A record budget deficit of $16.7 billion has been revealed today by Finance Minister Bill English, which will place pressure on our local economy in that the Government has chosen to continue to borrow from offshore to fund this shortfall.
Unlike the 2010 Budget, there are fewer significant tax changes. However, in light of the recent earthquakes the focus has understandably shifted and consequently there is a need for the Government to better manage expenditure going forward.
The good news is that the return to surplus is expected to occur a year earlier than expected, and we should be back in the black by the 2014/15 financial year. The Government aims to increase State sector efficiency achieving savings in the order of $980m over the next three years.
Within the Budget, student loans and Working for Families (WFF) have been targeted to ensure only those most in need will be eligible. As was flagged prior to the Budget announcement, changes will be made to KiwiSaver, whereby the burden of contribution falls more heavily on the employer and employee; instead of the Government.
Overall, business owners can be relatively comfortable with this Budget in that the bulk of the spending cuts and savings are coming from the public sector, with a drive towards efficiency for most Government agencies. This will be welcome news for business owners, and in our opinion it simply makes sense.
Below is a brief overview of the Budget 2011 announcements:
- From 1 July 2012 the Government will contribute 50 cents for each dollar contributed by KiwiSaver members. This is the equivalent to $10 per week.
- From 1 April 2012 all employer contributions to employee KiwiSaver accounts will be subject to Employee Superannuation Contribution Tax (ESCT) applied at the individual’s marginal tax rate. This will therefore have a bigger impact on those on higher marginal tax rates i.e. those with higher incomes.
- From 1 April 2013 the minimum employee contribution rate will rise from 2% to 3% for all KiwiSaver members.
- From 1 April 2013 compulsory employer contributions will rise from 2% to 3%.
- The initial Government Kick-Start of $1,000 remains unchanged.
Working for Families (WFF)
- The abatement threshold will reduce to $35,000, down from $36,827 and the abatement rate will increase to 25 cents up from 20 cents. These changes will gradually be introduced and ensure WFF is better placed to help those families most in need.
- Student loan eligibility will be restricted for those with an overdue student loan repayment obligation of $500 or more and who are in default for more than one year.
- Eligibility will also be restricted for those aged over 55 to tuition fees only.
- Part-time full-year students will not be able to borrow for course-related costs.
- The inflation adjustments to the repayment threshold will be suspended until 1 April 2015.
- The repayment holiday for overseas-based borrowers will be shortened from three years to one year. In addition, the overseas-based borrowers will need to apply for the repayment holiday and appoint a New Zealand-based contact person.
- Future levies will be lower as a result of the cost savings within the ACC scheme.
- The Government is establishing a Canterbury Earthquake Recovery Fund of initially $5.5bn to account for its share of the estimated recovery costs. The Fund will ensure transparency and control over the cost of rebuilding the city following the earthquakes.
- The Government is creating a new Canterbury Earthquake Kiwi Bond to give New Zealanders the opportunity to assist Christchurch by investing in a four year maturity bond.
How will the Budget 2011 announcements impact New Zealand business?
Key initiatives that may have an impact on the SME business owner include:
Halving the tax credits on Kiwisaver
Whilst there is arguably no direct impact on businesses, we may see some pressure from the labour force – particularly if the labour market tightens as forecast – for employers to pick up the shortfall. This will undoubtedly add to the cost base for small businesses and it may be difficult to pass this cost on.
Mixed Ownership Model
On the face of it this is another asset sale, but if we consider the implications and drivers of the decision they are actually sound. In our opinion it makes sense to divest a stake in the four state-owned energy companies and Air New Zealand and free up that capital to invest in new core social assets.
A Focus on Driving Exports
The budget talks about real export growth having declined from 5.4% over the previous 15 years to just under 1.4% now, and states that it must turn this around and get back to previous levels. We agree with this comment, however cannot actually see how they plan to do this.
Health and Education
Health and education get the attention they need, so businesses supporting this sector of the economy should be looking to capitalise on funds made available to improve those sectors. Heath has an additional $1.7 billion in operating budget and $40 million in capital funding and Education receives $1.3 billion in operating budget and $109 million in capital funding.
Mixed Use Private Assets
Undoubtedly this will have a few people scurrying around reviewing their tax positions! The proposal seems to be targeting people who derive tax subsidised benefits of owning expensive assets. An example is the person who purchases an expensive yacht and makes it available for charter and thus turns non-deductible expenditure into deductible expenditure. This has been an area of interest for the IRD over recent times already, and signals a definite move to crack down on these schemes. We urge people to seek appropriate advice if this announcement affects you.
A responsible Budget, no increase in taxes, cuts in Government department spending which were well overdue, partial sale of commercial assets to fund social assets, return to surplus earlier than predicted and therefore commencement of debt reduction.
Our verdict for the SME business community – 7/10. A good budget, but could have gone more aggressively on spending cuts based on Treasury forecasts of strong economic growth next year, and put some more meat into the export led growth statements.
Full details of the budget are available on the Policy Advice Division website http://taxpolicy.ird.govt.nz/
If you would like to discuss the Budget further or have any questions, contact your Hayes Knight advisor or our Tax Team:
Phil Barlow – Tax Director
T + 64 9 414 5444
Shelley-ann Brinkley – Senior Tax Manager
T +64 9 414 5444