Budget changes raise revenue, increase fairness
Hon Peter Dunne
Minister of Revenue
24 May 2012
Budget changes raise revenue, increase fairness
The Government is taking a number of steps to tighten the tax system by closing loopholes and updating the tax credit system, which will generate hundreds of millions of dollars of extra revenue over the next four years.
“This continues the Government’s work over the previous three Budgets to protect its revenue base and ensure the tax system is fairer for all taxpayers,” Revenue Minister Peter Dunne says.
The changes include:
• Tightening the rules around the
deductibility of costs relating to assets that are both used
by their owners and rented out for income, such as holiday
homes, boats, and aircraft. The changes are expected to save
about $109 million over the next four years.
• Putting changes to livestock valuation rules into Budget legislation to prevent farmers who change valuation schemes receiving an unintended tax break. The changes will reverse what would otherwise have been an estimated $184 million fall in operating revenue over the next four years.
• Removing three tax credits which no longer fit the purpose for which they were set up – the income-under-$9,880 tax credit, the childcare and housekeeper tax credit, and the tax credit for the active income of children, which will be replaced by a limited exemption. The changes will save $117 million over the next four years.
“These changes will help modernise the tax system and ensure tax deductions and tax credits are being targeted to areas where they are intended and needed,” Mr Dunne says.
“In the case of mixed-use assets, such as a holiday home, it is unfair that owners can claim a tax deduction for the majority of their costs because it is available for rent or hire, even if it is mainly used privately. In effect, they are getting a taxpayer subsidy for their private use of the asset.”
The new rules will require mixed-use asset owners to apportion their deductions based on the actual income earned and private use of the asset.
For example, owners who rent out their holiday home for 30 days in a year and use it themselves for 30 days in a year will be able to claim a deduction for 50 per cent of their general costs, rather than the 90 per cent they can claim now.
“In the case of livestock valuations, the previous rules were too loose and allowed some farmers switching between the two main livestock valuation methods to receive an unfair tax advantage over those farmers who applied the rules as they were intended,” Mr Dunne says.
In March, the Government announced it would disallow them to move from the ‘herd scheme’ to the alternative ‘national standard cost scheme’, except in narrow circumstances, effective from 18 August 2011. Budget legislation will put that into law. Details will be included in the next omnibus tax bill.
“The three tax credits we are removing in Budget 2012 have become poorly targeted. For example, the bottom 30 per cent of households make up just 11 per cent of childcare and housekeeper tax credit claimants,” Mr Dunne says.
“Their use, in most cases, is now quite different from what was originally intended. For example, the income-under-$9,880 tax credit was originally put in place in 1986 to protect full-time workers on low wages, but it no longer applies to that group.
“The childcare and housekeeper tax credit has been superseded in recent years by other government support, such as Working for Families and 20 hours free early childhood education
“Times have changed, society has changed, and wider government policies have changed. The Government believes its spending on these tax credits could be better directed to areas of higher need.”
The tax credit for children will be replaced by a limited tax exemption to ensure that children will not need to file a tax return if they earn small amounts of ‘in the hand’ income that would not usually be taxed at source – for example, from babysitting or mowing the neighbour’s lawn.
However, children will no longer be able to claim a refund of tax that has already been correctly deducted and paid by an employer. These changes will take effect from the 2012/13 tax year.
People filing their 2011/12 tax returns can still claim these credits.
“These tax credit changes will also help make Inland Revenue more efficient. A lot of people are filing tax returns simply to claim these outdated tax credits.
“The changes will free up some of Inland Revenue’s resources, allowing it to focus on delivering the services New Zealanders want in the future,” Mr Dunne says.
Fact sheet – Tax credit changes
• Three tax credits – the income-under-$9,880 tax credit, the tax credit for childcare and housekeeper expenditure, and the tax credit for the active income of children – are being changed for the 2012/13 and later tax years.
• The tax credit for children is being replaced by a limited tax exemption. This credit ensures that children will not need to file a tax return if they have small amounts of income not taxed at source (for example, from mowing their neighbour’s lawn). This new exemption will not allow a child to claim a refund of tax that has already been paid, such as PAYE and Resident Withholding Tax.
• The income-under-$9,880 tax credit and the tax credit for childcare and housekeeper expenditure are being repealed. Taxpayers will not be able to claim these credits if they file a tax return at the end of the tax year.
• Transitional rules have been developed for people who are claiming one of these tax credits in the current year through the PAYE system.
Why are these changes being made?
• These tax credits are all outdated and no longer serve their original policy intent.
o The income-under-$9,880 tax credit was introduced as part of a 1986 tax reform package to ensure that low-paid, fulltime workers were not made worse off due to the tax reforms.
o The tax credit for childcare and housekeepers expenses has existed in some form since 1933. The amount of the credit was last updated for the 1984-85 tax year. It has largely been superseded by other policies, such as early childhood education, which the Government now spends $1.4 billion a year on, and the $2.7 billion support provided through Working for Families.
The credit is also poorly targeted. Wealthy families who may not need any help meeting the costs of childcare are just as able to claim the credit as poorer ones. Only 11 per cent of the claimants of the credit come from the bottom 30 per cent of households.
o The tax credit
for the active income of children was introduced in 1978 and
was designed to reduce the compliance costs of employing
children on a part-time basis. The credit meant that
employers of children with low annual salaries did not need
to withhold tax (PAYE).
The credit now serves this purpose very rarely. Most employers prefer to apply their normal payroll systems, including deducting PAYE, to all their employees. As a result, the credit is now mostly claimed via a child filing a tax return at the end of the year. This means the credit, originally designed to reduce compliance costs, increases paperwork.
Where can I find more information?
Information about the transitional rules for individuals who are claiming the income-under-$9,880 tax credit or the tax credit for children through the PAYE system is available on Inland Revenue’s website: www.ird.govt.nz.