Harvesting the rewards
Policy initiatives made by the government in prior budgets positioned it to make no taxation changes of any substance this year, leaving the 2014 Budget relatively unscathed from a taxation perspective.
Significant changes had previously been made to the GST rate (increased to 15%), property (denial of depreciation deductions on buildings), together with personal and corporate rates reductions (across the board and 28% respectively). These were made with the purpose of adjusting the levers in preparation for, and to encourage, the economic recovery which is now underway. Now is the time to see whether those changes will deliver the intended outcomes.
With a focus of managing the growing economy, the key taxation aspect of the 2014 Budget relates to the projections for tax revenue. It recognised a growth in tax revenues of 5% in the current year, will increase to an estimated 7% in the coming year, with ongoing increases projected through to 2017/18 and beyond.
That said, given recent underestimations, there is an express acknowledgement of the volatility of tax revenue forecasting is highly dependent on nominal GDP growth.
The announcements relating to tax were relatively minor, including:
- The abolition of cheque duty from 1 July 2014
- Confirmation of the previously announced tax policy intent to support business R&D, and
- An increase in the parental tax credit from $150 per week to $220 a week as part of a package supporting children and families.
Cheque duties currently only raise $4m per year and continue to fall each year with the decline in this means of payment.
The R&D tax policy changes do not go as far as full scale tax R&D incentives, instead focussing on the ability for R&D intensive start-up companies to cash up initial tax losses, and permitting tax deductibility of R&D “black hole” expenditure that is currently neither deductible nor able to be depreciated. The design details are currently the subject of public consultation.
Despite the Australian government reinforcing its commitment to reduce its corporate tax rate to 28.5% from 1 July 2015, the New Zealand government felt no need to stray from its corporate tax rate to maintain a jump on the Australians. At 28%, the New Zealand corporate tax rate remains below Australia’s, not taking into account the additional tax burden Australians bear through capital gains tax.
Silent in the budget commentary are three key aspects which will affect the tax landscape in coming years.
The first of these relates to comments now being made publicly that future tax cuts are not off the agenda, and in particular targeting middle income earners. This would be a welcome boost for those who are generally the meat in the sandwich for tax changes, picking up the costs and missing out on the benefits.
The most significant impending tax changes relate to the global shift in taxation, currently in its design phase with the OECD, relating to the Base Erosion and Profit Splitting project (commonly referred to as BEPS). Despite a focus for the project on adjustments to income tax principles to counter shifting profits to low or no tax jurisdictions, the project encompasses a much wider mandate, dealing with other modern day tax issues such as e-commerce and cross border GST. The answers are elusive, and are dependent on widespread international cooperation.
With growing calls for a reduction to the taxation of savings, which are over taxed compared to the investment in the property sector, Mr English confirmed no current intention to revisit this inequity.
Lest we forget, the tax transformation project is also underway, intent at bringing the Inland Revenue computer systems into the 21st century, but charged with using technology to simplify and enhance the tax system to once again lead the world in tax policy design and administration. Mr English confirmed that until this project makes material headway, no material change to the current tax system can be entertained.
The government therefore watches the tax design strategies from prior years coming to fruition, with a focus on tax revenue growth through economic factors, rather than changing the rules of taxation. That is to be left to another day.