BUDGET 2012: Tax changes at a glance - tightening the screws

More funding for Inland Revenue
Today’s budget provides a tick of confidence for the Inland Revenue with an extra $78.4m of funding over the next four years to be used to extend its successful tax compliance activities in dealing with the hidden economy, debt collection and taxpayers who have not filed their returns.

This funding is in addition to the $119.3 million awarded to IRD in the 2010 Budget and the government has acknowledged the encouraging return that has already been seen on that earlier investment. The extra compliance activities in this Budget are estimated to have a net positive impact of $345.4m over the next four years.

Clearly, the government wishes to tighten the screws a little further and in doing so is sending a signal to the majority of taxpayers who already meet their tax obligations voluntarily that it will not turn a blind eye to those ripping off and undermining the integrity of the tax system.

Measures to raise revenue and increase fairness

Three tax areas have been targeted for change:

Assets that are partly used for private purposes and partly for income producing purposes will be subject to tighter restrictions on the deductibility of costs.

These measures are specifically targeted at taxpayers who are offsetting holding costs on assets such as holiday homes, planes, and boats.

Under current rules the costs associated with these assets are tax deductible against income derived from renting the assets out and often the net result is a tax loss which is offset against other income.

Today’s announcements will limit the deductions available for these types of assets and these changes are expected to save $109m in revenue over four years. The changes will also improve the perceived fairness of the tax system.

Changes to the livestock valuation rules to prevent farmers who change valuation schemes from getting an unintended tax break. This change is expected to prevent a $184m fall in revenue over the next four years.

Removing a range of tax credits including the childcare and housekeeper tax credits, the under $9880 tax credit as well as that for the active income of children.

These credits are no longer seen as fit for purpose due to other initiatives such as working for families and the 20 hours per week childcare subsidy. The removal of these tax credits will save $117m over the next 4 years.

Tobacco excise to rise 10% per annum
Excise tax on tobacco will rise 10% on 1 January each year for the next 4 years. This will be in addition to any inflation adjustment to the excise tax and is also in addition to the 40% increase in excise since April 2010.

These measures are aimed at improving the health of New Zealanders and reducing the long-term burden on the health system and to assist in the Government’s goal of making New Zealand smoke free by 2025.

KiwiSaver changes
KiwiSaver fund managers will be required to report their performance and returns including their fees and costs via a standardised report on their websites. This will assist investors to make investment judgements and comparisons between funds

The government will also review the rules and arrangements of KiwiSaver default providers. Currently there are 500,000 New Zealanders with default funds.

This review is designed to ensure the best results can be achieved for investors in default funds and this review will occur before the term of the six current default providers ends at June 30, 2014.

Government’s plan to look at auto enrolment for KiwiSaver (being the automatic enrolment of workers not already in KiwiSaver) will be deferred until such time that sufficient surpluses exist to fund the estimated $514m four-year cost.

The employee minimum contribution to KiwiSaver will increase to 3% (from 2%) at 1 April 2013 as previously announced in 2011 Budget changes.

Student Loans
Student Loan repayment rates for all New Zealand based borrowers will increase from 10 cents to 12 cents in the dollar (where income is over the repayment threshold). This will save $184.2m over 4 years.

The definition of income for student loan repayment purposes will be broadened, meaning more repayments will arise. This will save $3.1m over four years.

The voluntary repayment bonus will be removed, saving $43.5m in a four-year period.

Inland Revenue and Customs will have new information matching procedures to identify defaulting borrowers.

Students will be limited on the number of courses which they can borrow for in one year.

Parental income thresholds will be maintained at current rates until 31 March 2016, saving $12.7m over four years.

Eligibility for student allowances will be removed for postgraduate study, saving $33m, also over four years.

Innovation
There are no tax incentive announcements on innovation, science and research.

However, direct funding has been allocated to these areas on a range of fronts including $159m to strengthen tertiary education of which $42m is allocated engineering, $17m for science, and a further $100m towards the $200m already allocated to the Performance-Based Research fund.

Murray Brewer is a tax partner at Grant Thornton. Email murray.brewer@nz.gt.com.