Issue 3 - May 2013
Budget 2013 is about staying the course, reflecting the fact the Government’s priorities have not changed.
However, the fiscal restraint to date appears to be paying off in contrast to the situation facing the Australian Government.
- GDP growth is forecast to continue at between 2 and 3 percent.
- Investment, including in the Canterbury rebuild, underpins economic growth.
- The Government is on track to achieve its aim of a return to surplus in 2014/15, but at $75m it is wafer thin.
- Government expenditure is forecast to reduce to 30% of GDP by 2015/16.
- Crown debt is still the black cloud hanging over the Budget. It is expected to peak at $70 billion in 2015/16 before reducing as surpluses pick up.
Download Taxmail - Budget 2013 commentary [PDF: 77KB]
The Budget stays the course set in previous Budgets. Government’s priorities remain unchanged. It is using its Building Growth Agenda as a framework for building a more competitive economy and its Result Areas as a framework for Public Sector Spending. It continues to focus on spending which it considers will achieve better results. The spending however remains constrained.
If your business is R&D heavy, in the tourism sector, or working in residential or commercial construction in Auckland or Christchurch, there is some good news in this Budget for you. For other business, a reduction in ACC levies is really the only material change. This is particularly noticeable for the export sector which sees little direct attention in the Budget.
This Budget is notable for its shift into social areas, on alleviating poverty, social housing and education, which have been on the priority list for Labour and the Greens.
It therefore remains a political document, with an eye on next year’s election. It reinforces that, even as new money starts becoming available, this is a Government that does not believe in interventionist initiatives – most of the shifts referred to above are regulatory in nature. This is in increasingly stark contrast to the emerging policy positions of the major Opposition parties
From a tax perspective, there are few announcements because the Government’s major tax reforms were made in 2010.
The effect of those tax reforms is seen in the projections for increasing tax revenue over the four year forecast period – 5% annual growth or $14.5 billion over the period. This contributes to the surplus in 2014/15, rising to $2.6 billion in 2016/17.
At the time of the 2010 tax reforms, the increase in the GST rate provided little increased revenue as it was offset by other measures. However, the rationale for the shift, from personal income tax to GST, is now clearer. The Government captures an additional 2.5% GST automatically as economic activity (particularly the Christchurch rebuild) increases.
The tax surprise is the announcement of a $300 million reduction in ACC levies from 1 April 2014. The reduction will increase to $1 billion in subsequent years. The detail of this change has not yet been released – it will be public when the new ACC levies are set by the Government later in the year. However, the reduction is expected to flow to businesses (employers) and households (employees and vehicle owners).
The ability to reduce levies is based on the Government’s confidence that ACC has made progress in reforming itself and in providing a clear investment strategy.
This is the major tax news in the Budget. It will be welcome by business – the Government managing its costs to help business manage its own costs.
A fair share of tax – targeting non-residents
The Government will proceed with proposals consulted on earlier this year to extend the thin capitalisation rules to holdings in New Zealand business by multiple non-residents and to exclude shareholder debt from safe harbour calculations. Other related proposals are still being considered.
The thin capitalisation announcements are the only Budget comment on the international debate on how non-residents should be taxed. This contrasts with the Australian Budget, earlier this week, where a number of measures were tied to companies paying their “fair share of tax”.
As we noted in our pre-Budget taxmail, this is in part due to New Zealand having already moved in some areas and, with the current tax projections, having a lesser need to dramatically increase revenue.
The Government believes we can afford to wait for OECD and other international developments before acting. The specific announcements are disappointing. They indicate a piecemeal approach to the perceived problems with the thin capitalisation rules. A more principled approach is required. It is likely that the amended regime will be compliance costly and less likely to achieve its objective.
R&D expenditure tax losses – proposal to allow a cash refund
Small start-up companies which generate tax losses from R&D expenditure will be provided a refund. The Budget announcement provides very little further detail including the conditions for being able to claim the refund and constraints on qualifying expenditure. A June issues paper will provide more detail.
Start-up businesses are generally cash poor. Providing a way for those businesses to cash up their tax losses is a positive measure. This will be particularly helpful as start-up businesses generally need to source additional capital.
This means their early tax losses cannot be used as the company will lose shareholder continuity. With this proposal the Government, which takes its share of the upside when those businesses are successful, is saying it is prepared to share in the downside.
This measure raises the question of why tax losses, generally, cannot be cashed up (either directly or by allowing a carry back to years where tax has been paid)? In principle, the logic is the same. However, we appreciate that current fiscal constraints mean this is unlikely to be a practical policy advancement in the short to medium term.
Certain “black hole” expenditure to be deductible
Business costs are not always deductible or depreciable (i.e. “black hole” expenditures). The Government has announced that a targeted list of “black hole” expenses will be deductible or depreciable, from the 2014/15 year:
This proposal is a useful tidy-up which will provide compliance savings. However, practically, it may not result in lower tax payments as much of this expenditure is likely to be deducted already.
It is disappointing the Government has not seen fit to introduce a general provision, similar to the Australian rules, which allow “black hole” costs to be claimed over time.
What is not in Budget 2013
We assessed a change in the tax mix as a low probability. This has been borne out in the Budget. The key question is what tax measures, if any, should be used to encourage savings.
There are no specific measures in Budget 2013 – there are no changes to tax rates on investment income, and no changes to KiwiSaver, including the Government’s 2014/15 auto-enrolment proposal which was previously deferred.
Instead the Government’s focus remains on repaying its own debt. This contributes to national saving and puts Government in a position to manage future shocks to the economy. New Zealand’s relative ability to manage the effects of the Global Financial Crisis and the Canterbury Earthquakes is attributed to the low starting debt position. Reducing debt remains a key focus for Government.