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Budget 2022

Tax: If the Budget genie gave me one wish, I'd ask for...

Greg Thompson Greg Thompson

Kiwi businesses have been through the wringer over the past few years, with so much instability and rapid change. We need a tax strategy to help the country tackle it’s looming problems, says Greg Thompson, Business Advisory and Tax Leader.

New Zealand businesses have been through a period of time like no other since Covid inserted itself into our everyday lives. It hasn’t been a global financial crisis, a medical emergency, major social change or a lack of resource - it was all of these rolled into one mega-black swan event.

As we emerge from isolation and re-engage with the world, another storm in the form of inflation is upon us. If you ask any business what they would like now, it’s certainty.

That’s easier said than done in a world still reeling from supply change disruption, a change in capital markets, and now war. But if there is anyone who can provide certainty, it is the Government, and it’s what all areas of the economy are crying out for in this year’s Budget.

Certainty starts with a solid approach to tax policy

For too long a lack of clarity around Government priorities and policy has left businesses and society in limbo. A clear path to prosperity, socially and economically, is required and tax policy is an integral part of this.

The Government’s commitment to “no new taxes” left many quite rightly assuming major tax policy had been put on hold domestically. But the introduction of an increased bright line period, denial of interest deductions, and broad changes proposed to protect structuring around the increase in the top personal tax rate to 39% are effectively new taxes in disguise. Economically there is no longer a level playing field.

This ad-hoc approach has left businesses with a tremendous amount of uncertainty and an overwhelming sense of, “What’s next?”

The Government has spent up large on Covid support, and healthcare will soak up more taxpayer funds in this year’s Budget. The Government can earn more money, borrow, or sell its assets to deliver prosperity. It is certainly borrowing, and while we have relied on economic growth to drive more taxpayer dollars, the spectre of inflation and recession calls our growing debt into question.

Inland Revenue audits loom large

The prospect of Inland Revenue audits, and the subsequent cost and stress associated with these is compounding uncertainty for businesses.

Audit activity was put in a “holding pattern” during the peak of the pandemic and will ramp up again as Inland Revenue uses its freshly optimised IT systems to drive more taxes payable to the Government. Clarity should be provided by Government about when this holding pattern will cease or transition.

Fiscal creep

Fiscal creep is of particular concern in an inflationary environment where increases in taxpayers’ income is offset by rising costs, but if the increased income pushes a person into a higher tax bracket, they will be worse off by paying more tax.

This has been flagged for a long time, with limited engagement by successive governments. It is now a significant issue that will be exacerbated by material inflation pushing income levels higher.

Taxes to fund the big issues

The government has been advised of the significant issues New Zealand will face in funding national superannuation with our aging population, and our overreliance on taxes from wages. One of the solutions to address this and create economic neutrality was to adopt a capital gains tax, which has been rejected by the current Government, as has an increase in the age of retirement.

What is my ask from the Budget genie?

On behalf of all New Zealand businesses, please be clear on the path forward. What you will and won’t do and how you will address these key future issues (rather than deferring to the future) so businesses can deal with all the other uncertainties they face.