Tax Tips: Budget 2025 – round up of tax announcements

Finance Minister Nicola Willis announced the Government’s 2025 Budget yesterday. The so-called “growth budget” includes tax announcements that focus on attracting foreign investment, encouraging spending on infrastructure and productive assets, and amending rules to attract skilled migrants.

In this issue of Tax Tips we outline what the Government has dubbed the ‘Investment Boost’ - an accelerated depreciation scheme, possible changes to the thin capitalisation rules, tweaks to KiwiSaver, employee share schemes (ESS), fringe benefit tax (FBT), foreign investment fund (FIF) rules and impacts on FamilyBoost and Working for Families. We also provide an update following the consultation on potential tax changes in relation to the not-for-profit (NFP) sector, and note Inland Revenue’s increased funding for compliance and collection.

In alignment with the strategic initiatives outlined in Inland Revenue's 2022 Long Term Insights Briefing (LTIB), the May 2025 Budget introduces an accelerated depreciation scheme, ‘Investment Boost’. This scheme will be enacted as part of the Budget legislation, and is aimed at promoting economic growth and encouraging companies to enhance their capital expenditure strategies.

New assets purchased or that become available for use from 22 May 2025 can be ‘partially expensed’ by allowing 20% of the cost of the asset (net of certain contributions to the cost of the asset) to be immediately deducted, on top of standard depreciation in the year the asset is acquired. Standard depreciation for the year is to be calculated on the value of the asset less the 20% deduction i.e. 80% of the asset value.

Most assets that are depreciable for tax purposes will qualify, as well as new commercial and industrial buildings, despite not being eligible for depreciation deductions. Certain assets that are not classed as depreciable property, but are currently allowed depreciation-like deductions are also eligible under Investment Boost, including improvements to farmland, aquaculture business, forestry land and the planting of listed horticultural plants. There is no cap on the value of the asset and it is optional to claim the deduction.

Investment Boost does not apply to the following:

• Assets that have previously been used in New Zealand
• Land
• Residential buildings
• Fixed life intangible assets
• Assets that are fully expensed under other rules.

As noted above, while Investment Boost is targeted at new investments, some second-hand assets imported from overseas may be eligible, provided they have not been used in New Zealand before.

Also of note is that expenditure on capital improvements to existing assets may also be eligible.

Where Investment Boost is claimed on an asset which is later sold, some or all of the deduction may be recoverable by the Commissioner of Inland Revenue on disposal (or deemed disposal) of the asset where the consideration is greater than the asset’s adjusted tax value.

Consideration should be given to systems used within your business in calculating depreciation to ensure that it has the flexibility to account for the immediate upfront deduction and to apply the standard depreciation rate based on a reduced cost base. If systems do not have this flexibility, manual adjustments may be required, which could result in more risk of errors occurring. Finally, as disposal of assets may result in depreciation recovery income, the total value of the asset will need to be tracked, which includes the 20% upfront deduction. More details have been provided by Inland Revenue in the Investment Boost Information Sheet.

Thin capitalisation review - infrastructure

In response to concerns about the impact of current thin capitalisation settings on foreign investment in New Zealand infrastructure projects, the Government has allocated $65m in the Budget towards realigning the current thin capitalisation rules to encourage investment in privately-owned infrastructure projects in New Zealand.

New Zealand currently has an infrastructure deficit. In line with the broader goal of enhancing New Zealand's capital intensity and productivity, the proposals aim to attract foreign direct investment to help meet that shortfall.

Alongside the Budget announcement, Inland Revenue has launched a consultation process setting out two options for potential changes to thin capitalisation rules. The document acknowledges that there are genuine commercial drivers for infrastructure projects to be significantly debt funded in excess of the current safe harbours and that the current denial of interest deductions may act as a tax barrier to foreign investment. The policy intention is to reduce those tax barriers for foreign investors that are looking to invest in privately owned infrastructure projects.

The two options proposed are:

• A targeted rule that applies only to infrastructure projects
• A more general rule that applies to third party-debt.

It is important to note that it is currently envisaged that both options would apply to third-party debt only and they would both be subject to a number of other criteria including having recourse to the New Zealand assets only.

Our initial view is that a general rule that applies to third party-debt appears more sensible, as it could be complex to try and define what constitutes eligible infrastructure projects. Any definition of eligible infrastructure projects will likely need to be revisited regularly to ensure it remains fit for purpose, adding cost and uncertainty, and potentially creating further barriers to investment. In addition, given foreign direct investment is also needed in other sectors, to the extent that the debt is genuinely third-party and has recourse to New Zealand assets only, a broader rule would seem in line with the policy objective, and there should be limited risk of artificial inflation of debt into New Zealand. Rather, such a change could result in further foreign investment resulting in the growth of the New Zealand economy that the Government is after.

Submissions on the proposals are due by 19 June 2025. Please get in touch with your usual PwC advisor if you would like to discuss further.

KiwiSaver

The 2025 Budget also announced a number of changes to KiwiSaver which aim to help increase KiwiSaver balances, whilst reducing the cost of Government contributions to make it more sustainable. Changes to the KiwiSaver scheme are as follows:

• Increasing default rates for employer and employee minimum contributions from 3% to 4% of salary and wages. This will be phased over a three-year period, with a 3.5% minimum applying from 1 April 2026, increasing to 4% from 1 April 2028. A temporary opt-out is available to employees, with employer contributions lowering to match that rate.
• Scaling back Government top-up to contributions to 25 cents for every dollar of member contribution, up to a maximum of $260.72 per year from 1 July 2025. This is a 50% reduction from the previous maximum contribution of $521.43 per year.
• The Government top-up contribution will no longer be provided to KiwiSaver members with an annual income over $180,000 from 1 July 2025.
• Extending Government contributions to 16 and 17 year olds from 1 July 2025, and extending employer matching to 16 and 17 year olds from 1 April 2026.

These changes aim to increase the funds available for investment in New Zealand assets and to strengthen the overall accumulation of members’ savings. Inland Revenue has released an accompanying Factsheet explaining these changes, which can be found here.

Employee Share Schemes (ESS)

The Government has announced its intention to proceed with changes aimed at improving taxation of employee share schemes (ESS) for startups and unlisted companies. It allocates $10m for these changes, focusing on deferring a tax liability associated with ESS until a liquidity event occurs, such as the sale of shares.

Presently, ESS tax rules require employees to pay tax on the difference between the value of shares received and the amount paid for them. However, this can create a problem when the employees receive a tax bill, but they are unable to realise the value of their shares to pay it. This happens particularly for employees of start-ups where shares may be illiquid and difficult to value. Inland Revenue released a consultation on this change earlier this year.

Fringe Benefit Tax (FBT) rules

The Government also announced its intention to proceed with reforms consulted on earlier this year in relation to the FBT rules, albeit it is unclear whether all or just some of the specific proposals in these reforms will be progressed. You can find further analysis in our previous tax tips here.

Foreign Investment Fund (FIF) rules

The Government has confirmed its intention to progress ongoing efforts to modernise FIF regulations to make New Zealand more attractive to migrants and digital nomads, however the draft legislation for these reforms is not expected to be released until later in the year

Earlier in the year, the Government announced major amendments to the FIF rules, aimed at reducing the tax burden for migrants and returning New Zealanders. FIF rules apply to tax residents on deemed income, whether they receive a return or not. The proposed introduction of the "Revenue Account Method" allows qualifying new migrants to calculate FIF income on a realisation basis - taxing gains only when realised. While these FIF changes aim to help, there are concerns about their effectiveness. It will be interesting to see what changes, if any, are made to the proposed “Revenue Account Method” to make the changes more effective.

Not for profits (NFPs) and charities

Earlier this year Inland Revenue released the consultation document ‘Taxation and the not-for-profit sector’, reviewing the concessions available to charities and NFPs under New Zealand’s

tax system and considering ways of simplifying tax settings to capture forgone tax revenue and ensure compliance on non-taxable charitable activities. Some key potential changes included:

• Removal of the tax exemption with respect to charity business income where this is unrelated to charitable purposes;
• Limiting the availability of deductions for donations made to donor controlled charities;
• Mechanisms to address timing differences between the receipt of donations and the use of these funds for ultimate public benefit (e.g. minimum distribution rules or investment restrictions for donor controlled charities);
• Removing / reducing a variety of targeted tax exemptions available to NFPs, for example local and regional promotional body income tax exemption, bodies promoting scientific or industrial research income tax exemption, and non-resident charity tax exemption.

We understand a significant number of submissions were received on the consultation document. As a result, the Minister of Finance confirmed ahead of the Budget that the Government would not be making any changes in the 2025 Budget. Instead, it will take more time to consider the extensive feedback received and continue with the review. It is possible that we may still see changes in this sector, but it may be some time before we get further clarity on what those changes may be.

Best Start & Working for Families

Budget 2025 also included changes to the Best Start tax credit and the Working for Families tax credit. Under the changes, the abatement threshold (the income level at which the entitlements begin to reduce) for Working for Families will increase from $42,700 per year to $44,900. 142,000 families will receive an average of $14 more per fortnight as a result.

This increase is funded by introducing an income test to the first year of the Best Start tax credit which previously provided a flat amount of $73 per week, up to a maximum of $3,838 regardless of income. This aligns with the testing applied in the second and third years of the Best Start tax credit.

Additional funding for Inland Revenue compliance activities

Finally, Budget 2025 also saw the allocation of further funding for Inland Revenue to undertake compliance activities. An additional $35m per annum has been committed by the Government to continue Inland Revenue’s recent focus on increasing its tax compliance and debt management activities. There is an expected return from this funding of 4 to 1 in the 2025/26 year and this increases to 8 to 1 from 2026/27 onwards.

It is not surprising to see additional funding for compliance activities. As indicated by Inland Revenue, there has been a significant increase in tax collection resulting from its increased activities, and based on data for the first two quarters of the year, Inland Revenue is ahead of the previous year as well as its targets.

It is a timely reminder that taxpayers should take care to revisit their tax affairs to ensure compliance, including giving consideration to having adequate tax governance in place. As previously indicated by Inland Revenue, good tax governance may play a role in the Commissioner’s approach to voluntary disclosures and audit activity.