April 1 tax changes will mean govt's 2010 tax package will be fiscally negative for 2 more years as it struggles with quake costs

The government’s revenue stream will come under more pressure from April 1, as tax cuts announced in the 2010 budget come into force, on top of personal income tax cuts implemented in October last year.

The government has said the tax package announced in last year’s budget will be fiscally neutral due to the increase in GST to 15% from 12.5% in October, and pending changes to property depreciation rules.

However, the package is expected to only become fiscally neutral in the 2013/2014 financial year, meaning two years of reduced revenues as the government grapples with the financial costs of supporting and rebuilding Christchurch in the face of the threat of a credit rating downgrade.

On top of this, Treasury said earlier this month that, even before the February 22 Christchurch earthquake, the economy was weaker than expected over the second half of 2010, with the danger of negative economic growth over this period meaning the economy could have entered a double-dip recession.

Tax changes

Finance Minister Bill English and Revenue Minister Peter Dunne re-announced the upcoming tax changes today, which take effect on 1 April, or for the 2011/12 income year, including:

• A cut in the company tax rate from 30% to 28%.
• A cut in the tax rate faced by unit trusts, life insurance policyholders and some other savings vehicles from 30% to 28%.
• Ending landlords' and businesses' ability to claim depreciation on buildings with an estimated useful life of 50 years or more.
• Abolishing loss attributing qualifying companies (LAQCs) and replacing them with a new structure that ensures owners cannot claim a tax deduction on losses at a higher rate than they pay on profits.
• Tightening the definition of income for Working for Families and the Community Services Card so income from sources like family trusts are counted and rental and other investment losses are excluded.
• Changes to the thin capitalisation tax rules to limit the scope for foreign multinationals to reduce their New Zealand tax liability.
• Ending the automatic CPI indexation of the Working for Families abatement threshold to stop higher-income recipients getting bigger increases than those on lower incomes.

“Lowering the company tax rate will cost about NZ$1.1 billion over the next four financial years, the reductions in tax on savings vehicles will cost about NZ$170 million. These are more than offset by the other measures, which are expected to raise about NZ$3 billion over the next four years,” English said in Parliament this afternoon.

“By 2013/14 the overall package announced in the 2010 Budget, of tax changes, will be just fiscally positive,” English said.

In a media release, English said cutting the company tax rate would make New Zealand more competitive and increase incentives for businesses to reinvest earnings back into jobs and growth.

"A number of property and other tax changes will encourage sound investment decisions, make the tax system fairer and ensure the overall tax package is broadly fiscally neutral," English said.

"Pressing on with policies that encourage faster growth is one of the best ways we can meet the costs associated with the repair of Christchurch. Treasury estimates all the Budget 2010 tax package will add about 1% to economic growth over the next few years," he said.

Quake costs

The two Christchurch earthquakes are expected to cost the government in the region of NZ$10 billion, including NZ$5 billion of reduced tax revenues, over the next four years due to the disruption caused by the quakes on September 4 and February 22.

Government has said it would increase its borrowing programme in order to pay for the immediate costs of the quakes, and is ruling out any sort of additional income tax levy in order to help pay for costs.

The Green Party has repeatedly called for the government to look at implementing a levy on taxpayers earning over NZ$48,000 to help pay for future costs of the quakes and take pressure off the government’s borrowing requirements. See more about the Green Party's proposal here.

Finance Minister Bill English has said the increased levels of borrowing will take net government debt above 30% of GDP, which would be just outside the government’s comfort zone for the amount of debt it owes.

Treasury had forecast in December – before the latest quake – that government’s net debt would hit a peak of 28.5% of GDP in four years’ time.

Rather than implement a levy, Prime Minister John Key has signaled government will look to make spending cuts in areas other than health and education in the upcoming May 19 Budget, as the government seeks to get its books back to surplus by 2014/15.

Key announced over the weekend the government was looking at implementing a ‘zero budget’ with no additional spending from the current year.

Credit rating worries

Both Key and English yesterday touched on the fact that international credit rating agencies were reviewing the way they assessed certain risks following sovereign debt crises in Europe, meaning there was a danger of a credit rating downgrade for New Zealand.

“We’re all in this together,” Prime Minister John Key said yesterday in answer to a question whether government schemes initiated due to coalition agreements could face the axe in the May 19 Budget.

“In the end we’ve got to find ways of making sure that our budget is balanced, that we’re in a position where the country doesn’t suffer a downgrade unnecessarily,” Key said.

“I can’t stop the sorts of things Standard & Poor’s are looking at at the moment. They’re taking a complete review of the way they look at ratings, and that includes the Australian banking system, so we can’t stop that,” he said. See threat from S&P methodology review and S&P warning on NZ private sector debt.

See Key's and English's comments here.

New Zealand also had a regular annual visit from the International Monetary Fund last week, with the IMF suggesting government look to control its spending enough to get back to surplus by 2014/15. See the IMF's comments here.

After the February 22 earthquake, English had signaled it may take until 2015/16 for the budget to reach surplus, but his more recent comments suggest government may still focus on reaching a surplus by 2014/15 so that it can begin to pay back debt.

Changes to Working for Families

Meanwhile, the changes set to be implemented on April 1 will include tighter criteria for those currently eligible for Working for Families tax credits, the Inland Revenue Department said today.

See its announcement here

There have been changes to the types of income you must tell us about when applying for and receiving Working for Families Tax Credits.

For the year starting 1 April 2011, we need to know if you receive income from the following sources:

Attributable trustee income

Attributable fringe benefits

PIE income

Passive income of children

Income of non-resident spouse

Tax exempt salary or wages

Pensions and Annuities

Other payments

Income equalisation scheme deposits (excludes "adverse events" deposits)

The above income types will need to be included in the 'other income' box of the Working for Families Tax Credits application form (FS1) along with income from interest, dividends, rents, royalties, estates, trusts and Māori authorities.

If you are already receiving Working for Families Tax Credits, and you receive any of the above income types, you’ll need to tell us about them before 1 April 2011 so that we can make sure you receive your correct entitlement. You can do this by phoning us on 0800 227 773.