No one, except Bill English, has a crystal ball to predict what tax measures might be introduced in the Budget on 24 May 2012.
However, there is no shroud of secrecy over the likely changes. We know the broad objectives of the government, what works for New Zealand compared with our international partners and what constraints we face. Applying some insight to this mix allows us to determine some likely Budget day announcements.
The main tax collection objective in New Zealand is to build a tax system which has a broad base and a low rate (BBLR). This BBLR system makes it easier for taxpayers to voluntarily comply with their tax obligations, an essential aspect of our voluntary compliance tax system (which is also encouraged by a robust penalty regime). BBLR should also encourage people into the workforce and reduce the costs of tax collection.
There are some obvious gaps in the broad base when compared with other OECD countries, but these are unlikely to be closed on 24 May. For example, Capital Gains Tax is a hot potato which works in many countries and is often championed by opposition parties, but not by New Zealand governments.
Our tax comparison with OECD countries demonstrates where we are succeeding in tax raising and arguably, where we should focus our attention. The IRD released a report in November, Briefing for the Incoming Minister of Revenue – 2011. While it may not sound like a best-selling title and the data contained is not current across the OECD, it contains some insightful information:
- Our taxes are collected efficiently from three main sources, income tax 48%, GST 24% and company tax 14%. We are third in a ranking of 33 OECD countries, based on the percentage of tax collected from income and profits – marginally behind Australia
- Our tax take represents 31% of our gross domestic product, which is less than the UK, France and Germany but more than Australia and the US
- Based on the tax collected and the GST rate, our GST system is very efficient. We stand sixth on this efficiency scale out of the 33 countries and first based on a broad based efficiency measure. This gives a “don’t mess with it” message despite the calls to use GST as a policy tool
- Our personal income tax efficiency rating is also based on the amount collected compared with the rates levied (sixth out of 33). However, the recent increase in the Australian tax free personal income band to $18,201 will get our policy officials thinking, given the migration of Kiwis across the Tasman
- Excise duties represent almost 7% of the tax take and this should not be underestimated. We face increasing health costs and the government coalition is determined to see a reduction in the health problems caused by smoking and drinking. It is the aim of some party’s to see smoking become financially prohibitive, which will require a significant increases in tobacco tax. Excise duty on alcohol could also be a target given our high profile drinking problems, especially among the young
Our long term fiscal constraints include an aging population that will require increased budget funding. In the short term, we are facing a budget deficit which is likely to extend in this fiscal year by a further $1 billion due to:
- a slower than expected economy after our glorious rugby world cup victory
- lower earnings from our state owned enterprises, eg New Zealand Post and the electricity companies
- the Christchurch earthquakes, in particular the pre-Christmas quake on 23 December 2011
As Budget day approaches we are likely to be fed some tasty tax morsels by the Government to satisfy our inquisitive appetites. Based on all of this information to date what can we expect?
Firstly there will be no big spending plans as we can’t currently afford it.
There will be more efficiency in spending on the taxpayer funded public sector.
There will be an increased broadening of the tax base and a closing of loopholes. For example, changes to livestock valuation, holiday homes and car parks have been announced.
My crystal ball tells me there will be little change to personal taxes, company taxes or GST. However, given the expansion of Australia’s tax-free band, our tax free band will need to be addressed sometime soon.
Excise duties are likely candidates for a hike, but measures such as technology and export assistance will improve the ability of New Zealand businesses to grow and employ people, produce and sell more products and in the process, generate a greater tax take from our BBLR system. We will then be able to fund the health, education, welfare and other programmes we all aspire to have.
Further enquiries, please contact:
Partner, Tax Services
T +64 9 308 2753