Our view: Budget 2014 – Measured and focused for growth

We were warned not to expect any major surprises in the 2014 Budget and what was delivered was very measured and focused. The theme was one of ‘focusing on growth’ and it is encouraging how strongly the economy is forecast to grow.

As anticipated the focus of the Budget was not tax; however it did include some initiatives.  Families were the big winners this year.

We have reviewed the Budget and this is our take on the key points:

ACC Levies
More funding for apprenticeships
Tax free grants
Research and development expenditure
Impact for families
Health
One from left field – cheque duty
More in the coffers for IRD

What’s in the Budget for small and medium businesses?

There is nothing in the Budget that specifically cuts taxes or the obligations for the small to medium sized businesses within New Zealand.  Last year’s budget contained the tax sweeteners such as ACC levy reductions and tax deductibility for R&D expenditure.

The ACC levy reductions for both employees and employers did come to fruition and yesterday’s budget signalled more to come.  It also confirmed that the R&D tax proposals in last year’s budget would proceed.  We have outlined what these include below:

ACC Levies

The bulk of the ACC Levy cuts will be passed on to motor vehicle owners who missed out last time where employees and employers were the recipients of the levy cuts.

More funding for apprenticeships

The government announced a purse of $20 million for an additional 6,000 trade apprenticeships under the Government’s Apprenticeship Reboot subsidy programme that was introduced last year.

That programme provides subsidies for $1,000 to $2,000 per trainee with employers eligible for an equal payment.

This will be welcomed by small businesses, particularly those supporting the Christchurch rebuild and housing construction sectors.  However there will, of course, be a lag between the right skills coming online from apprenticeships and the immediate need for skilled labour.

Tax free grants

Another initiative is a $3,000 tax free grant to encourage job seekers to take up work in Christchurch.  With a much lower unemployment rate than the rest of  the country, the initiative is aimed at matching the demand in Christchurch with the current supply.  However, again the challenge will be getting the right skills to fill the current vacancies.

Research & Development expenditure (R&D)

For the innovative Kiwi businesses that invest in Research and Development (R&D), there were two new tax measures included in today’s budget.

Loss making start-up companies will be able to cash out all or part of their tax losses resulting from R&D expenditure, while all businesses will be allowed a tax deduction for R&D ‘black hole’ expenditure that is currently neither deductible nor able to be capitalised and depreciated.

This means that start-up businesses will be able to access their tax losses a lot earlier and in the form of cash instead of having to carry the losses forward until such time as they make profits.  There are certain criteria set down to qualify and, as this is intended to be merely a timing benefit and not a grant, businesses will eventually be obliged to return the value of any cashed-out loss taken.

And for all other businesses undertaking R&D, all capitalised costs will be deductible over time.  Currently only the legal and administrative costs of registering an asset are depreciable.  In addition to this there will be a one-off tax deduction permitted for capitalised development expenditure that is written off for accounting purposes.  Thus relieving the ‘black hole’ expenditure on R&D for projects that turn out to be unsuccessful.

These measures are welcomed as they will allow start-up companies to reduce constraints on their cash flow and, by allowing deductions for expenditure not previously permitted, will mean that businesses are not discouraged from undertaking such R&D programmes simply because of the tax treatment.

Impact for families

Parents of new and young children were the biggest winners of yesterday’s Budget with the government allocating a $500 million package to the increase in paid parental leave, extending free GP visits for children up to the age of 13, and increasing the level of the parental tax credit that focuses on the low to middle income families.

This boost for parents however will not kick in straight away – these new rules do not come into force until the middle of next year.  At this time the paid parental leave period will increase from 14 weeks to 16 weeks with a further increase to 18 weeks in 2016.

The criteria will also change so that some permanent guardians, casual and seasonal workers and those who have recently changed jobs will also be eligible.  The rules will also be more flexible to allow parents on leave to take part in planning days, and even work occasionally without jeopardising their entitlements.

The 15,000 families in New Zealand who do not qualify for paid parental leave also benefit with the increase in the level of the Parental Tax Credit.

The current maximum credit available is $150 per week – for babies born after 1 April 2015, this will increase to $220 per week.  This increases the maximum payment available from $1,200 to $2,200.  The period over which this credit is available will also increase from 8 weeks to 10 weeks following the birth of a child.

With this increase it is expected that the number of lower-income families will increase because it will pay them more than they would otherwise get from paid parental leave.  People cannot claim both of these payments.

Like other Working for Families payments, the parental tax credit starts to reduce when the family’s income rises.  The level at which this occurs depends on the number of children in the family.  The changes being introduced will also increase the rate at which the credit available will reduce as the family income increases.  Currently the credit reduces by 3.26 cents for each additional dollar of family income.  This will increase to 26.25 cents from 1 April 2015.   This change will better target the credit towards the low-to-middle income families.

The Budget provides for an extra $30 million a year to go towards extending free GP visits and prescriptions for children up to the age of 13.  This change is expected to benefit over 400,000 more children.

Health

There is around $15.6 million over the next four years allocated to the health industry with children’s health, disability support and elective surgery among the recipients.

This package provides for more elective surgery services, reduced waiting times, $112 million for disability support services, more services provided for elderly care including dementia, more cancer treatments and additional home care services.

Also included is some $40 million to get Kiwis eating healthier and exercising more.

One from left field – cheque duty to be abolished

Who uses cheques anymore?  Well for those of you who do you, from 1 July this year you will no longer be charged five cents for each cheque used, which is paid in advance when you start a new cheque book.

The government has realised that cheque duty is a relic from a previous age and that there are other methods of payment that do not have an equivalent tax.  It also recognised that due to other modes of payment becoming more prevalent, the income raised from cheque duty has declined from some $17 million in 1991/92 to now being only worth about $4 million a year.

For those of you who have paid cheque duty on unused cheques it would be wise to discuss refunds before 1 July 2014.

More in the coffers for IRD

As with every budget, the IRD is provided more funding.  This time there has been an allocation of $132 million over the next five years to bolster its tax compliance activities.  In particular to assist in chasing up unfiled tax returns.

Of this total $132 million – $48.6 million is cash for the IRD to undertake compliance activities.  The remaining $84 million is to cover tax being written off where it is unlikely to be paid.

This initiative builds on the success of the 2012 Budget unfiled returns initiative that focused on reducing outstanding tax return volumes and targeting returns with higher revenue values.  The funding for this work has been worthwhile: since 1 July 2012, the focus on unfiled returns has generated an extra $106 million.

When people who do not meet their tax obligations it is not fair on those who do – everyone in this case suffers because there is less money for health, education and other essential services that benefit the community.  We must all pay our fair share.

If you have any questions concerning any of the budget announcements, please feel free to contact your Moore Stephens Markhams advisor.

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