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Budget 2014: The judicious use of the scalpel

15 May 2014 5 min read

It has been a big week for governments on each side of the Tasman, with both releasing their federal budgets for the next 12 months.

At times, commentators have been known to describe these major events on the political calendar as a lolly scramble. In Australia this week it was more a case of taking candy from a baby with Treasurer Joe Hockey introducing higher taxes, cuts to welfare spending and a major reduction in government employee numbers.

The Australian government is on what it calls a “budget repair” mission. The Australian Council of Trade Unions has a different turn of phrase, describing it as a “brutal attack”.

Here in New Zealand, the response to Finance Minister Bill English’s budget has been somewhat more muted. The days of major surprises are gone largely thanks to the era of pre-budget statements. But, more significantly, New Zealand is now streets ahead of Australia in its pursuit of that economic Holy Grail, the surplus.

As foreshadowed, this year’s Budget shows a small surplus - the first in six years. Compare this with Australia’s AU$49.9 billion deficit, and we can appreciate the significant challenge facing the Australian government.

Commenting earlier this week, Mr English said surpluses were a means of avoiding what he referred to as the “vigorous budget” being implemented by his counterpart across the Tasman.

But some elements of the budget delivered in Canberra on Tuesday night will be familiar to New Zealanders - such as the reduction in public servant numbers and charges for doctor visits.

It was interesting to note Tony Abbott’s government’s intention to establish a $20 billion medical research fund by 2020, to be funded through GP charges; and surprising that Research and Development tax incentives are to be reduced.

The Australian rates of refundable and non-refundable R&D offsets are being reduced by 1.5 percentage points to match the drop in the Australian company tax rate. This will result in tax benefits, estimated at tens of millions of dollars, no longer being available for Australian companies undertaking R&D. By contrast New Zealand will move forward with R&D incentives for loss-making start-up companies. They will be able to cash out all or part of their tax losses from R&D expenditure.

Furthermore all businesses will be allowed tax deductibility for R&D “black hole" expenditure that is currently neither deductible nor able to be depreciated. These two measures will return an estimated $58 million in tax to innovative New Zealand companies.

It will therefore be interesting to see whether the Australian R&D refund scheme will still be seen as more generous than New Zealand’s, and whether this, along with the 1.5% drop in the Australian company tax rate to 28.5%, will mean New Zealand companies will look to transfer some elements of their operations to Australia to take advantage of these benefits.

With a general election four months away, the Government here says it has avoided the temptation for an election year spend-up. Cynics might suggest that with Australia’s bleak budget as a curtain raiser, the Finance Minister did not have to do much to make his budget look good in comparison.

As he has done in the past, Minister English is describing his budget as a “steady as she goes” variety. Making it more of a middle-of-the-road crooner than a rock star.   

Further enquiries, please contact:

Murray Brewer
Grant Thornton New Zealand Partner, Tax
M +64 (0)9 308 2586 
E murray.brewer@nz.gt.com

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