Tax cuts delivered, but what next?

The Budget, as expected, has delivered tax relief in the form of National’s personal income tax threshold increases, albeit the start date has been pushed out by a month from July to August, but no other significant tax changes. The Government’s other flagship election tax policies, to progressively reinstate interest deductibility and reduce the ‘bright-line’ taxing period to two years for residential rental properties, have already been implemented. As has the removal of commercial building tax depreciation, to help fund part of the cost of the various tax reductions. The Budget does forecast additional tax revenue of $500m over four years from Inland Revenue compliance activity, which is not surprising given the promise to increase audit funding in the National – NZ First coalition agreement.  

So, in all, a case of no real tax surprises.

Looking ahead, what can we potentially expect in the form of tax changes over the medium term? What is clear is that the fiscal balance is precarious for the foreseeable future, which is likely to constrain major tax reform. Particularly if such reform is likely to reduce tax revenue.

Does this mean that any business-friendly tax changes are off the agenda? Not necessarily. The Government has signalled a focus on reducing compliance costs and red tape. So, what are some potential opportunities to reduce tax compliance costs, that is not going to result in significant tax revenue leakage? 

Let’s start with Inland Revenue. Its recent Business Transformation means there is greater use of digital channels to interact with individuals and business. In general, this has resulted in a much-improved user experience. However, when we speak to clients, there is still some concern over multiple (and in some cases duplication of) Inland Revenue requests for information and the manual collection of data. We believe there are likely to be wins for both business and tax administration from Inland Revenue streamlining and, where possible, digitalising these information requests. 

Then there are the instances where tax-related compliance costs means that New Zealand misses out on key skills and the capital we need to fuel a prosperous and vibrant economy. We believe there is the opportunity to be a bit more aspirational in some of our tax settings to not only keep but attract people and investment. And this does not have to come at the expense of the current tax base, as New Zealand is missing out already. 

A couple of examples to illustrate:  

New Zealand’s current international tax settings (the Foreign Investment Fund (FIF) rules) can be a financial barrier for new migrants and returning expatriates, where they have invested in offshore businesses such as start-ups. This is because the FIF rules can result in New Zealand tax arising on ‘deemed’ income from these investments. This is even if no actual return (such as a dividend or proceeds from selling the shares), or a loss, has been made. Often these investments will have little liquidity to pay the resulting tax bills, with high valuations on paper (that may never be realised) often driving prohibitive tax outcomes. New Zealand is relatively unique in taxing investments in this manner. Other countries, including Australia, tax on a ‘cash-flow’ basis (such as on realisation). In the global competition for talent and skills, it makes sense for New Zealand to better align with our competitors to ensure that tax is not a reason for not coming here, or leaving altogether.

New Zealand’s significant infrastructure needs will require fresh funding sources, including from offshore, and new capital funding models. While public-private partnerships (PPPs) appear to be back on the Government’s agenda, there are likely to be significant changes to the previous PPP models, including what investment looks like (e.g., preferred investment structures, the equity/debt mix, and the types of investors). This will require thinking through different regulatory considerations, including the current tax settings (for example, interest limitation restrictions, withholding rates, and tax features of different investment structures), to ensure they are fit-for-purpose and sustainable over time to attract and keep such investment.