By Terry Baucher*
With any major tax initiatives all kicked over to the Tax Working Group for review, unsurprisingly the Budget made no changes to existing tax rates and thresholds.
No increases in thresholds results in extra tax revenue through the effect of ‘fiscal drag’ whereby individuals pay more tax as their earnings ‘drag’ them into higher tax brackets.
For the year to 30 June 2018 the fiscal drag effect is calculated as $276 million. By 30 June 2022, when the total tax take is predicted to rise by almost 25% to over $103 billion, it will be $398 million.
At some stage thresholds, which have not been increased since 2010, will need to be adjusted, but for the moment the government, like its predecessor, is happy to collect the additional revenue.
Two significant tax changes were announced prior to the Budget. The major initiative is the ring-fencing of residential property losses. From 2020 it will no longer be possible to offset losses against other income. Instead the losses must be carried forward for future use. The additional tax collected as a result of this change is $125 million for the June 2021 year rising to $190 million for the June 2022 year.
The other change - and one likely to affect more taxpayers - is the introduction of GST on low-value imported goods from 1 October 2019. The current estimate is for this measure to raise $218 million between 1 October 2019 and 30 June 2022.
In the meantime, Inland Revenue will get a further $31.3 million of funding over the next four years to boost compliance. $23.5 million of this is specifically targeted at ensuring outstanding company tax returns are filed.
Another $3 million is to analyse the potential for improved tax compliance in ‘specific industries’ through better third-party reporting and withholding taxes. This is probably aimed at contractors not currently covered by the PAYE rules.
Overall, Inland Revenue expects to recover approximately an additional $239 million over the four years to 30 June 2022 from enhanced compliance activities.
There’s some more details about the Research and Development tax incentive which will involve $1 billion over four years. Eligible businesses spending more than $100,000 annually on R&D will get a rebate of 12.5 cents for every dollar of R&D spend.
In a nod to the Deputy Prime Minister’s love of racing the bloodstock tax rules will change to allow deductions to be claimed for the “costs of high-quality horses acquired with the intention to breed.” A snip at $4.8 million over the next four years.
Migrants can expect to pay another $113 million in fees over the next four years, and the Immigration Levy is expected to raise another $44.7 million over the same period.
*Terry Baucher is an Auckland-based tax specialist and head of Baucher Consulting.