By Terry Baucher*
The investment boost tax incentive announced as a centre piece of “The Growth Budget” is one of the bolder tax initiatives in recent years.
From today businesses of any size can fully deduct 20% of the value of new assets (or secondhand assets purchased from overseas) in the year of purchase. For example, if a company invested $200,000 in new plant, $40,000 would be immediately deductible. The remaining $160,000 would be depreciated as normal. There is no cap on this allowance which is also welcome (and a little surprising).
Investment boost also applies to new commercial and industrial buildings. Although residential buildings and most buildings used to provide accommodation will not be eligible there will be explicit exceptions for hotels, hospitals and rest homes. Any construction project underway before 22nd May 2025 may also qualify if the asset is used or available for use for the first time after that date.
The allowance may also be available for improvements to depreciable property such as significant strengthening of an industrial building. This should be welcome news for owners facing earthquake strengthening costs.
Treasury and Inland Revenue estimate this initiative will increase GDP by 1%, wages by 1.5% and the country’s capital stock by 1.6% over the next 20 years. Half of those gains are expected in the next five years as it sparks an investment boom.
On the other hand, investment boost doesn’t come cheap with an expected cost of $1.7 billion per year over the next four years to 30 June 2029.
I speculated last week that the Budget might contain changes around accelerated depreciation, which I considered would be a better and more affordable option than a cut in the corporate tax rate.
Which is exactly what the Finance Minister Nicola Willis acknowledged when announcing the incentive it; “delivers more bang for buck than a company tax cut because it only applies to new investments, not those made in the past.”
I thought we might have seen an increase in the $1,000 full write-off for low-value assets. Although that didn’t happen this is a welcome move particularly as it is available for any businesses of any size without cap.
On the other hand it is somewhat ironic that having removed depreciation on commercial and industrial buildings last year, the Government has now enabled new commercial and industrial buildings to qualify for the 20% deduction. Allowing this is perhaps a belated recognition that removing depreciation in the first place would hinder investment?
The Ghost of Bill English?
I also described last week the many and quite significant changes to KiwiSaver Bill English made during his time as Finance Minister. The reduction in the Government’s contribution to a maximum of $260.72 annually and removal in full for those earning over $180,000 annually is therefore straight out of English’s playbook. (In fact during the question & answer session the Finance Minister commented that officials had advised removing the contribution completely).
This is to be compensated by increased employer and employee contributions first to 3.5% from 1 April 2026 and then to 4% from 1 April 2028. How that plays out in boosting saving will be interesting to see. On the other hand, the proposal to extend KiwiSaver eligibility to 16-17 year olds is a good move.
Not much love for low-income families
Earlier this year a Treasury paper noted 30% of all single-parent families faced an effective marginal tax rate of 50% or more. The Budget contains changes to the Working for Families which (very) partially addresses this with a lift in the family income threshold from $42,700 to $44,900. However, this has been paid for by means testing the first year of the Best Start tax credit and lifting the Working for Families abatement rate from 27% to 27.5%. (Another very Bill English-type move).
To put that in context if the Working for Families threshold had been adjusted for inflation since it was last set in June 2018, it would now be $54,650 or nearly $10,000 more.
The low threshold and high abatement rate mean many families find themselves in debt with Inland Revenue. To address this the Government is releasing a discussion document with proposals to make Working for Families payments more accurate. This is helpful but nowhere near as much as a meaningful increase in the threshold which, remember, is still below what a person on minimum wage would earn annually.
(Also worth noting that an additional $154 million over four years was found to increase the abatement income threshold for SuperGold cardholders from $31,510 to $45,000. That’s welcome but it’s interesting to compare this with the assistance given to younger families and workers whose taxes pay for NZ Superannuation).
More money for Inland Revenue
As expected, Inland Revenue will get another $35 million a year for compliance and debt collection. This is expected to return four dollars for every dollar spent in the year to 30 June 2026 and rising to eight dollars per dollar spent in the year to 30 June 2027. The expectation is that Inland Revenue is on track to collect more than $4 billion in overdue debt by 30 June.
Elsewhere, we got no further details on the proposed tax changes to thin capitalisation and employee share schemes announced earlier this week. These are expected to cost $75 million over four years, the majority of which relates to the thin capitalisation proposals.
Overall, a growth budget perhaps but one that relies on several sleight of hand moves, and does next to nothing to address the problem of low-income families facing high effective marginal tax rates.
*Terry Baucher is the director of his own tax consultancy firm Baucher Consulting Ltd which he founded in August 2004. He has over 40 years’ experience in New Zealand and the UK working as a tax specialist advising on tax issues primarily affecting small businesses, investors and migrants.
3 Comments
On the other hand, investment boost doesn’t come cheap with an expected cost of $1.7 billion per year over the next four years to 30 June 2029.
Add that to landlord boost in their last budget (for which costs have gone up more recently);
The cost of reinstating full interest deductions for residential property will be $2.9 billion over the four-year forecast period, according to data from the Government.
That is an increase of $800 million on the four-year cost signalled in National’s pre-election fiscal and tax plans, which costed the policy at $2.1b.
And no wonder we can't afford new hospitals; fully funded emergency services; pay equity claims and so on and so forth.
And while I'm at it - we're going to means test the parents of 18 and 19 year olds (as a means to deny them an unemployment benefit if they can't find work) - yet no means test (or anything changing the settings for that matter) on universal super - by far our largest expense line.
I wouldn't call this an austerity budget - I'd call it a receivership budget. In every year up to 2029 when they say they'll balance the budget again (finally) - the books will deteriorate each year further and further.
To my mind the government needs to get back to work at collecting more revenue - not giving it away.
We could debate the merits of budget allocations indefinitely however Willis is still spending several billion more than Robertson forecast this period had he remained Finance minister.
Yep, she is - and it just doesn't seem to me that there is anything in there that generates new/more revenue for them to offset all the tax breaks.
Recipe for disaster relying on a 'hope and a prayer'.
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