Budget 2011 - Key facts

Following the significant tax changes arising out of the 2010 Budget, including a GST rate increase and broad income tax cuts, this year’s Budget was always going to be about consolidation of the policy initiatives, sustainability and tinkering around the edges.

The Government signaled well in advance its intention to modify the three key platforms administered by Inland Revenue, being Working for Families, Student Loans, and the KiwiSaver schemes. All have been modified, essentially to make them sustainable in the long term.

Significant growth over the past few years in costs associated with all three schemes meant that changes had to be made to ensure they could remain viable.  Any fundamental change, however, was never on the cards given how entrenched all three regimes are in the New Zealand psyche and the political suicide resulting from any major change.

• Income and expenditure
• Working for Families
• Student loan
• KiwiSaver
• Other tax changes
• Other Budget announcements
• Budget tax bill

Income and expenditure

Before we delve into salient details of Budget 2011, let’s take a look at where this year’s income is coming from and where it’s going to be spent:

Working for Families

The Government has made minor changes in this Budget to the Working for Families regime to address the relentless growth in the cost of the scheme to the Government.  The amendments have been at the “wealthy” end of the scheme, including:

• Reduction in the abatement threshold from $36,827 to $35,000
• Increase in rate of abatement from 20% to 25%
• Temporary halt in the inflation indexation for payments relating to children aged 16 and over until they align with those for children aged 13 to 15

All of these changes will be drip-fed at the time of the next four CPI inflation adjustments, which are expected biannually.

Student loan

The changes to the student loan scheme have focussed on those areas where the greater loss to Government arises.  The changes include:

• Restricting access to further loans to those who are in arrears with their payments
• Limiting access to the scheme for those aged 55 and older to tuition fees only
• Denying access for part-time full year students
• Shortening a repayment holiday for students going overseas from three years to one
• Widening the definition of income for student loan repayment purposes

KiwiSaver

There have been a number of changes to the KiwiSaver regime with the aim of trying to encourage higher levels of private savings and ensuring the financial sustainability of the scheme for the future.  These changes include:

• Removing the tax-free status of employer contributions. Contributions will be subject to Employer Superannuation Contribution Tax at the employee’s marginal tax rate
• Halving the member tax credit to a maximum of approximately $10 per week
• Increasing the minimum employee contribution rate from 2% to 3% from 1 April 2013 with an equal rise in the compulsory employer contribution rate

The initial kick-start payment of $1,000 will remain.  These changes to KiwiSaver will reduce Government spending by an estimated $2.6 billion over the next four years.

Other tax changes

In addition to its existing tax work programme, the Government has also indicated an intention to generally tinker with some existing tax rules, including:

• Reviewing the tax rules for mixed-use assets (targeting yachts and holiday homes) which are both rented out and used privately and provide owners with inflated tax deductions
• A new approach to livestock valuation elections for farmers (to stop flip-flopping between regimes)
• Looking at trying to capture as taxable more non-cash benefits to employees
• A change in the thin capitalisation ratio for foreign owned banks, with the minimum prescribed equity percentage increasing from 4% to 6% from 1 April 2012

Importantly, the Government has indicated a continued focus on audit activity and debt enforcement action meaning taxpayers will continue to feel the direct hand of Inland Revenue in their affairs.

After one of the heaviest years of tax changes in recent history, a tinkering was not unexpected and a welcome relief from that pace of change.

Other Budget announcements

A brief summary follows of the other main points included in the Government's 2011 Budget:

• Forecasting a return to surplus in 2014-15
• Expectation of a boost to economic growth to 4 per cent in 2012
• Creation of 170,000 jobs by 2015
• Creation of a $5.5bn Canterbury Earthquake Recovery Fund, $25.5m to the new Canterbury Earthquake Recovery Authority and $10m to support Cantabrians rebuilding their lives
• Proposal to sell-off shares in four state-owned energy companies and to reduce its majority shareholding in Air New Zealand
• The public sector are being asked to find $980m in savings over three years
• Delivering $2.2bn to public health services over the next four years, directed at training, maternity initiatives, improved access to medicine, elective surgery, disability support and GP visits
• Schools and early childhood education are going to get an extra $1.4bn up to 2015
• A $157m boost to the justice sector mainly aimed at legal aid and tackling white collar crime
• About $100m will be channeled into social development in order to get more young people into jobs and for community social services
• Infrastructure to get a $1.6b boost, including almost $1bn for ultra-fast broadband, $250m for rail, and about $100m to fix leaky schools
• Business R&D and commercialisation and earthquake research is set to receive an additional $36m. The funding isn’t a new initiative, it’s a shift in priorities within Vote Science and Innovation

Budget tax bill

The Budget tax bill, introduced on Budget day, passed its final stages in Parliament on Friday 20 May and received Royal Assent on 24 May.  This Bill introduces the changes to Working for Families and KiwiSaver which were announced in Budget 2011 (detailed above).