As expected, the 2018 Budget had little in the way of new tax announcements with most of the changes previously announced and, in some cases, already enacted. The Budget includes an extra $6.8 million for Inland Revenue to “crack down on tax dodgers” – whatever that means – with this activity expected to raise $183 million over four years.
Such increases in Inland Revenue funding have been present in most of the recently-presented budgets. There is a further $3 million allocated to Inland Revenue to identify opportunities to improve tax compliance in specific industries using third party reporting and withholding taxes. There is also provision in the Budget for new tax deductions for the cost of bloodstock acquired for breeding; this is expected to cost $4.8 million over four years.
Among the pre-Budget tax changes announced is the scrapping of the previous Government’s tax cuts, which were achieved through tweaking of the thresholds at which higher tax rates kick in.
An area of concern for the Government is housing affordability, and this is an area in which we have already seen legislative action with the introduction of restrictions on the ability of foreigners to buy residential property in New Zealand, and the extension of the bright-line test from two to five years. The bright-line test taxes the proceeds of selling a residential property that is not a person’s main home when the property is sold within the bright-line period.
Previously, this bright-line period was for two years commencing on the date of registration of a title in a new owner’s name. This period is extended to five years post registration of the title. The stated purpose of this rule is to ensure speculators pay tax on properties sold, and to buttress the existing intention rule which Inland Revenue found difficult to enforce. However, this rule goes beyond taxing property speculators, and effectively taxes anyone who owns a holiday home, second home or investment property, and sells it for whatever reason, including unforeseeable events such as financial challenges, health matters, changes in life priorities and the like.
Another housing sector announcement is the introduction of a residential property loss ring-fence which prevents property investors from offsetting losses arising from their rental properties against income from other sources. This sets out to remove a perceived advantage investors and speculators have over owner-occupiers and to help drive down house prices. However, there is potential upward pressure on rents. The main impact will be felt by long-term property investors who suffer losses when they have unoccupied rental properties, or who incur significant repairs and maintenance expenditure on their properties. However, for speculators and those subject to the bright-line test, it only has the effect of deferring claims of losses against any income derived from selling land, which is a little ironic.
The Government has also announced the intention to reintroduce a tax credit for research and development (R&D). This will provide taxpayers undertaking eligible R&D with a tax credit of 12.5 cents for each dollar spent on R&D. This is forecast to amount to $71 million per annum growing to $350 million over four years. However, the proposal does not address the position of R&D startups which are in a tax loss position, which is a fundamental flaw. Simply put, a tax credit for a company which is not paying tax is of little value.
Legislation is making its way through Parliament to allow for the introduction of regional fuel taxes. In the first instance, this will apply only to Auckland and is intended to fund the development of transport infrastructure in Auckland.
Finally, we’ve seen changes to GST released. A discussion document has been released proposing the introduction of GST on low-value imported goods (those costing less than $400) – the so-called “Amazon Tax”. This change will require offshore suppliers of goods to New Zealand residents to collect GST on those goods and pay it to Inland Revenue. We’ve also seen the release of a discussion document proposing to require non-profit bodies to account for GST on goods they sell. Non-profit bodies have a concessionary ability to claim GST on purchases of goods that other taxpayers cannot and have been able to sell those goods without accounting for GST. This proposal will require them to pay GST on the disposal of any goods on which they have claimed GST under this concession.
Of course, in the background, the Tax Working Group is working on its proposals to make New Zealand’s tax system fairer. This is widely anticipated to mean the introduction of a “comprehensive” capital gains tax which excludes the family home.
So, although the Government came to power promising no further taxes or tax increases, there are plenty of changes planned and in process which will increase the Government’s tax revenue.
Opinion by Scott Mason, Managing Partner – Tax Advisory (Australasia)