By Terry Baucher
Wednesday’s Mini-Budget clarified a couple of items but left the big decisions until the New Year.
Firstly, the Mini-Budget confirms the bright-line test will drop back to two years from 1 July 2024. Commercial building depreciation will be withdrawn from 1st April 2024. Both measures were signalled in the Coalition Agreements and the timeline is as expected.
But…although the Finance Minister Nicola Willis confirmed “the Government’s commitment to fully restoring interest deductibility for rental properties”, there is no firm news about exactly how this will be phased in and we will have to wait for the details to be announced in the New Year. Reading between the lines changes to interest deductibility may no longer be backdated to 1st April 2023 as the accompanying press release refers to “an intention to increase interest deductibility for rental properties from April 2024”.
Similarly, there is no clear timeline about any adjustments to tax thresholds. Instead “the Government is progressing work to deliver meaningful income tax reduction in next year’s Budget…and for delivering income relief to workers and their families.” This work will also “uphold the commitment in the ACT-National Coalition Agreement to consider the concepts of ACT’s income tax policy as a pathway to delivering National’s promised tax relief.”
We may get a clearer idea of timing when the Budget Policy Statement is released next March. All the Minister would say when questioned is that the details would be confirmed in the Budget, but the Government is still committed to changes as from 1st July 2024.
The removal of commercial building depreciation is expected to be worth $2.3 billion over the forecast period to 30 June 2028. Treasury’s profile of the effect looks odd but apparently reflects the lack of information available to accurately calculate the impact of the policy.
In terms of paying for the future tax relief, apart from the withdrawal of commercial property depreciation, funding from the Emissions Trading Scheme will go into the Consolidated Fund rather than be ring-fenced for environmental measures.
As the Treasury HYEFU documents made clear, the economy has hit a hole with the impact of several quarters of negative GDP per capita growth masked by record immigration. That in turn means falling corporate income tax and GST revenue. In fact, just under 50% or $20 billion, of the expected increase in tax revenue for the forecast period to 30 June 2028 is to come from increased PAYE on wage growth and fiscal drag.
Treasury estimates the effect of fiscal drag (when increased wages cross a tax threshold, raising the effective marginal tax rate) to be $4.5 billion over the five year forecast period. That highlights both the need to adjust tax thresholds but also the cost of doing so. Clearly, squaring that circle is still an issue the Minister and Treasury are yet to resolve.
Nicola Willis spoke with some enthusiasm about the prospect of Inland Revenue delivering “hundreds of millions” from increased audit activity but didn’t confirm whether the department would still be expected to cut 6.5% of its baseline expenditure. (Bear in mind that Inland Revenue’s headcount has fallen by 25% since 2017).
In summary, there was very little to get enthused about for Christmas, although the Finance Minister seemed to enjoy laying it on thick about the state of the Government’s finances. Relief might be on the way but for now there’s a great dearth of detail.