On a day when John Campbell announces his resignation from TV3 and Dean Barker announces he has joined a Japanese Americas Cup Team, the Government announces its 2015 Budget. Some may say these announcements provided more excitement than the Budget. You be the judge.
Budget Highlights for Tax
The key tax proposals outlined in the 2015 Budget are:
- strengthen the tax rules for property
- address child support penalties debt
- increase the in-work tax credit and abatement rate
- repeal the $1,000 KiwiSaver incentive payment
- clarify that payments made by MSD to social housing providers are GST-exempt
- extra funding allocated to IRD to pursue aggressive tax planning; and
- extra funding allocated to IRD to pursue property compliance and hidden economy initiatives.
The proposals are discussed briefly below:
Strengthen the tax rules for property
As was announced by the Government over the weekend, a New Zealand IRD number will be required as part of the land transfer process and non-resident buyers and sellers will also need to provide their tax identification number from their home country together with identification details such as a passport. Before a non-resident can obtain an IRD number they will need to have a New Zealand bank account number.
The IRD will also tax the profits on the sale of residential property which is sold within two years of purchase, unless it is the seller’s main home, an inherited property or part of a relationship property settlement. This new two-year rule is being referred to as a “bright-line” test.
This is not a ‘capital gains tax’, rather a measure to strengthen the existing tax rule that taxes gains on the sale of property where that property was purchased with the intention of selling. The tax will be levied at the seller’s marginal tax rate and will be captured in the seller’s income tax return. Primarily the change is focused on overseas investors as they can be difficult for the IRD to track down and the overseas property investors should be subject to the same tax rules as resident property investors.
The Government is also considering introducing a withholding tax mechanism in mid-2016 for non-residents selling residential property.
These proposals will go through a consultation process and are expected to take effect from 1 October 2015, which means the new bright-line test will apply to properties brought on or after 1 October 2015.
It should be noted that these changes do not apply to the family home, however, existing land taxing rules should still be considered in respect of the family home. The intention behind the proposals is to help IRD to track and identify transactions likely to be taxable and will allow IRD to share information about non-residents with overseas tax authorities.
An Issues Paper on the bright-line test is expected to be released in July, with draft legislation available late August.
Repeal the $1,000 KiwiSaver incentive payment
Due to the considerable cost to taxpayers, the Government has announced that as of 2pm today people enrolling in KiwiSaver will no longer receive the $1,000 kick-start payment.
The change does not affect existing KiwiSaver members. Contributing KiwiSaver members aged 18 or over or under 65 will continue to receive the annual Member Tax Credit from the Government of up to $521. Employers in general are still required to contribute at least 3 per cent of an employee’s gross wage or salary and employees will continue to make their own contributions.
The Government expects to save $500m over the next four years from this measure and will redirect that saving into priority public services.
Address child support penalties debt
The following measures have been proposed to encourage parents to pay what they owe:
- from 1 April 2016, extending the write-off of monthly incremental penalties to parents who are paying by compulsory deduction and meeting their payment requirements; and
- an amendment to the penalty write-off tests to adopt a more pragmatic “fair and reasonable” test to apply on a discretionary, case-by-case basis from 1 April 2016.
These measures have been introduced due to liable parents facing paralysing debt from penalties added to their child support bill and hence many are not attempting to pay their outstanding amount, nor their current obligation and in a growing number of cases the parents are leaving the country.
Increase the in-work tax credit and abatement rate
To give more financial support to lower-income working families not on a benefit the Government has proposed to increase the rate of the in-work tax credit and increase the Working for Families tax credits abatement from 1 April 2016. Specifically:
- low-income working families earning $36,350 or less a year, before tax, will get $12.50 extra a week from Working for Families, and some very low-income families will get $24.50 extra
- working families earning more than $36,350 will get extra from Working for Families, but it will be less than $12.50 a week, with the exact amount dependent on their family income
- families earning more than $88,000 a year will get slightly lower Working for Families payments, with the average reduction being around $3 a week.
A proposal has been announced to clarify that payments made by the Ministry of Social Development to social housing providers to the extent the payments relate to the provision of social housing are GST-exempt which brings the payments in line with payments for residential accommodation.
Income Tax Rates
While no proposal has been announced to reduce income tax rates, the Minister’s speech does acknowledge that one of the Government’s five fiscal priorities is to begin reducing income taxes from 2017. This is predicated on fiscal and economic conditions being favourable come 2017.
The Minister’s speech mentioned that the Budget allows for ACC levy cuts of $375m in 2016 and an additional $120m in 2017.
Final decisions on levy reductions will be made after public consultation, but it is anticipated that cuts will be across all levied accounts thereby reducing costs for businesses, workers and motor vehicle owners.
As an example the Minister indicated that the average motor vehicle levy, including the annual licence fee and petrol levy, could fall to around $120 in 2016, around a third of what it is now.
Border clearance levy
A new border clearance levy will be introduced from 1 January 2016 to fund passenger-related biosecurity and customs activities. Currently the cost is covered by taxpayers and it is considered fairer for the cost to be covered by a per-passenger levy, as is typically the case overseas. Although the levy will be subject to consultation, it is expected the levy to be $16 for arriving passengers and $6 for departing passengers.
Budget Highlights for Businesses
The Budget increases the Government’s investment in tertiary education, research and innovation with the following measures:
- up to $25m over three years to support the establishment of new, privately-led Regional Research Institutes, to support increased innovation in regional areas outside of Auckland, Wellington and Christchurch
- an $80m boost over four years to R&D growth grants, which support innovative businesses by contributing 20 per cent of their R&D costs
- $113m over four years for tertiary education initiatives such as increases in tuition rates for science subjects, an increase in the number of engineering places, and a contingency to grow Māori and Pasifika Trades Training
- up to $210m for additional investment to bring Ultra-Fast Broadband to 80 per cent of New Zealanders
- the Telecommunications Development Levy is being extended to provide $150m for major improvements in rural broadband
- KiwiRail receives $210m in new capital next year, and a further $190m as a pre-commitment against Budget 2016 giving KiwiRail a two-year window to identify savings
- $97m in capital for regional highways and $40m for urban cycleways
- $37m of operating funding over four years to provide greater national direction and support to councils as they implement the Government’s resource management and freshwater reforms
- $13m over four years for initiatives to improve the productivity of under-utilised Māori land, complementing the reform of Te Ture Whenua Māori Act
- a new grant scheme has been established to encourage the planting of new forests, with the Budget providing $22m for this scheme over the next six years
- $32m over four years to increase the number of labour inspectors and strengthen enforcement of employment law
- the New Zealand Business Number gets a boost with funding of $12m over four years which will help to reduce costs for businesses when they interact with government agencies
Budget Highlights for Families
In addition to the in-work tax credit and abatement rate changes outlined above, from 1 April 2016 most sole parents, and partners of beneficiaries, will have to be available for part-time work when their youngest child turns three, rather than five as is currently the case.
In addition, all beneficiaries with part-time work obligations will be expected to find work for 20 hours a week, rather than 15 hours a week under the current requirements.
On 1 April 2016, benefit rates for families with children will rise by $25 a week after tax and beneficiaries on Sole Parent Support will need to reapply for their benefit every year, which will ensure the benefit is going to the right people.
Also from 1 April 2016, Childcare Assistance for low-income families will increase from $4 an hour to $5 an hour, for up to 50 hours of childcare a week per child. The new rate will apply to both the Childcare Subsidy for pre-schoolers and the OSCAR subsidy for out-of-school care and school holiday programmes.
Budget Highlights for Health and Medical
The Budget invests $1.7b of operating funding in health over the next four years.
District Health Boards will have around $320m available next year for extra services and to help meet cost pressures and population growth.
New health initiatives include $98m to increase elective surgery volumes and help New Zealanders suffering from orthopaedic conditions.
An extra $76m is being provided for hospices and to support 60 new palliative care nurse specialists.
The bowel cancer screening pilot is being extended at a cost of $12m and the Budget provides an additional $16m over four years to continue support for very high needs students with disabilities after they leave school.
Budget Highlights for Education
Early childhood, primary and secondary education receive an additional $443m of new operating funding and $244m of capital. Of this, $75m of operating funding over four years is for early childhood education and $42m is to increase school operating grants.
An extra $63m over four years will go towards assisting children with special education needs. This includes funding to continue teacher aide support for 1,500 additional students with special needs.
$244m of capital from the Future Investment Fund is being allocated to build new schools, expand existing schools and construct around 240 classrooms.
If you have any questions, please contact your Hayes Knight advisor or the tax team.
T +64 9 414 5444
Shelley-ann Brinkley Associate
T +64 9 414 5444