On Thursday, 16 May 2013, the Minister of Finance, the Hon Bill English, delivered the National-led Government’s fifth Budget. The Minister stated that he will meet his targets for a return to budget surplus in 2014/15 and a drop in net core Crown debt down to no higher than 20% of GDP by 2020. These targets will be achieved by putting a cap on new spending, taking in more tax and delaying the resumption of contributions to the New Zealand Superannuation Fund until net core Crown debt is no higher than 20% of GDP (this is expected in 2020/21). The focus is therefore on further strengthening the tax system and improving public services to provide an environment that supports business. The Budget 2013 tax announcements include the following proposals:

Budget tax relief for “black hole” expenditure

Budget 2013 will provide relief for six areas of “black hole” business expenditure, bringing in tax deductibility on items where it previously has not applied. The six proposed changes are:

  • immediate deductibility for capitalised expenditure on legal and administrative fees incurred in applying for a patent or plant variety rights, but where no depreciable asset is recognised for tax purposes
  • making certain fixed-life resource consents granted under the Resource Management Act 1991 depreciable for tax purposes
  • making expenditure immediately tax deductible if it is incurred on resource consent applications that are abandoned, rather than requiring the application to be lodged in order to be tax deductible
  • immediate deductibility for all direct costs associated with the payment of dividends by a company to shareholders
  • immediate deductibility on annual fees for listing on a stock exchange, while clarifying that the initial costs of listing on a stock exchange and the costs of additional share issues are not tax deductible, and
  • specifying that annual shareholder meeting costs are immediately tax deductible, and special shareholder meeting costs are non-deductible.

It is proposed that the changes be included in a tax Bill to be introduced later this year and apply from the 2014/15 income year.

R&D tax-break proposal to boost start-ups

A public consultation paper will be released in June 2013 on a proposal to allow tax losses arising from R&D expenditure to be refunded up to a certain limit. It will be targeted at R&D start-up firms.

Review of effectiveness of the thin capitalisation rules

Changes are proposed to the thin capitalisation rules to help ensure multinational companies investing in New Zealand pay their fair share of tax. The changes flow from the officials’ issues paper, “Review of the thin capitalisation rules”, released on 14 January 2013.

The thin capitalisation rules are designed to address the situation where non-resident investors can artificially load debt into their New Zealand investments to limit their tax exposure, so limiting interest deductions for foreign-owned firms. However, the rules currently apply only where one non-resident owns 50% or more of a New Zealand investment. This means that the rules apply to traditional multinational companies but not to other types of non-resident investors, such as private equity investors. The Government has therefore decided to extend these rules to where non-residents are acting together, and together have a controlling interest of a New Zealand investment.

Another area of concern is around the issue of shareholder debt, which can allow companies operating in New Zealand to have excessive levels of debt without the thin capitalisation rules applying. As this defeats the intent of the rules, it has been decided that shareholder debt should be excluded from the worldwide group safe harbour debt calculations.

The Minister of Revenue has stated that some technical issues still need to be resolved, including defining the “acting together” test and making sure that extending the application of the rules to trusts does not inadvertently affect benign structures. Inland Revenue officials will continue to work with interested parties to ensure the legislation works in practice.

Legislation for the changes is expected to be introduced later in 2013. It is proposed that the changes apply from the start of the 2015/16 income year.

Funding for Inland Revenue to strengthen auditing of property transactions

Budget 2013 provides a permanent $6.65m increase in annual funding for Inland Revenue to pursue property investment tax compliance, which is expected to return $45m a year. The extra funding will begin in the 2014/15 financial year.

The officials’ issues paper, “Clarifying the acquisition date of land”, was released on 16 May 2013 with proposals to clarify the date of acquisition of land as it affects people who acquire land specifically to resell it and who are generally taxed. The issues paper is at www.taxpolicy.ird.govt and the consultation will close on 28 June 2013.

Student Loan Scheme

The Budget 2013 student support package aims to further target student allowance eligibility, improve repayments from overseas-based borrowers and increase personal responsibility for debt repayment. The Government is committed to maintaining the affordability of tertiary education by retaining interest-free loans. The student support package for Budget 2013 builds on the policy changes introduced in Budgets 2011 and 2012 and aims to improve value for money. Initiatives include:

  • putting in place an information-sharing agreement between Inland Revenue and the Department of Internal Affairs to collect contact details from passport renewal applications
  • adjusting the overseas-based borrower repayment thresholds so that borrowers with higher loan balances have a higher repayment obligation
  • making it an offence for a borrower to knowingly default on an overseas-based borrower repayment obligation so that an arrest warrant can be requested to prevent the most non-compliant borrowers from leaving the country
  • extending the student loan and allowance stand-down period for permanent residents and Australian citizens from two years to three years from 1 January 2014
  • reducing student allowance entitlement for those aged 40 and over to 120 weeks
  • removing student allowance eligibility for those aged 65 years and over, and
  • changing the way the cost of lending is calculated in the Student Loan Scheme.

ACC levies

Budget 2013 allows for ACC levy reductions of around $300m in 2014/15, increasing to a reduction of around $1b in 2015/16. When combined with the $630m levy reduction in 2012/13, these changes will amount to around 40% lower ACC levy rates for households and businesses. The final decisions on levies for 2014/15 will be made later this year, following public consultation.

Building a more productive and competitive economy

Additional Budget measures to build a more productive and competitive economy include:

  • confirming a further $1.5b to be invested using proceeds from the Government’s share offer programme, including in redeveloping Christchurch’s hospitals, building modern schools and classrooms, and supporting irrigation infrastructure
  • announcing that Meridian Energy will be the next company to be prepared for a partial share offer, in the second half of 2013
  • legislation to improve housing affordability, which will deliver flexible regulatory tools to councils under accords between the Government and councils in areas where housing is least affordable, and
  • a memorandum of understanding with the Reserve Bank Governor confirming a range of measures, if required, to protect the economy from periods of excessive growth in credit and asset prices, reduce reliance on unstable sources of funding, and require banks and other financial institutions to better manage their own risks.

Budget 2013 also provides significant extra money to help low-income families through a number of targeted initiatives and provides $5.1b of new operating spending in the current year and over the next four years for initiatives across areas such as health, education, welfare and housing.