Tax columnist Terry Baucher does the sums on the "zero" 2012 budget and uncovers the unreported $1.4 billion 'bracket creep' that will put more money in Govt's pocket.

By Terry Baucher*

Yesterday was the first time I was in the Budget Lock-Up, where analysts and media get advance notice of the Budget’s contents.  By now the main announcements regarding tax will be well known but as always with tax the devil is in the detail and the mass of documents released in the media kit (Treasury doesn’t seem to have heard of double-sided printing) contained some interesting nuggets about why one tax change was bad news not only for kids but also for tax refund agents, and just how much “bracket creep” is worth to the Government.

It's not been a good week for tax refund agents (more properly Personal Tax Summary Intermediaries, or PTSIs): on Tuesday the Commerce Commission fired a shot across their bows when it warned that they may be failing to comply with the Fair Trading Act; then yesterday’s Budget appears to have removed one of their principal sources of income at a stroke.(See Amanda Morrall story here).

One of the few tax related surprises in the Budget was the abolition of the income under $9,880 tax credit, the tax credit for housekeeper and childcare expenditure and the tax credit for the active income of children. All told these measures are expected to raise $117 million over four years.  

Ancient tax relics gone

At the Budget Lock-Up, Bill English was rather offhand explaining this move.  He said their abolition was being made in the interests of fairness, ease of compliance, and anyway the housekeeper and childcare tax credit was a "relic from the 1930s", claimed mainly by high income earners.  

The preamble to the Taxation (Budget Measures) Bill containing the relevant legislation was a little more frank referring to these “outdated tax credits” as "fiscally expensive" (what on Earth does that make New Zealand Superannuation or interest free student loans?).  But it is the accompanying Regulatory Impact Statement that contains the most interesting remarks.  

According to the Regulatory Impact Statement, "The repeal of these tax credits could also indirectly affect the businesses of PTSIs since the tax credits are a major driver of tax refunds so their repeal should reduce the number of taxpayers who have overpaid tax."  

PTSIs will feel the pinch too

I am aware that the IRD have become increasingly concerned about the role of PTSIs, principally because the large number of telephone calls PTSIs generate puts great pressure on the IRD's telephone systems.  Therefore eliminating the credits not only reduces tax refunds but reduces the IRD’s compliance costs, a clear "win-win" so far as it is concerned.  In fact the repeal of these tax credits is effectively retrospective as of 1^st April because claims could only be made after the end of a tax year.  Accordingly, the claims for the tax year just ended will be the last to be allowed.  

It’s also clear these changes were a very late addition to the Budget.  Under the Generic Tax Policy Process proposed tax legislation amendments are usually foreshadowed by the release of discussion documents a year or so before enactment.  This was the case with the revisions to “mixed use assets” and livestock elections announced yesterday. 

By contrast, the Regulatory Impact Statement regarding the abolition of the various tax credits confirms that abolition was a late addition to the Budget as it concludes "Due to the need for Budget secrecy and the short timeframes involved there was no ability to consult in the usual manner with affected parties.

The Treasury and Inland Revenue were the only agencies involved in developing the proposals and carrying out the analysis."   Which begs the question were Treasury and Inland Revenue aware of the likely contents of the Commerce Commission media release and took the opportunity to slay two birds with one stone? 

More take than give

Either way PTSIs appear set to lose out as a result of the Budget changes. So too will those earning under $9,880 and, as has grabbed the headlines, those school-girls and boys earning a little money through part-time work.  In a possible case of the law of unintended consequences, those affected will include children under the age of 16 who are receiving ACC compensation as the result of the accidental death of a parent, in a car crash for example, or other tragedy such as the Christchurch Earthquake or the Pike River Mine disaster.  (A colleague has advised me he knows of at least two such affected children whose father died at Pike River).  

The Government has already drawn fire over the apparent move to tax paperboys and girls so it will therefore be interesting to see if the Government makes some “minor adjustments” to the proposed abolition of children’s active income tax credit. 

Taxation by stealth

Returning to a topic I raised in my last post, the Government’s tax measures announced yesterday are designed to bring in about $1.36 billion over the next four years.  An impressive enough sum, but eclipsed by the effect of bracket creep or “fiscal drag” as the Treasury describes it.  At the Budget Lock-Up I was able to ask Treasury officials their estimate of the effect of “bracket creep”.  (See Terry's column on bracket creep here).

Treasury expects the fiscal drag effect to total 0.7% of GDP, or a little more than $1.4 billion based on current GDP, over the four years to 30 June 2016.  In fact, the amount is likely to be greater than that if the Budget’s (somewhat heroic) growth forecasts and projections of wage growth do eventuate.  So bracket creep is a nice little earner the more so since it goes largely unnoticed.   It will be interesting to see if this issue gets attention as the Budget debate unfolds. 

*Terry Baucher is an Auckland-based tax specialist with 20 years experience. He works almost exclusively with high net worth individuals and owners of medium sized and emerging businesses.