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Govt eyes NZ$1.4 bln extra revenue over next four years as tobacco excise hiked, mixed-use and livestock rules tightened, tax compliance increased
By Alex Tarrant
The government’s bid to hit a NZ$197 million surplus in 2014/15 will be aided by an expected NZ$1.4 billion worth of new revenue over the next four years.
Finance Minister Bill English announced on Thursday that tobacco excise would rise by 10% a year in each of the next four years, on top of the annual inflation-indexed increases. That follows a 40% hike in excise since April 2010.
The excise hikes are expected to bring in NZ$528 million over four years.
Increased tax compliance activity, debt collection, and following up on unfiled tax returns would save NZ$423.8 million over four years.
Tightening of tax deductibility rules for mixed-use assets, such as holiday homes, would bring in NZ$109 million over the four years.
Tightening of livestock valuation rules would bring in NZ$184 million over the four years.
And the removal of three tax credits would save NZ$117.1 million over the four years.
Revenue Minister Peter Dunne said steps to close loopholes and update the tax credit system would bring in hundreds of millions of dollars of extra revenue over the next four years.
“This continues the Government’s work over the previous three Budgets to protect its revenue base and ensure the tax system is fairer for all taxpayers,” Dunne said.
The changes include:
· Tightening the rules around the deductibility of costs relating to assets that are both used by their owners and rented out for income, such as holiday homes, boats, and aircraft. The changes are expected to save about $109 million over the next four years.
· Putting changes to livestock valuation rules into Budget legislation to prevent 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.
· Removing three tax credits which no longer fit the purpose for which they were set up – the income-under-$9,880 tax credit, the childcare and housekeeper tax credit, and the tax credit for the active income of children, which will be replaced by a limited exemption. The changes will save $117 million over the next four years.
“These changes will help modernise the tax system and ensure tax deductions and tax credits are being targeted to areas where they are intended and needed,” Dunne said.
“In the case of mixed-use assets, such as a holiday home, it is unfair that owners can claim a tax deduction for the majority of their costs because it is available for rent or hire, even if it is mainly used privately. In effect, they are getting a taxpayer subsidy for their private use of the asset,” he said.
The new rules would require mixed-use asset owners to apportion their deductions based on the actual income earned and private use of the asset.
For example, owners who rented out their holiday home for 30 days in a year and used it themselves for 30 days in a year will be able to claim a deduction for 50 per cent of their general costs, rather than the 90 per cent they could claim now.
“In the case of livestock valuations, the previous rules were too loose and allowed some farmers switching between the two main livestock valuation methods to receive an unfair tax advantage over those farmers who applied the rules as they were intended,” Dunne said.
In March, the Government announced it would disallow farmers to move from the ‘herd scheme’ to the alternative ‘national standard cost scheme’, except in narrow circumstances, effective from 18 August 2011. Budget legislation would put that into law, with details to be included in the next omnibus tax bill.
“The three tax credits we are removing in Budget 2012 have become poorly targeted. For example, the bottom 30 per cent of households make up just 11 per cent of childcare and housekeeper tax credit claimants,” Dunne said.
“Their use, in most cases, is now quite different from what was originally intended. For example, the income-under-$9,880 tax credit was originally put in place in 1986 to protect full-time workers on low wages, but it no longer applies to that group,” he said.
“The childcare and housekeeper tax credit has been superseded in recent years by other government support, such as Working for Families and 20 hours free early childhood education.
“Times have changed, society has changed, and wider government policies have changed. The Government believes its spending on these tax credits could be better directed to areas of higher need,” Dunne said.
The tax credit for children would be replaced by a limited tax exemption to ensure that children would not need to file a tax return if they earned small amounts of ‘in the hand’ income that would not usually be taxed at source – for example, from babysitting or mowing the neighbour’s lawn.
However, children would no longer be able to claim a refund of tax that had already been correctly deducted and paid by an employer. These changes would take effect from the 2012/13 tax year.
People filing their 2011/12 tax returns could still claim these credits.
Finally, Budget 2012 will provide Inland Revenue with an extra $78.4 million over the next four years to bolster its tax compliance activities in dealing with the hidden economy, debt collection, and following up on unfiled returns, Dunne said.
“In Budget 2010, the Government allocated an additional $119.3 million over four years for the department to strengthen its compliance and debt activities.
“The return on investment from that funding in the first year was encouraging, Dunne said.
Extra tax of $86.9 million was assessed, representing a return of $6.62 for every dollar invested in the hidden economy and the property sector. An additional $115.3 million of tax debt was recovered – a return of $9.50 for every dollar invested.
“The extra compliance activities in Budget 2012 are estimated to have a net positive impact on the operating balance of $345.4 million over the four years to 2015/16,” Dunne said.