Tax and economy

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:

• $2.311 billion of additional tax over the forecast period from removing depreciation on commercial and industrial buildings
• $190 million from additional taxes from foreign online casino operators
• $531 million of revenue from immigration levies
• $586 million of additional revenue from increased Inland Revenue compliance on tax and overseas student loan borrowers
• $40 million of additional revenue from a new Crypto-asset Reporting Framework to enable Inland Revenue to enforce current tax law on people who trade crypto-assets 

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.” 

What do these tax changes mean for you?

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. 

To check how the tax relief benefits you, a tax calculator is available at budget.govt.nz/taxcalculator

Tax relief - details

From 31 July 2024, the Government is:

• Increasing the tax brackets for people earning over $14,000 of income per annum.   It's been 14 years since there were changes to the tax brackets and these changes go some way to addressing fiscal drag, which arises when people’s incomes move into the next tax bracket as their wages grow with inflation.  
• Extending the upper limit of the independent earner tax credit, which is a tax credit of up to $20 per fortnight, from $48,000 per annum to $70,000 per annum. This will now apply to people earning between $24,000 and $70,000 with entitlements reducing for income between $66,000 and $70,000. Earners will need to use the appropriate tax code to access the benefit during the year.
• Increasing the in-work tax credit by up to $50 per fortnight for families with dependent children who are normally in paid work.  
• Increasing the minimum family tax credit for low income working families with dependent children.  

 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.

So what is the business impact of Budget 2024? 

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.”

The NZ economy: how do the books look? 

Key numbers from Budget 2024:  

• The Budget Economic and Fiscal Update 2024 (BEFU) confirms that the economic outlook has deteriorated significantly since the Half Year Economic and Fiscal Update (HYEFU) in December 2023.  

• Real GDP growth in NZ is forecast to be (0.2%) in 2023/24, increasing to 1.7% in 2024/25 and averaging 2.9% over the remaining forecast period (June 28).    
• CPI inflation is forecast to be 3.4% in 2023/24. Inflation is forecast to average just over 2% over the remaining forecast period which will take it back to the 1 to 3% target band.  
• The unemployment rate is forecast to increase through to 2024/25 to a peak of around 5.2% before falling back to 4.4% by 2027/28.    
• The operating balance before gains or losses is forecast to be a deficit of $11.1 billion this year, a deficit of $13.4 billion in 2024/25, a deficit of $8.5 billion in 2025/26, a deficit of $3.1 billion in 2026/27 before returning to a surplus of $1.5 billion in 2027/28. 
• Net debt is expected to peak in 2027/28 over the forecast period at 41.8% of GDP ($209.9  billion).    
• The Government is changing the headline net debt indicator back to the 2009 definition of net core Crown debt.  In 2022, the previous Government revised this measure by adding the assets of the New Zealand Superannuation Fund (NZSF), core Crown advances and Crown entities borrowing.
• Core Crown tax revenue is expected to increase by $35.8 billion over the forecast period from $112.4 billion in 2022/23 to $148.2 billion in 2027/28.  Tax revenue is weaker than previously forecast due to subdued business activity.  Despite changes to personal income taxes, most of the forecast growth comes from source deduction payments ($15.4 billion) as forecast employment and wage growth lift household incomes.  
• Core Crown expenses are expected to remain elevated in the near-term and are expected to increase from $127.6 billion in 2022/23 to $156.4 billion in 2027/28.    

Interest deductions re-introduced for residential property

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:

• 50% deductible in the 2024 year;
• 80% deductible in the 2025 year; and
• Fully deductible from the 2026 and subsequent years.  

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.  

Commercial and industrial building depreciation removed

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.

More information and help available

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.