Budget 2011 – Our View

The Government’s budget announcements yestesrday came as no surprise with the main focus being  to reduce the country’s deficit and assist Canterbury to recover and rebuild after recent events.

A summary of the changes are as follows:

Kiwisaver

  • The $1,000 kick start remains unchanged.
  • Effective 1 April 2012, the tax-free status of the employer contributions to Kiwisaver will be removed.  In future these contributions will be taxed at the employee’s marginal tax rate.
  • The Government annual tax credit will reduce from a maximum of $1,040 per annum to $520 per annum.
  • From 1 April 2013, the minimum contributions to Kiwisaver for both employees and employers will rise from 2% to 3%.

It is believed that these changes will save $2.6 billion over the next four years.  Mr Dunne considers that most people will find the 3% minimum contribution as affordable and this coupled with the employer and government contributions, will continue to offer an attractive rate of return on the money invested.

Taxing the employer contributions at the employee’s marginal tax rates is also said to make sense.  About half of the benefit of the current arrangements goes to the top 15% of income earners, who already get a larger tax break due to their higher marginal tax rate.

Working for Families

The changes announced to the Working for Families system is intended to better target lower income earners and ensure that the system’s cost remains sustainable into the future.  The effect of this is that high income families will see their entitlements diminish over time.

Working for Families will be altered over time so that eventually the scheme has:

  • A slightly lower abatement threshold of $35,000, compared to the current $36,827
  • A slightly higher abatement rate of 25 cents in the dollar, compared to the current 20 cents in the dollar.
  • An alignment between the family tax credit payments for children aged 16 years and over and the payments for those aged 13 to 15.

It is impossible to say with any certainty what an individual family will receive from one year to the next – this depends on so many different factors that contribute to the calculations.

Thin capitalisation rules for foreign banks

There is to be a change to the thin capitalisation rules for foreign owned banks.  The new minimum prescribed percentage of equity for tax purposes will increase to 6% from the existing 4% effective 1 April 2012.

The effect of these rules is to limit the interest deduction of foreign owned banks against the New Zealand tax base.  This is part of the Government’s continuing focus on ensuring that all taxpayers pay their fair share of tax.

Student loans

Tighter lending criteria has been announced for student loans.  Those affected are those aged 55 years and over, part time students and students with loans overdue or in default.

Making the tax system fairer

The budget announcements have also signalled the introduction of measures to ensure fairer treatment of employee benefits, new rules for mixed used assets, and a new approach to livestock valuation elections for farmers.

  • The question now raised is whether the current definition of income for Working for Families tax credit purposes should be further widened to include more fringe benefits provided to employees, and whether salary that can be traded off for non-taxed non-cash benefits should be subject to tax.
  • The Government also intends to review the tax treatment of mixed-use assets used for both private and business purposes.  This brings into the limelight instances where high value assets such as yachts and holiday homes, which are both rented out and used privately, have provided the owners with inflated tax deductions, which either result in less taxable rental income or tax losses that can be used to offset other income.

              “Everyone would like to own a holiday home, but it should not be subsidised by the taxpayer.”  Mr Dunne says.

  • The Government is also investigating options for fairer rules covering livestock valuation elections.  Under the two methods currently available there is the ability for farmers to switch back and forth choosing the more favourable outcome for tax purposes.  However this can currently give rise to increases in market values going untaxed and decreases in value eligible for tax deductions.

It is intended that consultation documents will be released regarding these initiatives later in the year.

Additional funding for IRD audit activity

In the 2010 Budget, an additional $119m was to be allocated over four years to help IRD with its audit activities.  In the first nine months this has helped to assess or bring in an additional $115.2 million of tax.

The IRD’s audit activities have centred around the hidden economy where people tend to do cash transactions to avoid paying tax.  Given the return to date, the IRD is likely to continue to focus in these areas.

If you have any questions concerning the announcements made and their impact on you, please contact your Markhams advisor.

May 2011