Any thoughts of further fundamental changes to the tax system have well and truly been put to bed by a budget devoid of any real tax substance. The headline tax change being the rise in excise duty on tobacco confirms the fact that, for now, everything major has been done.
The 2012 budget delivers only some minor adjustments to the tax scene, most of which had been signalled well in advance.
Tobacco excise will increase 10% a year on January 1 for the next four years, estimated to add more than $20 to a pack of cigarettes. Ostensibly a move to encourage people to quit smoking, it has an additional benefit of raising revenue for the government to the extent of an additional $528 million over 4 years. It is estimated that for every 10% increase in the excise tax, only 5% of smokers will actually quit, leading to a continued rise in the revenue.
The two other significant policy designs have already been released and as such is old news.
The first of these relates to closing the ability for farmers to transfer between livestock valuation methods, cherry picking the lowest valuations. It is estimated to save the government $184 million over four years.
The second has had more airplay recently. The Minister of Finance has been at pains to show the government is cracking down on tax loopholes for the rich. However, this policy was announced in last year’s budget, and has already been the subject of a discussion document.
The desire is to deny deductions for expenditure related to mixed use assets, such as holiday homes, yachts and aircraft where the actual business and personal use of those assets is low, but the costs relating to the period of non-use is treated as tax deductible. This deduction is used to minimise the owners’ other tax liabilities. This is estimated to raise additional revenue of $109 million over 4 years.
The only surprise in this year’s budget was the removal of some rather inconsequential tax credits, which are considered to be out of date. That said they are estimated to raise approximately $117.1 million over 4 years. Those tax credits relate to the income under $9880, childcare and housekeeper and for the active income of children. All are considered to be out of date and superseded by other measures.
It is surprising the government did not also re-announce further items on the tax work programme which could have bolstered the perception of tax change instead of the paucity of any tax change of substance.
The one certainty that was always going to be in this budget was additional funding to the Inland Revenue Department to fund additional audit and compliance work. When the ability to raise additional taxes is low, and the growth prospects are not strong, there will always be a focus on collecting more revenue from existing legislation. For an investment of $78.4 million the government is expecting a return of $345.4 net over four years. The primary focus is intended to be the hidden economy, debt collection and following up on unfiled tax returns.
The reform of the tax system is complete, given a greater focus on ensuring the economy returns to a surplus.
Well, at least until the recovery necessitates further adjustments.
Greg Thompson
Partner, Tax
T +64 (0)4 495 3775
M+64 (0)21 281 7332
E greg.thompson@nz.gt.com