Alan Scott
Tax Partner
Finance Minister Hon Nicola Willis promised she wouldn’t deliver a big-spending Budget, but she would deliver on the Government’s commitment to tax cuts while cutting Government spending to ease the pressure on inflation.
In Budget 2024, Nicola Willis has kept the final 2024 operating allowance at $3.2 billion while delivering tax relief from 31 July 2024, which she says is identical in most respects to that set out in National’s election tax plan, with some small adjustments to reflect its Coalition agreements which is as follows:
NEW PERSONAL TAX THRESHOLDS | ||
|---|---|---|
| Previous threshold | New threshold | Tax rate |
| Up to $14,000 | Up to $15,600 | 10.5% |
| $14,001 - 48,000 | $15,601-$53,500 | 17.5% |
| $48,001 - 70,000 | $53,501-$78,100 | 30% |
| $70,001 - $180,000 | $78,101-$180,000 | 33% |
| > $180,000 | >$180,000 | 39% |
The Budget 2024 tax relief package will cost $14.725 billion over 5 years to 2027/28. The cost of this package is covered by savings and revenue initiatives over the same period, which the Government says demonstrates it is not borrowing for tax relief.
The biggest saving to fund tax relief is $4.860 billion over the forecast period from cuts to Government agencies, expiring tagged contingencies, the closing of the National Resilience Plan and the Climate Emergency Response Fund, and with new sources of revenue largely making up the difference. A bit of a surprise is that savings of $879 million over the forecast period are achieved by scrapping first-year free tertiary education fees in favour of the final year being free.
New revenue over the forecast period includes:
Treasury says that the decisions taken in Budget 2024 will, on balance, reduce the contribution fiscal policy is making to inflation pressure. It acknowledges, however, that tax relief will boost aggregate demand but notes this is more than offset by lower government spending and allowances.
Alan Scott, BDO Tax Partner says “The timing of the tax relief has been delayed by 4 weeks from 1 July 2024 July to 31 July 2024 to give software providers a chance to make changes to payroll software. Tax rate/bracket changes made part way through a tax year do cause complications for the administration of the tax system but the Government was obviously keen to deliver the tax relief that was promised by National prior to the election. Their impact on inflation will depend on the timing of the cost savings over the forecast period.”
The table below shows the annual tax relief confirmed in Budget 2024 for a selection of NZ wage earners. This includes the benefit of changes to the tax brackets, the increase in eligibility for the independent earner tax credit, changes to various family tax credits, and the new FamilyBoost payment.
Group | Income | Annual Tax Relief | Weekly Tax Relief |
Full-time minimum wage worker | $48,000 | $632 | $12.15 |
Median wage worker | $62,000 | $1,320 | $25.38 |
Average wage worker | $76,000 | $980 | $18.85 |
Two-income household – no children, average income | $120,000 | $2,640 | $50.77 |
Two-income household – two children, average income | $120,000 | $2,640 | $50.77 |
Two-income household – one child, $300 weekly childcare costs, average income | $120,000 | $6,540 | $125.77 |
To check how the tax relief benefits you, a tax calculator is available at budget.govt.nz/taxcalculator
From 31 July 2024, the Government is:
Also from 1 July 2024, Budget 2024 introduces a new childcare subsidy that will be available to low-to-middle income families with children aged 5 and under, to help with the costs of early childhood education. This provides a partial reimbursement of 25% of such fees after the 20 hours ECE and MSD Childcare Subsidy have been taken into account, up to a maximum of $150 per family per fortnight. Eligibility is phased out for family incomes over $140,000 per annum and eligibility ceases when family income exceeds $180,000 per annum. The reimbursements will be paid quarterly in a lump sum, with the first payments available from October 2024.
“The timing of the tax relief has been delayed by 4 weeks from 1 July 2024 July to 31 July 2024 to give software providers a chance to make changes to payroll software. Tax rate/bracket changes made part way through a tax year do cause complications for the administration of the tax system but the Government was obviously keen to deliver the tax relief that was promised by National prior to the election. Their impact on inflation will depend on the timing of the cost savings over the forecast period.” Alan Scott, Tax Partner |
Economic concerns and financial pressures are the leading challenges for NZ business leaders right now, according to our April 2024 BDO Business Wellbeing Index.
There is not a lot of direct support in Budget 2024 for businesses. Many businesses will be hoping for some relief from economic conditions or at least a clear path to get through these tough times.
However, economic conditions are expected to remain subdued in the near term as the economy continues to move from a period of strong demand, tight supply, and high inflation.
Treasury expect the economy to gradually strengthen from the second half of 2024, when the tax relief kicks in thereby supporting people’s incomes, with a continuing recovery in tourism earnings and easing inflation resulting in a reduction in interest rates.
Alan Scott, BDO Tax Partner says “While the Government is aiming for the tax relief to not be inflationary, businesses will be hoping that they do provide a small boost to customer demand. However, the economic pressures of inflation and interest rates remain high, and the tax relief is modest for some. While many households may use the tax relief to pay for food, rent, petrol or energy bills, especially as we head into winter, some may use it to pay down personal debt while others might save it. And with the Government reducing spending elsewhere, there may be less money flowing through to NZ businesses to help them through these tough times.”
Key numbers from Budget 2024:
As promised by National during its pre-election campaign, the rules which limit interest deductions for residential rental property are being phased out. Legislation enacting this change is already in place.
For residential property where interest deductions were being phased out, interest deductions will now be phased back in so that interest will be:
For residential properties where no interest deductions are currently allowed, 80% of interest can be claimed from 1 April 2024 with, as above, interest fully deductible from the 2026 and subsequent years.
Both Inland Revenue and Treasury support these changes suggesting that restoring interest deducibility for residential landlords better reflects a taxpayer’s ability to pay and makes the income tax system more consistent and coherent.
The expected fiscal cost of restoring interest deductibility is $2.920 billion over the forecast period to 2027/28.
Alan Scott, BDO Tax Partner, notes it is a common theme in the tax system that tax is paid on net income. Restoring interest deductions for residential rental property is therefore sound tax policy. It also makes the tax system simpler as the interest limitation rules had various exclusions and transitional provisions which were very complicated for smaller investors to understand and apply.
The Government has again removed the ability to claim depreciation on commercial and industrial buildings with an estimated useful life of 50 years or more from the start of the 2024/25 income year. Legislation enacting this change is already in place.
Depreciation was previously removed on all buildings in 2010 but restored for commercial and industrial buildings in 2020 to correct policy settings as part of a Covid relief package.
The removal of depreciation on commercial and industrial buildings is expected to provide savings of $2.31 billion over the forecast period to 2027/28 which the Government is using to fund its overall fiscal package.
Inland Revenue recommended that the Government did not remove depreciation on commercial and industrial buildings but also recommended that consideration be given to allowing it again when fiscal conditions allow.
Alan Scott, BDO Tax Partner, says that changing the depreciation rate for commercial and industrial buildings to 0% will further exacerbate the hurdle rate of return for investment in commercial and industrial buildings which is already very high in NZ compared to most OECD countries.
The change will also bring back the tension for seismic strengthening work which is generally capital and non-deductible. However, when depreciation was reintroduced in 2020 it softened the blow as seismic strengthening costs could be depreciated at the applicable building rate. While most should already be doing so, building owners need to carefully identify any commercial fit-out which can be separately be depreciated for tax purposes. Lastly, for larger businesses who prepare financial statements using international financial reporting standards, the change could also have significant tax accounting implications which the accounting industry is still coming to grips with.
You can read more details on Budget 2024 at the Government Budget website here.
To talk about how any of today’s Budget announcements will affect your business and for help, or to talk about your business, reach out to your local BDO office today.
