National Budget Update 2015 By William Buck on 22/05/15 - Mins to read: 7 minutes Budget – What We Expected? Introduction The Budget is out and the Government has put a strong focus on social development measures with a $790 million child hardship package. Beneficiaries and low income working families have been given a leg up but as expected there is no budget surplus. The other big hitters are a border levy for arriving and departing passengers kicking in at the start of next year and people enrolled in KiwiSaver will no longer receive a $1,000 kick-start payment. The following summarises the key points in the Budget • A $790 million child hardship package which includes a $25 increase in core benefit for beneficiaries with children; minor adjustments up and down in Working for Families payments depending on income. • Increased obligations on beneficiaries regarding finding part-time work. • Budget deficit of $684 million this financial year, turning into a $176 million surplus in 2015/16. • Economic growth to average nearly 3 per cent over the next four years. • Unemployment expected to fall below 5 per cent next year. • The prospect of “modest” tax cuts in 2017 – election year. • A $52 million “contingency fund” to speed the building of houses on crown-owned land in Auckland. • The wiping of the $1,000 kick-start contribution on signing up to KiwiSaver. • A new “border clearance levy” for arriving and departing passengers of $16 and $6 respectively. • A $20 million increase in the budgets of both the Security Intelligence Service and the Government Communications Security Bureau. Today’s Budget also includes tax proposals aimed at supporting children in poverty, ensuring compliance with the tax rules and also strengthening the tax rules. The Budget includes proposals to: • address child support penalties debt; • increase the in-work tax credit and the abatement rate from 1 April 2016; • strengthen the tax rules for property; and • clarify that payments made by Ministry of Social Development to social housing providers for the provision of social housing are GST-exempt. Also included in the Budget is extra funding allocated to Inland Revenue Department (“IRD”) to pursue aggressive tax planning, property compliance and hidden economy initiatives. The following provides some further details in relation to some of the key points of the Budget. Capital Gain Tax – Bright Line Test In recent times a prominent issue has been residential property (“property”). The Government is looking to make the rules surrounding the taxation of property more robust. In particular, the Government is looking to ensure that all property investors pay their fair share of tax. Firstly, there will be an additional $29 million of funding for the IRD to target property tax compliance. This follows on from the $33 million that has been allocated to the IRD since 2010 for property tax compliance enforcement. The extra funding provided will be used to target property speculators (in Auckland and Christchurch particularly). The funds that the Government has allocated to the IRD in recent years for property compliance have been particularly effective. Since 2010 the Government has received approximately $8 of additional tax for each $1 of funding it has provided to the IRD. In addition, there will be certain requirements whenever a person buys property from 1 October 2015. These requirements are: • All non-residents and New Zealanders buying residential properties other than their main dwelling, must provide an IRD number; • All non-resident buyers and sellers must provide their tax registration numbers from their country of residence and some form of identification; • All non-resident buyers and sellers must have a New Zealand bank account before they can acquire a New Zealand IRD number; • Any gains from the sale of property within 2 years of it being purchased will be taxed. The exceptions to this are where it is the seller’s main dwelling, where it is inherited as part of a deceased estate or where it is sold as part of a relationship property settlement. The proposed new rules have been introduced to supplement the current land taxation rules. The new rules apply equally to both New Zealand residents and non-residents. The new rules are designed to ensure that everyone who has bought property with the intention of resale is taxed on any gain they make. In particular, the taxation of any property that is sold within 2 years of purchase will further fortify the rules to ensure that property speculators are taxed on any gains they make from the sale of property. In addition, the Government expects that it should have a “cooling” effect on the Auckland housing market. In addition, the information requirements for non-residents have been made more stringent with the requirement to provide IRD numbers, tax registration numbers from their country of residence and a form of identification. The new information requirements are designed to assist the IRD in identifying people that may be property speculators and assist with any information sharing with overseas tax authorities. Also, the new rules supplement New Zealand’s anti-money laundering rules. Non-residents will be required to open a bank account before they can be eligible to acquire an IRD number. The requirement to open a bank account in New Zealand will ensure that the non-resident investor will be subject to New Zealand’s anti-money laundering rules. The Government is considering introducing a withholding tax for non-residents that sell property. This is to ensure that non-resident property developers pay their fair share of tax. One of the reasons for this is that after the property is sold some non-residents can be difficult to track down. A withholding tax on the property at the time of sale will help ensure that the appropriate tax is collected. In addition, the requirement to provide an IRD number will assist in the identification of who should pay the proposed property withholding tax. Consultation on this proposal will commence in mid-2016. ACC Levy Cuts Signalled The Budget signalled ACC levy cuts of around $375 million in 2016/17 and $120 million in 2017/2018. These indicative levy cuts represent total savings for New Zealanders of around $500 million and will be spread across motor vehicle levies, work levies and earners levy, benefitting vehicle owners, workers and businesses alike. The average ACC motor vehicle levy, including the annual license levy and petrol levy, will fall from around $330 to $195 a year. Based on current projections, this is likely to fall further to around $120 next year, making the average motor vehicle levy around one third of what it is right now. Average work levy will drop by $0.20 per $100 of liable earnings and earners levy will drop by $0.60 per $100 of liable earnings. The indicative motor vehicle levy reductions announced today could come into effect on 1 July 2016 and work and earners levy reductions could come into effect on 1 April 2016. Funding in Research and Innovation The Budget increases the Government’s investment in research and innovation, aimed at encouraging more private sector research and development and growing New Zealand’s R&D ecosystem. Budget will give an $80 million boost over four years to R&D growth grants, which support innovative businesses by contributing 20 per cent of their R&D costs. Up to $25 million will be provided over three years to support the establishment of new, privately-led Regional Research Institutes, to support increased innovation in regional areas outside of Auckland, Wellington and Christchurch. The additional funding announced in the Budget will bring the Government’s total investment in science and innovation to over $1.5 billion in 2015/16. Working for Families Tax Credits The $790 million package for children in poorest families includes an increase in Working for Families payments to low-income families that are not on a benefit. As a result, from 1 April 2016: • Low-income working families earning $36,350 or less a year, before tax, will get $12.50 extra a week from Working for Families, and some very low-income families will get $24.50 extra. • Working families earning more than $36,350, before tax, will receive more from Working for Families, but it will be less than $12.50 a week, with the exact amount dependent on their family income. • Families earning more than $88,000 a year, before tax, will get slightly lower Working for Families payments, with the average reduction being around $3 a week. Workplace Compliance The Budget provides investment of $32 million in employment relations services over the next four years to strengthen the enforcement of minimum employment standards. The main aim is to protect the integrity of the labour market. There has been incidences of serious breaches of law and employment standards. While most of the employers follow rules and regulations, there are some incidences of workers exploitation. Hence, to increase employee security, the Budget is focussing on investing in the following over the period of four years: • Six more Labour Inspectors for Auckland, which will enable more investigations and enforcement actions in the region. • Information and education services and campaigns. These will be funded to ensure information, guidance and advice to employees and employers is available, accessible and fit for purpose on current and new law. • Ensure levels of service keep pace with demand. New Border Clearance Levy Foreign visitors and New Zealanders leaving and returning from overseas will be charged a new Border Clearance Levy effective from 1 January 2016. Subject to consultation, the levy will be around $16 for arriving passengers and $6 for departing passengers. This new levy, along with the additional funding totalling $60 million over the next four years, will be invested in border security improvements. Other Budget Announcements Other Budget announcements include the following: • The Government will forgive around $1.7 billion of penalties owed by parents to encourage more support to reach children. • $1.7 billion in health sector over the next four years. • $12 million over the next four year for funding New Zealand Business Number. • Payments made by the Ministry of Social Development to social housing providers are GST-exempt provided that the payments relate to the provision of social housing. Conclusion Bill English’s seventh Budget is a give-and-take Budget. Given ever tighter fiscal circumstances made worse by tax revenue falling short of forecasts, the Finance Minister had to find savings to get new projects up and running. The centre-piece is a $790 million child hardship package. In order to make that bundle of initiatives more than just a gesture towards addressing child poverty, English has had to find savings elsewhere. So out goes the $1,000 kick-start payment contributed by the Government when people sign up for KiwiSaver. In comes a new border clearance levy of up to $16 on each passenger either arriving in New Zealand or departing these shores. That said, the Budget continues the Government’s responsible economic direction. The Budget shows that the New Zealand economy remains on a sound track with a clear path to surplus forecast. Despite lower than forecast tax revenue, meaning that a surplus will not be reached this year as predicted; the important thing is that a small surplus is expected in 2015/16, rising to a $3.6 billion surplus in 2018/19. The Budget shows that the overall fiscal path remains positive, and that is the sign that the New Zealand economy is in good shape. We welcome this and the framework that the Budget puts in place to support this steady growth. It is pleasing to note that the reduction in crown debt remains on-track and that unemployment is forecast to fall below 5 per cent by 2016/17, while economic growth is set to average 2.8 per cent over the next four years. These are all signs that the economy is heading in the right direction. The Budget also confirmed a number of housing-related steps aimed at addressing challenges on both the demand and supply side of the equation. These are constructive steps and will aid housing supply and affordability especially in Auckland. We welcome the initiative in the Budget establishing a $52.2 million capital contingency fund to facilitate housing development on crown-owned land in Auckland. This move will help to boost the supply of affordable housing in the Auckland region. That said, the missed surplus for 2014/15, and reduced tax revenue, shows the relatively fragile nature of New Zealand’s economic growth story. That is why it is important that cautious, careful Government spending is maintained. The Government needs to remain prudent in its expenditure and continue to exercise restraint. It is noted that since the forecasts were prepared, dairy prices have continued to slide.