Budget 2011: Stark contrast but no surprises
19 May 2011
Budget 2011: Stark contrast but no surprises
This year’s budget is in stark contrast to budget 2010, but shouldn’t come as a surprise given the Government’s priority is to constrain expenditure and look at ways of minimising revenue leakage, says the New Zealand Institute of Chartered Accountants (NZICA).
In addition to the key proposals relating to KiwiSaver and Working for Families tax credits, a small number of tax system adjustments were also signalled that endeavour to bolster the tax base integrity and squeeze a few more dollars from the taxpaying public.
“History shows when initiatives rely on tax benefits and concessions they are inevitably a house of cards. Government priorities of the day can change rapidly in response to economic conditions, and when this happens, as it has recently, policies that rely on tax benefits and concessions are always at risk,” says NZICA Tax Director, Craig Macalister.
While the Government has lowered the member contribution, NZICA remains wary of savings policies that rely on tax benefits.
The budget proposes removing the exemption from tax on employer contributions to KiwiSaver schemes. NZICA opposed the exemption when KiwiSaver funds were introduced as this created an incentive for KiwiSaver over other superannuation funds. It is pleasing to see this put back in place from 1 April 2012.
In an unexpected move the Government announced that Government agencies would have to fund their own KiwiSaver contributions.
“This puts Government agencies on the same footing as private sector employers who have to find the compulsory contribution from within their own resources,” says Mr Macalister.
Working for Families
Trying to pare back spending in the area of Working for Families is fraught with difficulties – not the least is that people receiving the credits come to rely on them for support.
The Government has chosen a gentle approach with these changes coming in gradually over a four year period, but if anything they entrench the current anomalies with the scheme.
“The incremental changes will only confuse an already complicated system. While the Government’s approach in election year is understandable, a more robust policy solution is required as to how Government can deliver support to low income families,” says Mr Macalister.
Livestock valuation elections
The Government has signalled a move to tighten livestock valuation rules. The main concern is the ability for taxpayers with livestock to shift between valuation methods to achieve tax favourable outcomes.
“There isn’t anything wrong with the valuation methods in themselves, but the ability to shelter income when livestock values increase and take deductions when values decrease is a concern from a policy perspective. As a result, the integrity of the rules does need to be shored up to ensure that the tax outcomes arising from the use of the valuation options are not open to manipulation,” says Mr Macalister.
The Government’s decision to tackle the perceived mischief of salary sacrifice was quietly signalled in the Government’s economic fiscal update released in December 2010. The proposal put forward today is to tax salary that is traded off for non-taxed cash benefits, and also raises the question of whether this should also be regarded as income for Working for Families purposes.
“In an economic sense the proposal is hard to disagree with, however, in the absence of detail, it is difficult to gauge the impact of the proposed changes: they could either amount to a non-event, or place additional costs on businesses and employees depending on where the incidence of the tax on these benefits falls.
“If the gross benefit was treated as income it may well push an employee’s income through a higher tax bracket and change the notified investor rate for employees with investments in portfolio investment entities.
“Further, it is unlikely that people in receipt of non-cash employment benefits would welcome a loss of a cash benefit received through Working for Families. It is our view that extending this rule to normal employees is a step to far,” says Mr Macalister.
Mixed use private assets
While brief on detail, the proposal seems to be targeting people who derive tax subsidised benefits of owning expensive assets. An example is the person who purchases an expensive yacht and makes it available for charter and thus turns non-deductible expenditure into deductible expenditure.
“Again an initiative hard to argue against when put in those terms; but there will be the inevitable boundary arguments. For example, it may not always be clear when an expensive yacht is purchased principally for private purposes versus one purchased by a person who fully intends to have it available as a charter boat,” says Mr Macalister.