By Phil Barlow – 16 May 2013

The 2013 Budget once again comes with no surprises. The clear message coming through from the Government is their belief that careful stewardship of public money is key for the success of all New Zealanders. However it is a Budget with caution. The Government has earmarked an increase in spending on “new initiatives” of around $5.1b over the next 5 years. This is on the back of forecast surpluses from 2014/15. Given the events that have significantly impacted our economy over the last few years (GFC and the Christchurch earthquake), in comparison to many of our trading partners this would seem to be a good result. But will the spending on new initiatives be channelled in the right direction and is it enough?

From a tax perspective, few changes have been announced.  Of particular note, and clearly topical given the buoyant property market, is the extra Inland Revenue funding of $6.65m per year to pursue property investment tax compliance.

Clearly given recent press, there is pressure on the Government to address the property market.  No tax changes have however been announced to change the way in which property is taxed.  Primarily this is because under the existing land taxing provisions there is wide scope for Inland Revenue to seek to tax many land transactions that currently go untaxed.

This extra funding follows similar funding announced as part of the 2007 Budget.  Since July 2010 around $110m has been raised from property audits. This translates into a return of $6.60 for every dollar invested.  We suspect the Inland Revenue will use this additional funding to delve into land taxing provisions that they have historically not pursued.  In order to do this the likelihood of the Inland Revenue taking on particular test cases will possibly increase.  Time will tell.

We wonder whether the Inland Revenue will, at the same time, take any interest in similar land transactions that have taken place in recent years when the property market was depressed and where taxpayers have lost money.  We think not!

Concurrent to this the Inland Revenue has today issued an officials’ issues paper clarifying the acquisition date of land.

Budget 2013 therefore continues the Government’s focus on further strengthening the tax system and improving public services to help provide an environment that supports business.

Under the 2013 Budget the Government’s priorities are to:

  1. Responsibly manage its finances
  2. Build a more productive and competitive economy
  3. Deliver better public services
  4. Support the rebuilding of Christchurch

For the detail on how the Government will focus on these priorities, please refer to the following links:

Budget speech http://www.treasury.govt.nz/budget/2013/speech

Minister’s executive summary http://www.treasury.govt.nz/budget/2013/execsumm

Tax Highlights

Below are the key tax proposals outlined in the 2013 Budget.

R&D expenditure

There are proposals to let loss-making start-up businesses claim tax losses on R&D expenditure.

The proposal is to allow tax losses arising from R&D expenditure in R&D-intensive start-up businesses to be refunded up to a certain limit.

These businesses often have long periods in a tax loss position due to the high-risk, up-front investment and the high R&D costs can be a disincentive to undertaking R&D.  The idea being if R&D spend is encouraged by these businesses, the economy as a whole will benefit.

The Government will issue a public consultation paper in June.

Black hole expenditure

The Budget will provide relief for six areas of ‘black-hole’ business expenditure.  Black-hole expenditure is expenditure that is neither tax deductible up-front or over time.

The six proposed changes are:

  1. Immediate deductibility for capitalised expenditure on legal and administrative fees incurred in applying for a patent or plant variety rights, but where no depreciable asset is recognised for tax purposes.
  2. Making certain fixed-life resource consents granted under the Resource Management Act 1991 depreciable for tax purposes.
  3. Making expenditure immediately tax deductible if it is incurred on resource consent applications that are abandoned, rather than requiring the application to be lodged in order to be tax deductible.
  4. Immediate deductibility for all direct costs associated with the payment of dividends by a company to shareholders.
  5. Immediate deductibility on annual fees for listing on a stock exchange, while clarifying that the initial costs of listing on a stock exchange and the costs of additional share issues are not tax deductible.
  6. Specifying that annual shareholder-meeting costs are immediately tax deductible, and special shareholder meeting costs are non-deductible.

The aim is for the changes to make the tax system more efficient, provide greater certainty, and reduce compliance costs for businesses.

Thin capitalisation

The thin capitalisation rules are intended to ensure that non-resident investors cannot artificially load debt into their New Zealand investments which would limit their tax exposure.  Essentially, limiting New Zealand interest deductions for foreign-owned firms.

However, these rules currently only apply where one non-resident owns 50 per cent or more of a New Zealand investment, meaning the rules don’t always apply to non-traditional investments such as private equity investors.

The thin capitalisation rules will therefore be extended to situations where non-residents are acting together, and together have a controlling interest of a New Zealand investment.

Another issue being addressed is that of shareholder debt.  Shareholder debt can allow companies operating in New Zealand to have excessive levels of debt yet the thin capitalisation rules won’t apply.  To address this issue, shareholder debt will be excluded from the worldwide group safe harbour debt calculations.

Again the changes will be detailed in a tax bill to be introduced later this year.  The proposed application date is the 2015/16 income year.

Property Investments

From 2014/15 the Inland Revenue will receive a permanent $6.65m increase in annual funding to address property investment tax compliance, from which the Government is hoping to receive a return of $45m per annum.

Since July 2010, approximately $110 million has been raised from additional property audit funding -a return of $6.60 for each dollar invested

An Official’s Issues Paper has also been released today to clarify the date of acquisition of land for people who acquire land for the purpose of resale.

The paper suggests two options for determining a date of acquisition, based on events/phases of an agreement for the sale and purchase of land.  The options are:

  • Option 1   when an agreement for the sale and purchase of land is entered into; or
  • Option 2   when an agreement for the sale and purchase of land becomes unconditional and the equitable remedy of specific performance of the land transfer is available to the purchaser.

The Government is seeking taxpayers’ views on these options and also whether a legislative amendment is needed that allows for evidence presented before and after the date of acquisition to be considered when determining what the taxpayer’s intention was on the date of acquisition.

Here is the link to the Official’s Issues Paper: http://taxpolicy.ird.govt.nz/publications/2013-ip-acquisition-date-land/overview

The closing date for submissions on the Issues Paper is 28 June 2013.

Student Loans Scheme

The following changes have been proposed to the Student Loans Scheme:

  • Putting in place an information-sharing agreement between Inland Revenue and the Department of Internal Affairs to collect contact details from passport renewal applications.
  • Adjusting the overseas-based borrower repayment thresholds so that borrowers with higher loan balances have a higher repayment obligation.
  • Making it an offence for a borrower to knowingly default on an overseas-based borrower repayment obligation so that an arrest warrant can be requested to prevent the most non-compliant borrowers from leaving the country.

If you have any questions, please contact your Hayes Knight advisor or the tax team:

Shelley-ann BrinkleySenior Tax Manager
T +64 9 414 5444
E shelley-ann.brinkley@hayesknight.co.nz

Phil BarlowTax DirectorT + 64 9 414 5444
E phil.barlow@hayesknight.co.nz