Tax changes at the margins
The Government's changes to the income tax system are at the margins
The Government’s changes to the income tax system are at the margins. Two of the changes (to mixed use assets and the livestock rules) were foreshadowed last year. The third (repeal of three ‘minor’ tax credits) came as a tiny surprise.
Together the changes are expected to save the Government $410 million over the next four years. They will have less fiscal impact than the tobacco excise rate increases ($532 million over the same four year period) and the $421 million to be collected from increases in petrol excise duty and road user charges. Inland Revenue is expected to collect $377 million more in tax with the additional audit and debt recovery resources it receives.
Holiday homes, boats and aircraft used for both private and business purposes
The Government is concerned that some taxpayers have been able to use the current rules to obtain inflated deductions for assets that are used for both private and income earning purposes. In the gun is expenditure on holiday homes, pleasure boats and aircraft that relates to periods when the assets are not being used. The changes are expected to save about $109 million over the next four years.
The Government believes it is unfair and economically inefficient that an owner who uses an asset for both private and income earning purposes is currently entitled to deduct the majority of their costs because the asset is available for rent or hire most of the time. In effect, the owner of the bach, boat or helicopter is receiving 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. The Government gives the example of a bach owner, who rents the bach for 30 days in a year and uses it themselves for 30 days in that year. Under the new rules, the owner 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. The new approach remains relatively generous. A tougher approach would have netted the Government more than the $109 million it is expecting to raise from the changes.
The next omnibus tax bill will include changes to the livestock valuation rules aimed at preventing 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.
Under the current rules some farmers were able to switch between the two main livestock valuation methods and thereby obtain a tax advantage. In March, the Government announced it would not allow farmers to move from the ‘herd scheme’ to the ‘national standard cost scheme’, except in narrow circumstances, effective from 18 August 2011.
Removal of tax credits
Three ‘outdated’ tax credits (for income under $9,880; childcare and housekeeper expenditure; and the active income of children) will be removed with effect from the 2012/13 tax year. The Government believes its spending on these tax credits could be better directed to areas of higher need. According to the Government the three tax credits have become poorly targeted with their use, in most cases, now quite different from what was originally intended. For example, the childcare and housekeeper tax credit, which is limited to $310, has been superseded by Working for Families and 20 hours free early childhood education.
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 income that would not usually be taxed at source e.g. from babysitting or mowing lawns. However, children will no longer be able to claim a refund of tax that has already been correctly deducted by an employer.
Automatic enrolment in KiwiSaver of all workers over 18 will no longer commence in the 2014/2015 year. According to the Government automatic enrolment is a programme for a time when the Government does have sufficient surpluses. The Government expects the deferral will save it $514 million over four years.
Capital gains tax – no silver bullet
Earlier this week, Media had suggested there could be a surprise announcement of a capital gains tax (CGT) in the budget. Elvis Presley’s appearance on Lambton Quay is more likely. But, there is a serious issue here. The Dominion Post suggested in an editorial this week that the country is burdened with a tax regime that distorts investment away from productive job-creation towards speculative investment and property. Is this correct?
It is true that, in one sense, property has a tax preferred status because capital gains are not taxed (although gains made by traders and property speculators are). The problem, however, is that by far the largest share of property in New Zealand that currently falls outside the tax net, is actually owner occupied homes. CGT proponents generally agree owner occupied homes would be excluded from a CGT. That exclusion becomes a fatal blow to the effectiveness of a CGT because the largest single asset class is removed from it.
It was primarily these issues, together with some secondary issues such as very high compliance costs, lock-in effects and potential revenue loss to Government when capital values fall, that led the majority on the Tax Working Group (of which two PwC partners were members) to recommend against a CGT. None of the arguments raised since the TWG’s report was released in 2010 change that conclusion.