 and an Issues Paper was released on 18 August 2011.　 It was then announced on 28 March 2012 that elections to use the herd scheme will become irrevocable from the date of that issue paper, 18 August 2011.　 The announcement in Budget 2012 confirmed that the legislation to give effect to this change will be included in the Budget legislation, and the specific detail will be introduced in the next Tax Bill.　 This is expected to prevent a fall in revenue of $184 million over the next 4 years.

The backdating of the changes in the election rules to 18 August 2011 will mean that farmers will be unable to switch schemes for the 2012/13 year. 　The Government's view was that the previous rules were allowing farmers to switch between the two main livestock valuation methods to receive an unfair tax advantage. 　Farmers were previously able to elect out of the herd scheme at times when livestock values were high and obtain a tax advantage.　 Elections to use the herd scheme will now be irrevocable except when there is a change in farming operation due to a fattening regime.　 A link to the fact sheet setting out further details of the changes released on 28 March 2012 is here.  Further detail is to follow later this year so there may be some minor changes to what has already been proposed.

Increased compliance funding

The Government continues to increase funding to the Inland Revenue, with an additional $78.4 million over the next 4 years.　 This is intended to target the hidden economy, debt collection and unfiled returns and is expected to generate an extra $345.4 million of revenue over the 4 years to 2015/16.　 Whilst the expected return of $4.40 per dollar spent is significant it illustrates the law of diminishing returns compared to the return of $6.62 per dollar spent over the 2010 and 2011 tax years.　 It is likely that Inland Revenue have now picked off all the relatively easy targets and are having to work harder to find additional revenue.

Kiwisaver

Automatic enrolment has been placed on the back burner and will not be introduced in 2014/15 as originally planned, as this would jeopardise the Government's target of returning to surplus.  This measure will be subject to public consultation at a later date.　　 The changes announced in the last year's budget will still go ahead as planned when the employer and employee's contributions will both increase to 3% from 1 April 2013.

Other items on agenda

Whilst not included in the budget, Inland Revenue have recently signalled their intent to review the FBT exemptions in relation to employee car parks and childcare provided on employer premises as well as the wider issue of employees trading salary for allowances that are not subject to tax.　 Whilst no firm decisions have yet been made we expect there to be a tightening of the rules to be announced later this year.