Budget 2010 What’s in the mix for business? Deloitte’s ... · 31 Snippets Budget 2010 – What’s in the mix for business? Deloitte’s perspective 2. ... economy by 2017. Budget

20 May 2010 www.deloitte.com/nz/2010governmentbudget

Budget 2010What’s in themix for business?Deloitte’s perspective

Contents

4 Introduction 6 Budget at a glance 7 Tax reform 9 Personal tax rates 13 Taxation of property 15 GST increase confirmed 17 Company taxes 19 Superannuation 21 SME sector 23 Taxation of resources 25 Tax Working Group 28 Public sector 29 Infrastructure 31 Snippets

Budget 2010 – What’s in the mix for business?Deloitte’sperspective2

Budget 2010 was about materially repositioning the tax system to achieve some basic economic goals and chart a new strategic direction for the economy.


4

IntroductionTime to place some stakes in the ground

Murray [email protected]:+64(0)93030942

Thiswasaveryimportantbudget.Lastyear’sbudgetwasdominatedbytheneedtodealwiththeconse-quencesoftheGlobalFinancialCrisisandourhome-grownrecession,andelectionpromisesmade.TheGovernmentwasinnopositiontochartastrategicdirectionfortheeconomy.AsithappenedNewZealandhadaverygoodrecessionbyglobalstandards,largelybecauseourAustralasianbanksremainedsoundandtherewasenoughfiscalstimulusinthepipelineintheformoftaxcutsandinheritedexpenditurecommit-ments.AndthestrengthoftheAustralianeconomyhelped.Alreadyitisclearthatthedeficitandborrowingpathswillnotbeasbadasfirstthought.AllthismeantthatthisbudgetrepresentedtheGovernment’sopportu-nitytoputstakesinthegroundinpursuitofitsstrategyfortheeconomy.

AndthisstrategyfocusesonraisingNewZealand’sproductivityandgrowthrate.ThisistheonlywaytheGovernmentcandealwiththe“deadrats”itswallowedintheleaduptoitselection–interest-freestudentloans,workingforfamilies,andnotraisingtheentitle-mentageforsuperannuation.Let’sbeclear–iftheeconomydoesnotreachsustainablegrowthlevelstherewillbenochoicebuttopeelbackentitlementsifthecountryistoremainwithinprudentlevelsofdebt.SowhatarethekeystakesinthegroundthattheGovernmentisrelyingontogenerategreatergrowth?

Stake One: Tax changes.TheswitchtohigherGSTandlowermarginaltaxratesistargetedtotiltthetaxbasetoprovideincentivestoworkandsaveinfavourofconsumption.Eliminatingdeprecationclaimsonpropertyrecognisesthespecialnatureofpropertyreturnsandbringsthemproperlyintothetaxnettohelpfundcutstomarginaltaxrates.Applyingthesametreatmenttocommercialpropertyisperhapsasteptoofar.TheloweringoftheCorporateTaxrateiswelcomeanddealseffectivelywithAustralia.

Thequestionisdoesthisgofarenough,especiallyatthelowerend?TheanswerfornowisprobablyyesabsentareformofWorkingforFamilies.

Theincentiveeffectsareuncertainandwilltaketimetoplayout.Iftheexperienceofthecutstomarginaltaxratesinthemid1980sisrepeatedthetaxtakewillultimatelyrise.

ImportantlytheGovernmentwillbehopingthatextraeconomicgrowthwillprovideafiscaldividend.Theoddsarethattheywill–thenewtaxdirectionsignalledisprogrowth.

Stake Two: Research & Development funding.HavingculledtheLabourGovernment’sR&Dtaxbreakschemeinlastyear’sbudgetthereisanewcommit-menttomultiyearfundingforR&Dgrants.ButonlytolargerentitiescurrentlyundertakingR&D.Thisishailedasmoreefficientthanataxbreaklargelyasitavoidsthecomplianceindustry(mainlyAccountantsitseems!).ButitdoesassumethatlargecompaniesaregoodatorbestplacedtoundertakeR&Dandgettherocket-fuelthegrantsprovide.ThatseemscounterfactualwhenconfrontedwiththedominanceoftechnologyentitiesintheDeloitteFast50,manyofwhichhavehighlyinnova-tiveR&Dactivities.Thesekindsofentitiesarguablyneedmorehelpastheyaremostlystart-ups.

Thereisalsoaquestionastowhethertheamountcommittedisenoughtomakeamaterialdifferencetoourlongtermgrowthrates–itseemssmallcomparedwithAustralia’scommitmenttoR&Dfundinginthecleantechspaceforexample.Thereisnotyeta“NZInc”typecommitmenttobuildingworld-classR&Denviron-mentsinourareasofcompetitiveadvantage–agricul-tureandfoodproduction.Thiswilltakemuchmoremoneythaniscurrentlyonthetable.


Let’s be clear: if the economy does not reach sustainable growth levels there will be no choice but to peel back entitlements if the country is to remain within prudent levels of debt.

Stake Three: Constraining Government expenditure.Theevidenceforfast-growingeconomieswithGovernmentspendingover40%ofGDPisextremelythinontheground.TheGovernmentrecognisesthisandthestrategyistoconstrainincreasestobelowtherateofinflationforasustainedperiod,whileatthesametimedivertingspendingfromlowvalueareastohigherpriorities.Thebudgetdeliversonthisalthougharguablyitcouldhavebeenmoreaggressive.Staffnumbersinthecorepublicsectorarecomingdown,butnotbytherateofadjustmentwesawintheprivatesectorduringtherecession.Unfortunatelyadjustingtoalowerspendingpathactuallyrequiresinvestmentupfrontinnewtechnologyandsystems,andrestructuring.Moreimportantlythisstrategyishardtosustainforaprolongedperiod.

Thejudgementmaywellbethattherecoveryisstilltoofragiletomakelargecutsbutthattimewillcomeandtheopenquestionis–willtheGovernmentbeupforit?

Thereweresomemissedopportunities,particularlyintheSMEsector,evenwhenitisnotedthatthecutstomarginaltaxratesdoprovidemeaningfulassistancetoSMEsnotincorporateformandthecorporatetaxratereductionwillbenefitthoseinprofits.NotablyheretheAustraliansaremoreambitious.Itisinterestingto

seetheirraisedthresholdforwritingoffsmallassets(A$5,000asagainstourpaltry$500),andtheHenryproposaltoallowlosscarry-backs–twoinitiativesthatofferrealhelptosmallbusinessesinmanagingriskandcashflow.Weareafterallanationofsmallbusinessesandthisisasectorstillunderextremepressure.Butthisisatthemargingiventheloweringofthetaxrates.

Thisisbythemeasureofthepast10yearsaradicalprogrowthbudget.ItsetsthesceneforastepchangeinproductivityandeconomicgrowthprovidedsucceedingbudgetsuptheanteinR&Dandinnovation.AsalwaystherearerisksbutthesearenowlargelyconfinedtotheexpendituresideoftheNationalAccounts–itcouldbearguedbymovingfirstandfurtherontaxestheGovernmentisuppingtheanteonthepublicsectortodriveefficienciesandproductivitygains.InotherwordsplaytheirpartinoureffortstoclosethegapwithAustralia.Thatisdifferent.

6

Budget at a glance

Budget2010hastaxatitscentrepiece.Thetaxpolicyreformshouldbewelcomedbythemajorityandhaslargelybeenforeshadowed,albeitthereareafewextrasurprises.

Herearethehighlightsforbusiness:

TaxAshadbeensignalled,Budget2010containedaraftofmaterialchangestothetaxsystemwhichrepresentthemostthoroughoverhaulofthetaxsystemin25years:

• Personaltaxcutseffectivefrom1October2010foralltaxpayers,butmostnotablyadecreaseinthetoppersonalincometaxratefrom38%to33%.

• GSTwillincreasefrom12.5%to15%,from1October2010.ThisincreaseinGSTwillraiseanadditional$2.46billioningovernmentrevenueby2013/14,withoutfactoringinincreasingspendingarisingfromincometaxrelief.Benefitswillbeincreasedby2.02%on1OctobertocompensatefortheGSTrise.

• Thecompanytaxratewillfallfrom30%to28%fromthe2011/12incomeyear.Therewillbeatwoyeartransitionalperiodforimputingdividendsattheexisting30%rate.

• Thetoptaxrateformostportfolioinvestmententities(PIEs)willbereducedfrom30%to28%from1October2010.OtherPIErateswillalsobereducedtoalignwiththenewpersonalincometaxrates.Thetaxrateforothersavingsvehicleswillalsoreduceto28%,fromthe2011/12incomeyear.

• Depreciationdeductionswillberemovedforbuildingsthathaveanestimatedusefullifeof50yearsormorefromthe2011/12incomeyear.

• Depreciationloadingwillberemovedforthepurchaseofallnewassetsonorafter21May2010.

• Thethincapitalisationthresholdfornon-residentinvestorswillbereducedfrom75%to60%fromthe2011/12incomeyear.

• Lossattributingqualifyingcompaniesandqualifyingcompanieswillbecomeflow-throughentitiesfortaxpurposesforincomeyearsstartingonorafter1April2011.

• GSTruleswillbechangedtopreventtheuseof“phoenix”arrangements,byzero-ratingtransactionsinvolvingthetransferoflandbetweenregisteredpersons.

• InlandRevenuewillreceiveafundingboostof$119.3millionfundingoverfouryearstoincreaseitsauditandcomplianceactivity.

InfrastructureThegovernmenthasreiterateditscommitmenttoinfrastructureinvestment,withanallocationof$1.45billionincapitalspendingin2010/11.

Research, science and technology$321millionwillbeallocatedoverfouryearsfornewscience,researchandtechnologyinitiatives,including$234millionforsupportingbusinessR&D.

Fiscal outlookAgain,theGovernmentannouncedadeficitof$8.6billionfor2010andthefiscaloutlookremainsnegative,withdeficitsforecastforthenext6years.

It’snotalldoomandgloomthough–thedeficitforecasthasimprovedfromBudget2009withtheoperatingbalanceforecasttoreturntosurplusin2016,asopposedto2018/19aswasforecastin2009.ThisclearlyprovidestheGovernmentwithheadroomtocontinuetoshapetheeconomy.

Thetaxationpackageannouncedisbroadlyfiscallyneutral.Thetaxpackageisconservativelyforecasttoaddabout1percenttothesizeoftheeconomyby2017.


Tax reformA series of real steps in the right direction

Budget2009wasaboutbatteningdownthehatchesasNewZealandattemptedtoweatheraneconomicstorm.Budget2010wasabouttryingtohitahomerunnowthattheinitialstormseemstohavelargelypassed.

Thepast12monthshavebeenaperiodofuncertaintyforthetaxsystem,largelydrivenbythedelibera-tionsoftheTaxWorkingGroupandsignalsfromtheGovernmentthatthestatusquowasprobablynotsustainableinthemediumterm.

Budget2010drawsthisperiodofuncertaintytoaclose,pullingtogetheranumberofmaterialtaxreformsdrawnfromtherecommendationsoftheTaxWorkingGroupdesignedtorefocusthetaxsystemandcorrectsomehistoricimbalances.

Whenthelayersofanalysisarepulledback,Budget2010wasaboutrepositioningthetaxsystemtoachievesomebasiceconomicgoals:

• Encouragingproductivityoflabour

• Encouragingsavings

• Improvingtheintegrityofthetaxsystem

• Removingthetaxbiastowardhousinginvestment

TheGovernmenthassoughttoimplementthesegoalsviathefollowingmeasures.

Personal tax rate reductions across the board to encourage labour market productivityTheGovernmenthadalwayssignalleditsintentiontocutpersonaltaxratesatallincomelevels,toensurethatadequatecompensationwasprovidedforanincreaseinGST.

Timewilltellwhethertaxpayersdeemithasprovidedadequatecompensation(seeourseparatetableofweeklytaxsavings).NodoubttheGovernmentwilleagerlyawaitthenextpoliticalpoll,butclearlyit’samaterialstepintherightdirection.

Thedecisiontoreducepersonaltaxratesforasecondtimeinonly18monthsisaboutmorethancompensa-tionforincreasingGST–itisaclearsignalofachangeindirectionbetweenthisGovernmentandthelast.

Tax rate alignment to improve the integrity of the tax system TheneedtoaligntaxrateswasidentifiedbytheTaxWorkingGroupasbeingcriticaltoimprovingtheintegrityofthetaxsystem.

TheGovernmenthasnotfulfilleditsowngoaloftaxratealignmentat30:30:30–andprobablyneverwillasgloballysavingsandcorporaterateshavegreatergravi-tationalforcespullingthemdownthanotherrates.

Butwehavetakenamajorstepinthatdirectionbyaligningthetoppersonalincometaxrateandtrustrateat33%.

Withthecorporateandsavingstaxratesdroppingto28%,weareleftwitha5%wedge–maybejustafactoflifeevidencingthatthetheoreticalnirvanaisbestlefttotheory.

Corporate and savings tax rate reductions to encourage savings and investment in the productive sectorsTheGovernmentneversignalleditsintentiontocuttheseratessosoon.Aclear“bravo”.

IntermsofthecorporaterateajumpstartonAustraliathatwouldbeafirst,giventheAustraliandecisionearlierthismonthtoreducetheirrateto28%,butthreeyearslaterin2014-15.

Increasing GST to change the tax mix and encourage savingsWithoutdoubtthedecisiontoincreaseGSTto15%willbethemostunpopulardecisioninthisBudgetforthemasses.AlsoNewZealand’sworstkepttaxsecret.TheincreaseinGSTwillraiseover$2billioningovernmentrevenuewhichisbeingusedtofundthepackageoftaxreliefmeasures.

Thomas [email protected]+64(0)44953921

8

GiventheGovernmentwishedtoaligntaxratesandoffertaxreductionsacrosstheboard,ithadlittlechoicebuttoincreaseGSTgivenithadruledoutintroducingacapitalgainstaxoralandtax.Butmoreimportantly,increasingGSTcoupledwiththetaxratereductionpackagehasthesubstantialmeritofreducingthetaxationbiasagainstsavingandinvestment–thereforeeffectivelysatisfyingtwothornyissuesfortheGovernmentinonehit.

TheimmediateconcernwithanincreaseinGSTwillbehowbusinesseshandlethechange,intermsofbusinesssystems,complianceandcustomerrelations.Watchthisspace,butwithareductioninthecorporatetaxrateof2%Iamsuremanyimpactedbusinesstaxpayerswillweatherthestorm!

Removing depreciation deductions for buildings to eliminate investment biasChangestothetaxationofresidentialrentalproper-tieswereinevitablefromthemomenttheTaxWorkingGroupidentifiedthat$200billiondollarsofwealthwasinvestedinrentalproperties,butthatthesectorhadanegativetaxablereturnofapproximately$500millionin2008.

Whilethefiscalprojectionshavenotstoodthetestoftime,nonethelesstheyarecorrectintermsofatrendline.

WhatwillbeofinterestintheshorttomediumtermiswhetherremovingdepreciationdeductionsisenoughtoensurethattheGovernmentgetsafairreturnfromtherentalpropertysector.Therewasnosignallingthatanyfurtherreviewwillbeundertaken.

Moreimportantly,nomassivesighofrelieffromcommercialpropertyownersaschangestodepreciationoncommercialbuildingswerealsoannounced.Aslightreprieveinthatcommercialfitoutwillcontinuetobedepreciable.Likewisetheabilitytotakeadeductionforrepairsandmaintenanceremainsintact.

Depreciationloadingwillalsonowbeathingofthepastbutinthecontextofthetotalpackage-barelyregisterable.

Changing the thin capitalisation threshold for certain non resident investors is a sigh however.Thisismuchmorecomplicatedthanitappearsandfailstoreallyaddresstheinitialissueandwhethertheregimeisactuallyhittingtherealtarget.

But … we’re not out of the woods yetThemarkoftheglobalfinancialcrisisisstilletchedacrosstheGovernment’saccounts.Budget2010announcedadeficitof$8.6billionfor2010/11,andanticipatedfuturedeficitstill2016.

Inthiscontexttheproposedtaxchangesaremuchbraverthananyonereallyanticipatedalbeitthefinancialpositionhasmateriallyimprovedfromwhatwasexpectedevenayearago.Aninvestmentintaxreformthatislikelytopaymaterialdividendstotheeconomygoingforward.

Onthepositiveside,thetrendlineisanimprovementontheprojectionsin2009,whichhadtheoperatingbalanceindeficituntil2018/19.

% of GDP

Year ended 30 June

Budget 2009 Budget 2010

-8

-6

-4

-2

0

2

4

6

2007 2009 2011 2013 2015 2017 2019 2021 2023

Operating balance before gains and losses20010/11: -$8.6b (-4.2% of GDP)


Personal tax ratesReductions across the board welcomed

Robyn [email protected]+64(0)44703615


TheGovernmenthadsignalledinthelead-uptotheBudgetthatanytaxcutsitdeliveredwouldbeacrosstheboard.Budget2010confirmedthis.

Budget announcement:Taxrateswillbereducedfrom1October2010,takingeffectatthesametimeastheincreaseinGST.

New Zealand

Currenttaxthresholdsincomerange Newtaxthresholdsfrom1 October 2010

0–14,000 12.5% 0–14,000 10.5%

14,001–48,000 21% 14,000–48,000 17.5%

48,001–70,000 33% 48,001–70,000 30%

70,001+ 38% 70,000+ 33%

MinorchangesarealsobeingmadetoWorkingforFamilies(WfF)sothatfamilieswillnolongerbeabletouseinvestmentlossestoreducetheirincomeforWfFpurposesfrom1April2011.

AnissuespaperwillbereleasedlaterthisyearlookingatotherreformstoWfF.

Deloitte comment:WiththetaxcutsannouncedinBudget2010,taxpayerswillbereceivingtheirthirdtaxcutsinceOctober2008–atrendthatgoesagainsttheinternationalnorminrecenttimes.

Aworkeronanaveragewageofapproximately$50,000willreceiveanextra$29.42aweek($1,529.84ayear),whileataxpayeron$100,000willreceiveanextra$69.81aweek($3,630.12ayear).

OnemajorissuethattheGovernmentfacedinformulatingtheBudgetwashowtoprovidetaxreliefacrosstheboard,particularlywhenalargenumberoftaxpayerseffectivelydonotpayanyincometaxwhentheirWfFrebatesaretakenintoaccount.

10

Individual taxable income

Who pays tax… and how much?

(NZ$) 2007 2008 2009 2010

People Tax People Tax People Tax People Tax

Zero 7% 0% 7% 0% 7% 0% 7% 0%

1-10,000 14% 1% 14% 1% 14% 1% 13% 1%

10-20,000 26% 8% 26% 8% 25% 7% 25% 7%

20-30,000 12% 7% 11% 6% 12% 7% 12% 6%

30-40,000 11% 9% 10% 8% 11% 10% 10% 8%

40-50,000 10% 12% 10% 11% 10% 11% 9% 10%

50-60,000 6% 10% 7% 11% 7% 11% 7% 10%

60-70,000 9% 9% 4% 9% 5% 11% 5% 9%

70-100,000 6% 17% 6% 17% 6% 16% 7% 20%

100,000+ 3% 27% 5% 29% 3% 26% 5% 29%

Above $70,000 9% 44% 11% 46% 9% 42% 12% 49%

Toconceptualisethisproblem,considerthattheaggregatepercentageofpersonaltaxpaidbytaxpayersearningover$70,000is49%ofpersonalincometaxrevenue.Clearly,adisproportionatelysmallnumberoftaxpayers(12%)payadisproportionatelylargeamountofpersonaltax,notingthatpersonalincometaxcomprises$23.5billionor43.6%ofalltaxrevenues.

Annual income Weekly tax (current)

Weekly tax (1 Oct 2010)

Weekly saving Annual saving

20,000 57.88 48.46 9.42 489.84

30,000 98.27 82.11 16.16 840.32

40,000 138.65 115.77 22.88 1,189.76

50,000 183.64 154.22 29.42 1,529.84

60,000 247.11 211.91 35.20 1,830.40

70,000 310.57 269.61 40.96 2,129.92

100,000 529.79 459.98 69.81 3,630.12

150,000 895.17 777.29 117.88 6,129.76

200,000 1,260.56 1,094.60 165.96 8,629.92

*ignoresimpactofWorkingforFamiliesandindependentearnerrebate

Effective marginal tax rates compound this problemButthetableabovedoesn’tportraytherealposition.AstheTaxWorkingGrouppointedout,whenyouaddinsuperannuation,benefits,andthetaxcreditsreceivedbythoseclaimingWfF,10%ofindividualtaxpayerspay76%ofallpersonalincometaxand40%ofhouseholdspaynonettax–hardlyevidenceofahealthytaxsystem.

ButinformulatingthetaxcutsinBudget2010,theGovernmenthaseffectivelyignorednettaxstatistics,andcutratesatalllevels.Onthefaceofitsuchanacross-the-boardtaxcutshouldbesufficientcompensationfortheincreaseinGST,forthelargemajorityoftaxpayers.


Australia

Currenttaxthresholdsincomerange(AUD) Taxthresholdsfrom1July2010incomerange(AUD)

0–6000 0% 0–6000 0%

6,001–35,000 15% 6,001–37,000 15%

35,001–80,000 30% 37,001–80,000 30%

80,000–180,000 38% 80,001–180,000 37%

180,001+ 45% 180,001+ 45%

Tax rate alignment is a particularly important aspect of the tax rate reductions.Bytaxratealignment,wemeanthedecisiontoalignthetoppersonaltaxratewiththetrustrateat33%.Clearlythereisstilladifferential,albeitmanageable,betweentheseratesandthenew28%companyrateandtherateapplyingtosavings.

AstheTaxWorkingGroupidentified,withouttaxratealignmenttaxpayersarefacedwithanincentivetorestructuretheiraffairsusingtrustsandcompanies(currentlypayingtaxat33%and30%respectively)ratherthanpayingincometaxat38%.

Thelayerofcomplexitythisratedifferentialhascreatedthroughoutthetaxsystemhasbeenremarkable.

Compoundingmattersaredebatesastowhetherdifferentstructuresthatarenotsubjecttothe38%ratenonethelessfallfouloftheavoidanceboundary,includingtheimpositionofmaterialpenaltiesandinterest.Hopefullytheyarenowmoreathingofthepastbuttheaftertasteislikelytolingerforawhileyet.

Insayingthat,withthemostsignificanttaxratedifferentialandtheadverseincentivesitprovidedbeingremoved,hopefullyforgood,thetaxsystemshouldbelefttosettlebacktosomesemblanceofnormality.

Australia is still our closet neighbour and stiffest competitor Fromaninternationalperspective“competition”forlabourwithAustraliacontinues,albeitthepersonaltaxratereductionsannouncedinBudget2010meanthatNewZealandiswellandtrulybackinthegame.

TheAustralianBudgeton11MayincludedacontinuedcommitmenttoreducingpersonaltaxratesacrosstheTasman,reaffirmingpreviouslyannouncedpersonaltaxcutsandapplicationdates.

With the tax rate differential and the adverse incentives it provided removed, hopefully for good, the tax system should be left to settle back to some semblance of normality.

ThereisstillataxadvantageinAustraliaforsome–butfrom1October2010anindividualtaxpayerwouldonlyhavetoearnover$43,760beforetheypaidmoretaxinAustraliathaninNewZealand(butofcoursethisdoesn’ttakeaccountofrebates,additionaltaxesandlevies,andmakesanumberofothersimplisticassumptions).

Thetaxwedge(thedifferencebetweentaxpaidinAustraliaandNewZealand)thereforeisn’tgenerallythechasmthatperceptionsmightimply,andasillustratedbelowtheupcomingpersonaltaxreductionswillcloseitevenfurther.Infact,manyhigherincomeearnerswillbesubstantiallybetteroffinNewZealand.

12

Income NZ Tax Current

Australia Tax Cur-

rent

NZ Tax From 1

October 2010

Australia Tax From 1

July 2010

Tax Wedge Current

Tax Wedge From October

2010

20,000 3,010 2,100 2,519 2,100 910 1,190

40,000 7,210 5,850 6,019 5,550 1,360 469

60,000 12,849 11,850 11,019 11,550 999 (531)

80,000 19,948 17,850 17,319 17,550 2,098 (231)

100,000 27,549 25,449 23,919 24,949 2,100 (1,030)

140,000 42,749 40,649 37,119 39,749 2,100 (2,630)

180,000 57,949 55,849 50.319 54,549 2,100 (4,230)

200,000 65,549 64,849 56,919 63,549 700 (6,630)

240,000 80,749 82,849 70.119 81,549 (2,100) (11,430)

OfparticularnoteisthereductioninthetaxwedgewhentheincometaxcutstakeeffectinOctober.Thisislargelybroughtaboutbythereductioninthetoppersonalincometaxrate,from38%to33%.

Withthetaxwedgeclosing,itisperhapsmoreimportanttofocusontherealdifferencewithAustralia:therealwagesuponwhichtheseratesareapplied,theopportunitiestocontinuetogrowthatwage,andthecompulsorysavingsthatalsoflowtoemployees.

Thekeystatisticisofcoursetheaveragewage.OnthelatestAustraliandataavailable,anadultworkingfulltimewouldearnonaverageapproximatelyA$66,040.ThemostrecentNewZealanddataputsouraveragewagesignificantlyloweratapproximatelyNZ$49,874.

IfNewZealandwantstocatchAustraliaitwillneedtostepuptothemarkintermsofcompetingforcapitalandtalent,andmoreimportantlyretainandifpossibleattracthighlypaidjobstoNewZealand.

TotheGovernment’scredititdoesatleastrecognisethis,asillustratedbythePrimeMinister’sdesiretotransformNewZealandintoabackofficefinancialhub.Butthesemeasuresarenotstraightforwardandwilltakemorethanjusttalk–itremainstobeseenwhethertheGovernmentisuptothetask.Certainlytherearemorethanafewsceptics,anditwilltakemorethantargetedtaxrelieftomakeNewZealandcompetitiveglobally.

Apersonaltaxcalculatorisavailableonlineat

www.deloitte.com/nz/2010governmentbudget


Taxation of propertyDepreciation going for most buildings not just residential rentals

Thegovernmenthadsignalledinthelead-uptotheBudgetthattherewouldbechangestothetaxationofpropertyinvestment.Theonlyquestionwashowfarthechangeswouldgo.

Budget announcement:Depreciationdeductionswillnolongerbeavailableforanybuildingswithanestimatedusefullifeof50yearsormore.Thiswillincluderesidentialrentalpropertiesandmostcommercialbuildings.Thechangewilltakeeffectfromthestartofthe2011/12incomeyearandwillraise$690millionperyear.

BuildingownerswillbeabletoapplytoInlandRevenueforaprovisionaldepreciationrateiftheyconsideraclassofbuildingsasanestimatedusefullifeoflessthan50years.

Buildingownerswillstillbeabletoclaimdeductionsforrepairsandmaintenance.Depreciationdeductionswillstillbeabletobeclaimedfor“fitouts”notconsideredpartofthebuilding.TheGovernmentintendstoreviewthetreatmentofcommercial“fitout”and,ifnecessary,amendtherulespriorto1April2011toaddressanyuncertaintyinthisarea.

Deloitte comment:Thedecisiontoremovedepreciationdeductionsforresi-dentialrentalpropertieshadbeenwidelysignalled,andisnodoubttheeasiestfirststepinensuringthetaxationofrentalpropertiesisfairer,particularlygivenitissuchacomparativelysimplemeasure.

ItwastheTaxWorkingGroupprocessthatidentifiedthattheresidentialrentalpropertysectorhadanegativetaxablereturnofapproximately$500millionin2008.Anegativereturnfroma$200billionsectorwasneversustainable.

Mike [email protected]+64(0)44953932

Figure 7: Rental housing income, 1981 to 2008

-2,500

-2,000

-1,500

-1,000

-500

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500

1,000

1,500

2,000

1981

1982

1983

1984

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1988

1989

1990

1991

1992

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1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

$m

Income year

IR3 data only (not using nature

of business)

fo snruter gnidulcni atad evisneherpmoc eroMyevrusindividuals, trusts, partners & companies (using nature of business to identify non-individuals)

Total rental profits Total rental losses Total net rental estimated LAQC contribution

Source: Inland Revenue Department

14

The Government has gone a step further, and it is a big stepIthasalsotargetedcommercialbuildings.Fromthe2011/12incomeyeardepreciationdeductionsonbuildingswillceasewherethebuildinghasaneconomiclifeof50yearsormore.Thiswillincludeallofficebuildings,shoppingmalls,industrialbuildings.Certainbuildingswithanestimatedlifeoflessthan50yearsescapethechanges;theyincludefowlhouses,pighouses,chemicalandfertiliserworksandtheallimportantdairysheds.

Thiswillbeofrealconcerntobusinesswhohavesinglepurposebuildingswhetheritbemeatprocessingplants,coolstoresetc.Wherethesebuildingsarenotdepre-ciatinginvalue,theprincipledpositioniscorrectandtheGovernmenthasremovedataxsubsidyfromthissector.Howeverwherethesebuildingsreduceinvalue,thissectorcanberightlyconcernedasitwillbepayinggreaterthanitsfairshareoftax.

However,whereitcanbeshownthataspecificclassofbuildingreducesinvalue,therewillbetheabilitytoseekaprovisionaldepreciationrateandcontinuetoclaimtaxdepreciation.Thismaybethelifelineforthosespecificpurposebuildingsthattrulydoreduceinvalue.

Onthebrightsideforwhatcanbedeclaredaverygloomydayforallpropertyinvestors,theGovernmentwillclarifythatfitoutcostscanbetreatedseparatelyandcontinuetohavedepreciationdeductions.

The decision to remove depreciation deductions for residential rental properties had been widely signalled, and is no doubt the most appropriate approach to take to ensure the taxation of rental properties is fair, particularly given it is such a comparatively simple measure.

ThepreviousgraphillustratestheproblemfacingtheGovernment.Despiteincreasingprofitsovertime,totalresidentialrentallosseshavebeenincreasingdramati-cally.Theresultisthattotalnetrentals(thegreenline)havefallenbelowbreakeven.

Aningredientinthatnegativeoutturnistheabilitytodepreciaterentalproperties,asisconsistentwithmostothercapitalassets.Depreciationisdesignedtoreflectthatcapitalitemsreduceinvalueovertime–andsoaportionofthisreductioninvaluecanberecognisedasanexpenseeveryyear,overtheusefullifeoftheasset.

Theproblemwithresidentialrentalproperties,aspointedoutbytheTaxWorkingGroup,isthatbyandlargetheyincreaseinvalueovertime–itisthereforecounter-intuitivethattheyshouldqualifyfordeprecia-tiondeductions.

Whatwillbeofinterestintheshorttomediumtermiswhetherremovingdepreciationdeductionsisenoughtoensurethatthenetresidentialrentallineinthegraph(seepreviouspage)startstotrackupwards.

IfremovingdepreciationdeductionsisnotenoughthentheGovernmentislikelytoconsiderotheroptions–includingring-fencinglosses.Whilering-fencingoflossesraisesanumberofrealchallenges,itprobablywouldaddress80%ofthetaxpayerstheGovernmentisconcernedabout.


GST increase confirmedThe consequences for business are significant

Allan Bullô[email protected]:+64(0)93030732

ThegovernmenthasbeenprettytransparentoverthepastfewmonthsinpreparingtaxpayersforanincreaseinGST,withtheincreaseto15%confirmed.

Budget announcement:TherateofGSTwillincreasefrom12.5%to15%from1October2010.

In2010/11thismeasurewillraiseanet$1.62billioninadditionalgovernmentrevenueafterallowingfor$420millioncompensationtosuperannuitantsandbeneficiaries.In2011/12theestimatednetgainsare$2.255billion.

Asanticipated,nonewexemptionshavebeenintro-ducedaroundnecessitiessuchasfood.

GSTruleswillbechangedtostoptheuseof“phoenix”GSTfraudschemes.

Deloitte comment:IncreasingGSTisaneffectivewaytochangethetaxmix,simplybecauseeveryonepaysGSTinoneformoranother,andfromaneconomicperspectiveitisoneoftheleastdistortionaryandmostefficientwaystoraiserevenue.

GSTisalreadyanimportantsourceofgovernmentrevenue,raising$14,4billionin2010(24%ofgovern-mentrevenue).ThisissignificantlymorethanwhattheGovernmentcollectsfromcorporateincometax(being$8.9billion).

AconsequenceoftheratechangeandtheheightenedimportanceofGST,wecanexpecttoseeamuchgreaterauditfocusfromInlandRevenueonGSTasaresultofthechange,particularlyaroundthedatetheratechanges.WhethertheGSTincreaseleadstoconsumerssaving,ratherthanspending,willtakesometimetodetermine.

Theimmediateissue,however,isnothowanincreaseinGSTwillaffectbehaviour,buthowbusinesseswillcopewiththechange.

WhileincreasingGSTiseasyfromataxlegislativeperspective,therearemanypracticalimplicationswhichbusinesseswillhavetoworkthrough.Wehavecommentedonjustsomeoftheseissuesbelow.

Pricing points will need to be considered carefullyPricingpointswillbeamajorheadacheforbusinessessellingdirectlytoendconsumersonaGSTinclusivebasis.Forexample,ifaproductsellsfor$9.95underthe12.5%rateandstaysat$9.95underthe15%rate,thebusinesswillsufferadecreaseinafterGSTrevenueof2.2%.

Tomaintainthesamegrossprofitunderthenew15%GSTrate,theproductwouldneedtobesoldfor$10.17–whichhardlyhasthesameringas$9.95,andmaydampenconsumerspending.

Thoughtwillclearlyneedtobegiventothepriceelas-ticityofend-consumerproductsinthisregard.

Ifadecisionismadetoincreaseprices,theshelfpriceofthousandsofproductswillmostlikelyneedtobemanuallychangedandmarketingmaterialsuchasbrochureswillneedtobeupdated.

Businesseswillnotbelookingforwardtotheprospectofpotentiallyhavingtore-pricethousandsofitemsovernight.Soinpracticewecouldexpecttoseepricemovementswellinadvanceof1October2010.

Business systems will need to be updatedThenewratewillhavefar-reachingconsequencesforbusinesssystems–ERP,billing,purchasing,expenses,andaccountingsystemswillallbeaffectedbythechange.

Therealchallengefortaxpayerswillbeupdatingtheirsystemsintimefortheapplicationdateofthechangeon1October2010.Formanybusinesses,particularlylargecorporates,updatingGSTsystemswillbeverycomplex–itisnotsimplyamatterofsubstitutingoneratefortheother.Therewillbeaperiodofsomemonthsduringwhichbusinesseswillhavetodealwithboththeoldandthenewrate.

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If a decision is made to increase prices, the shelf price of thousands of products will most likely need to be manually changed, and marketing material such as brochures will need to be updated.

Accentuatingthisisthatjustoverfourmonthsisnotaparticularlylongtimeforsuchamajorsystemsoverhaul.ManybusinesseshavealreadycommencedGSTratechangesystemsupdateprojectsandingeneralitisasignificantlylargerprojectthanmanywouldhavethought.

TaxpayerswillbelookingtoInlandRevenueforguidanceonwhatwillhappenifsomesystemscannotbeupdatedintimeforthechange.

OnewouldhopeInlandRevenuewillexercisediscre-tionandpragmatismintheeventthatsomesystemscannotimmediatelycopewiththechangeandtechnicalbreachesofthelawresult,particularlyforerrorsbetweenbusinesseswithnorealcashcosttotheGovernment.Itwouldnotbetherightoutcomeifbusi-nessesweretosufferpenaltiessimplybecauseoftheshorttimeframetheyweregiventoupdatetheirsystemsfortheGSTincrease.

However,don’texpectInlandRevenuetoshowmuchtolerancetobusinessesthatfailtocorrectlycollectGSTfromendconsumersatthenew15%rateafter1October,asindicationsarethatahardlinewillbetaken.Afterall,theincometaxcutshavetobepaidforsomehow.

The Financial Services Industry will suffer a 20% rise in GST costAfurtherconsequenceoftheGSTrateincreasewillbethatGSTexemptentitieswillneedtofactorina20%riseinGSTcost,astheycannotrecoverallinputtaxcredits.

Thiswilllargelyimpactfinancialinstitutions,themostimmediateexamplebeingfinancialintermediariessuchasbanksandlifeinsurancecompanies.TheBudgetwassilentonanymeasurestocompensatethemforthisadditionalcost.

GST fraud will be targetedTheGovernmenthasbeenconcernedaboutanumberofopportunitiesthatexisttocommitGSTfrauds.Themostcommonexampleinvolves“phoenix”companiesthatenterintohighvaluetransactionswithamismatchbetweentheclaimingofinputtaxandthereturningofoutputtax–withtheoutputtaxinvariablyneverbeingreturnedtotheGovernment.TheGovernmentconsultedontheseissuesin2009andthisannounce-mentisentirelysensibleandappropriate.StampingdownonthesefraudopportunitiesisexpectedtosavetheGovernment$60millionannually.


Company taxesA reduction in the corporate tax rate – yes

Budget announcement:Thecorporatetaxratewilldropto28%nextfinancialyear–generallyfrom1April2011.

Deloitte comment:In1989NewZealand’s33%corporatetaxratewasoneofthelowestintheworld.Morethan20yearslater,ourcorporatetaxratewasonly3%lower,at30%,nowitwillbeafurther2%downto28%.

Duringthosetwodecades,theinternationaltrendhasbeenoverwhelminglydownwards–butnowNewZealandhasacomparablecorporatetaxraterelativetotheOECDaverageof26%(seebelow):

AlmostunbelievablyNewZealandhasovertakenAustraliaintermsoftiminggiventhatAustraliahasannouncedthatitwillreduceitscorporaterateto28%butonlyby2014.

Offsetting measures…Budget announcements:Thesafeharbourthresholdforinboundthincapitalisa-tionpurposeswilldecreasefrom75%to60%fromthe2011/12incomeyear.

Depreciationdeductionswillnolongerbeallowedforbuildingswithanestimatedusefullifeof50yearsormore.Thischangewillapplyfromthe2011/12incomeyear.


Figure 8:Trends in statutory company tax rates in OECD countries, 1985-2009

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30

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40

45

50

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1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Tax r

ates

in p

erce

nt

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Australia EU -15 average New Zealand United States OECD average

Source: OECD

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Businesseswillnolongerbeabletoclaim20percentaccelerateddepreciationonnewplantandequipment.ThiswillapplytoassetspurchasedafterBudgetday.

Deloitte comment:Whiletherewillbesomecollateraldamagearounddepreciation,morematerialisthebluntchangetothesafeharbourthresholdthatassumestheinitialtargetwastherightone.

Intheschemeofthingsit’srelevantbutnotover-poweringintermsoftheoverallbenefitthattheratereductionwillprovide.

Fromatechnicalperspectiveremovingdepreciationloadinghasmerittotheextentthathavingthe20%upliftwasresultingindepreciationbeingclaimedmorequicklythantheestimateddeclineinthevalueofthatasset.

Itishelpfulthattheremovalofdepreciationloadingwillonlyapplytothepurchaseofnewassets.Whatwillneedtobeconsiderediswhethersomedeprecia-tionratesneedtobeincreased,intheabsenceoftheloading,toreflecttheiractualusefuleconomiclife–particularlyinthetechnologyarea.

Matters unaddressed - Mutual RecognitionBudget announcement:Notthatitwasunexpected,butthevexedquestionofmutualrecognitionofimputationandfrankingcreditsdidn’tshinethroughinthisyear’sBudget.

Deloitte comment:Wethinkthatitistimetomoveonandtherealityisthatmutualrecognitionisunlikelytoseethelightofdayinourgeneration,ifever.

ThisnutneedstobecrackedinamannerthatenablescontinuedNewZealandportfolioequityparticipationanddoesnotincentiviseheadofficestorelocatetoAustralia.

MutualrecognitionwouldhavegonesomewaytoaddressingtheseissuesbutsuchabilateraloptioniseffectivelyoffthetablewiththelukewarmsupportsetoutintheAustralianHenryReview.

Intheschemeofthingsthisisamicropolicyreformbutwithpotentiallymaterialramificationsthatneedtobeaddressed–notfortodaythough.


SuperannuationSurprise tax rate reduction for savings vehicles

Charles [email protected]+64(0)44703866

Donald [email protected]+64(0)44953923

Budget announcement:From1October2010,thetoptaxrateformostportfolioinvestmententities(PIEs),includingKiwiSaveraccounts,willbereducedfrom30%to28%,whileotherPIEratesdroptoalignwiththenewpersonaltaxrates.

Thetaxrateforsavingsvehicleslikeunittrustsandwidely-heldsuperannuationfundswillalsobereducedfrom30%to28%fromthe2011/12incomeyear.

Deloitte comment:ThesurprisedropinthehighestPIErateshouldbewarmlywelcomedbythesavingsindustryassavingsvehicleswillstillenjoyasignificanttaxreductionforhighincomeearners.Postthepersonaltaxreductions,highincomeearnerswouldordinarilypaytaxat33%oninvestmentincome,howeveriftheyinvestthroughPIEstheywillonlypaytaxat28%.

This5%differentialshouldbearealbonusforthisgroupofinvestors.Somemayhavearguedthattheprinci-pledapproachwouldbethatthetopPIErateshouldhavebeenincreasedto33%,andnotreducedto28%.HoweversuchaviewwouldoverlooktheimportanceofsavingswhichAustraliahasembraced.

OtherswillarguethatlongtermsavingsshouldhaveasignificantlylowertaxrateifNewZealandisseriousaboutsaving.TheywillpointtoAustraliawherelongtermsavingsaretaxedat15%.

Whilethesechangesareasignificantstepthatsurpassesexpectations,thebiguntouchablepoliticalhotpotatoofcompulsorysavingsdidnotgetamention.

Does Australia have us beat?Australia’sdecisiontopursuecompulsorysuperannua-tionhasbuiltupatrilliondollarindustrythat’sseveraltimeslargerthanourGDP.

ItisdifficulttocomparethesuperannuationindustriesinAustraliaandNewZealand.Essentiallytheyaretwoentirelydifferentbeasts–andAustralia’sindustrycouldhaveoursforlunch.

Australia’ssuperannuationindustryisworthapproxi-mately$1.1trillion–aboutsixtimesthesizeofNewZealand’sgrossdomesticproductandapparentlythefourthlargestgeographicsavingspoolintheworld.

Anditissettogrowlarger.LastmonththeAustralianGovernmentannouncedsignificantchangestosuperan-nuation,includingincreasingthecompulsoryemployersuperannuationcontributionrateto12%by2019(itiscurrentlyat9%).

ItisestimatedthatthepackageofsuperannuationchangeswillprovideanadditionalincreaseinthevalueofAustraliansuperannuationschemesof$80billionoverthenextdecade–thisadditionalincreaseisgreaterthanthemarketcapitalisationofourstockexchange.

EffectivelythispoolofwealthsittingintheAustraliansuperannuationindustrywillensurethatAustraliansretirewealthierthanwouldotherwisebethecase,andprovidesaninvestmentpooltohelpstimulatefurthergrowthandinvestmentintotheAustralianeconomy.

Meanwhile,onoursideoftheTasman,whileKiwiSavercontinuestogrow–reaching1.3millionmembersandatotalvalueofapproximately$4.8billion–itisdwarfedbycomparison.

KiwiSaverinitscurrentformonlypayslipservicetotheAustralianindustry–notonlyisitvoluntary,butcompulsoryemployercontributionsarecappedat2%(comparedtothecurrent9%inAustralia).

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The surprise drop in the highest PIE rate should be warmly welcomed by the savings industry as savings vehicles will still enjoy a significant tax reduction for high income earners.

Australiaalsoonlytaxessuperannuationfundsataflatrateof15%.KiwiSaverfundswillbetaxedatratesaslowas10.5%,althoughmostsavingswillbetaxedateither17.5%or28%thereforeensuringahighertaxburdenforNewZealandsavers.

Inthewidercontext,someNewZealandersalsohaveadditionalinvestmentsinprivatesuperannuationschemesandNewZealanddoeshavetheCullenFund,whichhasrecoveredsomewhatafterbeinghitbytheglobalfinancialcrisisandiscurrentlyworth$15.49billionupfrom$12.88billionlastyear.

Still,thecombinedvalueofallNewZealandsuperan-nuationbarelyscratchesthesurfaceofAustralia’s,partlybecauseNewZealandwassuchalatestarter.

Soonerorlatertheissueofcompulsorysuperannuationwillberaisedagain–theproblemisthatsuccessiveNewZealandgovernmentshaveviewedcompulsorysuperaspoliticalsuicide.

Timewilltellwherethisissuewashesup,butonethingiscertain:whilethecourseofsuperannuationinNewZealandisdebated,ourAustraliancounter-partsaregrowingfromstrengthtostrength.


SME sectorThis budget delivers tax rate reductions for the small business owner

Keith McArleyAccounting&[email protected]+64(0)34748634

Ross [email protected]+64(0)93030950

Budget announcement:TherearenoBudgetannouncementsspecificallyaimedattheSMEsector.HoweverSMEswillbeimpactedbythewidertaxchangesincluding:

• Thecompanytaxratereducesfrom30%to28%fromthe2011/12incomeyear

• Personaltaxratesreducefrom1October2010

• Qualifyingcompaniesandlossattributingqualifyingcompanieswillbecomeflow-throughentitiesfortaxpurposes–similartolimitedpartnerships

• GSTisbeingincreasedto15%from1October2010

• Depreciationonbuildingswillbedeniedfromthe2011/12incomeyear

• The20%depreciationloadingonnewplantandequipmentisremovedforassetspurchasedfrom21May2010.

Deloitte comment:Wearelargelyanationofsmallbusinesses,yetthisfactseemstohavegoneunrecognisedbysuccessivegovern-ments.Whiletherehasbeenconsiderable“noise”onassistingsmallandmediumsizedbusinesses(SMEs),thedeliveryofpracticalassistancehasbeenthinonthegroundbeyondthecorporateandpersonaltaxcuts.Alignmentofthetopindividualtaxrateandthetrusttaxrateshouldgreatlysimplifytaxcompliance.

Witharelativelynewgovernmentandunderstandablylastyear’sbudgetaimedatmanagingtheimpactsoftheglobalrecession,theSMEsectorwouldhavebeenhopingforsomewellconsideredspecificincentivesandcompliance-costsavingreforms.However,theyareonceagainlikelytobedisappointedonthesefronts.

Thereisaveryrealandpressingneedtoprovideassist-ancewithdevelopingexportmarkets,removingunnec-essarycompliancecostsandmitigatingtheimpactsofaverydifficultfundingenvironment.

Onthebrighterside,thereductionofthecorporatetaxratewillprovideamaterialsavingespeciallyforthosecorporateSMEsthatreinvestprofitsbackintotheirbusiness.Further,thereductioninthetopmarginalpersonaltaxratewillprovidewelcomereliefforsomeunincorporatedbusinessowners,orthoseindividualswhosecurrentaccountshaverunoutandarefacedwiththeneedforincreasedsalaryordividendpayments.

Ahiddenbenefitthatwilladdresssomecompliancecostconcernswillresultfromthepersonaltaxratereduc-tions.Theywilllikelysimplifyaspectsofthetaxsystem,including:

• Simplifyingcompliancewithfringebenefittax–lowerpersonaltaxratesmeanlowerFBTbillsandlessincentivetoundertakecomplicatedFBTattribu-tioncalculations;

• Personalattributionrulesshouldbecomesimpler;

• ArguablythegrowingtensionwithinInlandRevenuearoundthetaxmotivationsbehindthechoiceofbusinessvehicleandthesalariespaidtoownersshouldstarttodissipate.

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HowmuchSMEbusinessownerswilltrulybenefitwillbeafunctionoftheirpersonalspendinghabitsgiventheincreaseinGSTto15%.TheimpactoftheGSTincreaseonSMEs’operatingmarginsalsoneedstobetakenintoaccount.ThereisaveryrealprospectthatinthecurrenteconomicclimatepressurewillbeappliedtosupplierstoabsorbtheimpactoftheGSTrateincreaseratherthanthecostbeingpassedontoendconsumers.

Onatechnicalfront,officialsreleasedanissuespaperseekingconsultationonrequiringqualifyingcompaniestobetreatedasflowthroughvehicles.QualifyingcompaniesarenotuncommonamongstSMEs.Currentlyonlylossesoflossattributingqualifyingcompaniesareallocatedtoshareholders.Theproposalisintendedtorequirebothprofitsandlossestoflowthroughtoshareholders.Thisistoaddresstheconcernsaboutshareholdersclaiminglossesatthehighestindi-vidualtaxratehowevertaxingprofitsatthecompanytaxrate(movingto28%).Whileitistooearlytotellwhatwillultimatelytranspirefromthisconsultation,thereisareallikelihoodthatlossattributingcompanieswilllosetheirabilitytoallocatelossestoshareholders.Thealternativeoptionsappearverycomplexandpossiblyunworkable.

Taxratereductionsaside,theoverallbenefitaimeddirectlyatSMEsfromthisBudgetisinstarkcontrasttoAustralia,whichisactivelytryingtomakelifeconsider-ablyeasierforSMEs.ThepragmatismbeingshowninAustraliainrelationtosmallbusinessesandtheabilitytoadoptdifferentpolicysolutionsforthatgroupoftaxpayersissomethingthatNewZealandissadlylackinginanymaterialway.

Anotherareawherewebelieveourtrans-Tasmancousinshaveitrightandwedon’tisinthesupportforresearchanddevelopment.AustraliaspecificallyprovidestaxbreaksforSMEsintheareaofresearchanddevelopmentviaa45%refundabletaxcreditforfirmswithanannualturnoveroflessthan$20million.Again,thistranslatesintorealcashinthehandsofSMEbusinessowners.

TheBudget2010announcementofanadditional$321mforresearch,scienceandtechnologyisonthefaceofitpleasing.AlthoughhowmuchofthenewmoneywillfinditswaytotheSMEsectorisdebatablegiventhefundswillonlybeavailabletobusinesseswithaturnoverofmorethan$3million.ThisseemscounterintuitivetouswhenalignedtothepredominanceoftechnologyentitiesintheDeloitteFast50.ExperienceshowstheseentitiestypicallyhavehighlyinnovativeR&Dactivitiesthatarguablyneedmorehelpastheyaremostlystart-ups.

ItremainstobeseenifBudget2010deliversonitsmajorobjectivesofhelpingtheeconomythroughtherecession,liftingproductivityandcontrollinggovern-mentspending.ThetaxreductionswillassistSMEs,howeverthereisclearlystillroomforgreaterassistancetobeofferedtoSMEs.

How much SME business owners will truly benefit will be a function of their personal spending habits given the increase in GST to 15%. The impact of the GST increase on SMEs’ operating margins also needs to be taken into account.


Robyn [email protected]+64(0)44703615

Taxation of resourcesIs it the gate to a golden age?

Budget announcement:TheGovernmentreleasedaplantounlockNewZealand’spetroleumandmineralpotentialinNovember2009andhasbegunimplementingit.Budget2010allocatesfundstoimplementthatplan.

Deloitte comment:WhetherNewZealandshouldbeseekingtotapintoournaturalresourcesisn’tataxconsideration,buttaxesdoimpactonwhetheranyonewantstotapintotheminthefirstplace.Australia’staxinitiativesinthisareaareofdirectrelevancetoNewZealandgiventhenoiseaboutgrowingthissectoroftheNewZealandeconomy.

Australiaisproposingtoincreasetaxesonitsnon-renewableresourcesectortofundvarioustaxpayerfriendlyinitiativeswiththeintroductionofanewresourcesuperprofitstax(RSPT).

TheRSPT–effectivelyanexplicittaxoneconomicrents–taxestheso-called“super”profitsmadefromtheexploitationofAustralia’snon-renewableresourcesatarateof40%(inactualfactitisseekingtolevyanadditionaltaxonwhatmanywouldconsiderordinaryprofits,anditshouldalsobenotedthatincometaxwillalsocontinuetoapply).

Taxingeconomicrentsinthiswayflowsfromtheconceptthattaxingsomethingthatissophysicallyintertwinedwithageography,i.e.itsnaturalresources,hasmeritsincethoseresourcescannotbeextractedanywhereelse.

ItisestimatedthattheRSPTwillgenerateAustraliaanadditional$3billioningovernmentrevenuein2012/2013and$9billionby2013/2014.NeedlesstosaytherehasbeentheanticipatedoutcryfromtheminingsectorinAustraliaandconcernfromothertaxpayersastowhoorwhatmaybenext.

Intermsoftheanticipatedrevenue,itwouldbeenoughtosingle-handedlyputNewZealandbackintosurplus.Canweeverhopetogeneratesimilarrevenuefiguresfromthetaxationofourresources?Let’sconsiderthecurrentposition.

Companiesthatareinvolvedinminingoranyotherexplorationintheresourcessectoraresubjecttoincometaxlikeotherbusinesses(notingthattherearespecifictaxrulesforthissector).Likeotherjurisdictions,thepetroleum,mineralandcoalindustriesarealsosubjecttoroyaltyregimeswhichcollecttaxonthebasisofapercentageofnetrevenuesoraccountingprofits(whicheverisgreater).

Inthe2008-09year,thepetroleumindustrypaid$511millioninroyaltiestotheGovernment,largelyduetoincreasedoilproductionworth$2.8billion,NewZealand’sthirdlargestexportearner.Themineralandcoalindustriesaccountedforonly$7.5millioninroyaltiesbetweenthem,despitetherecentboomingoldprices.

CombinedwithanenergyresourceslevytheannualbenefittotheGovernmentfromtheresourcesector(excludingcompanytax)issomewhereintheregionof$557million.

CouldtheGovernmentabolishoramendthecurrentroyaltiesandintroducearesourcesuperprofitstax?Theoreticallyyes,butwhiletheresourcessectorisnotarevenuestreamtobelaughedat,it’snotcurrentlyoureconomicsavioureither.

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Giventherisksinvolved,particularlyingreenfieldsexplo-ration,thetaxandroyaltyregimesstillneedtoleaveenoughrewardswiththeprivatesectorforlocatingandextractingresourcesasotherwisenoonewill.

ApositivedevelopmentinAustraliaistheproposedintroductionofaResourceExplorationRebate.Thisrebaterecognisestheinherentriskofdigginganexpensiveholeinthegroundandessentiallyprovidescashbackfortaxlosses.Thisistheeconomicequivalentofallowing“flowthroughshares”andissomethingwhichshouldalsobeconsideredheretofosterinvest-mentinthissector,particularlyifresidentialrentalpropertiesarenolongerflavourofthemonth.

Thephrase“watchthisspace”appliestothisindustryastherearecertainlyafewofficialsthatseeitasfurtivegroundfor“remedial”(andfiscallypositivefortheGovernment)policyintervention.

The annual benefit to the Government from the resource sector (excluding company tax) is somewhere in the region of $557million.


Tax Working GroupFinal results revealed

Mike [email protected]+64(0)44953932

TheTaxWorkingGroupmade13recommendationstotheGovernmentbackinJanuary,sparkingmuchdebateandpublicinterest.WhiletheGovernmentimmediatelyruledoutsomeofthemorecontroversialrecommendations,decisionsonthemajoritywereleftfortheBudget.Let’sseewhathappened…

Recommendation / comment Government response Comment

1.Thecompany,toppersonal,andtrustratesshouldbealigned.

AnnouncedinBudget2010thatthetoppersonalrateandtrustratewillbealignedat33%.Thecompanyratehasbeenreducedto28%.

Thealignmentofthetoppersonalandtrustratewillimprovetheintegrityofthetaxsystembyremovingthecurrentbiasofusingtruststoavoidthetopmarginaltaxrate.Thegapbetweentheseratesandthecorporatetaxratewillbe5%.

2.Thecompanytaxrateneedstobecompetitive.

AnnouncedinBudget2010thatthecompanytaxratewillbereducedto28%for2011/12incomeyear.

Thereductioninthecorporatetaxrateiswelcomed.TheGovernmenthaseffectivelytrumpedtherecentAustralianmovesofmovingtheirrateto29%in2013-14and28%in2014-15.

3.Theimputationregimeshouldberetained.

AnnouncedinFebruarythatimputationwouldberetained.

Imputationhasmanybenefits,primarilytopreventdoubletaxationwhenNewZealandtaxpaidprofitsaredistrib-utedtoNewZealandshareholders.Considerationneedstobegiventohowimputationcanbeimprovedwherecorporateshavesignificantforeigninvestmentsandforeignshareholders.Australiahasalsoconfirmedthatitwillretainitsimputationregime.AndfollowingrecentannouncementsinAustralia,mutualrecognitionseemstobenomorethanaremotepossibility–atbest.

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4.Personaltaxratesshouldbereduced.

PersonaltaxcutsannouncedinBudget2010.

Themovetowardslowerpersonalincometaxratesispositive;wherehighmarginaltaxratesexistthereisdisincen-tivetoincreaseincome,productivityandefficiency.Internationalevidencesuggeststhattaxingincomeisharmfultoeconomicgrowth.

5.Thetaxbaseshouldbebroadened.

Budget2010doesnottaxanynewsectors,albeitasoutlinedbelowchangesarebeingmadetodepreciation.

Whenconsideringthedirectionofthetaxsystem,weagreethat“broadbase-lowrate”isutopia.Removingthetaxbiasforresidentialrentalinvestmentandthereductioninavoidanceoppor-tunitiesaroundWorkingforFamiliesisastepintherightdirection.

6.Acomprehensivecapitalgainstaxwouldbroadenthetaxbase.

RuledoutinthePrimeMinister’sstatementtoParliamenton9February.

Therearemanyissueswithacompre-hensivecapitalgainstax,thepoliticaldimensionprobablythemostdaunting.ForthetimebeingNewZealandwillhavepocketsoftaxingcapitalgainsthroughtheapplicationofspecifictaxregimesbutnogeneralcapitalgainstax–areliefnodoubttomany.

7.ConsiderationshouldbegiventoanRFRMmodelforresidentialrentals.


WesupporttheminorityviewoftheTWG,andtheGovernmentwasrighttorulethisout.Taxingdeemednotionalreturnshasrealpracticalissuesandbecauseoftheseitseemsunworkable.

8.Alow-ratelandtaxshouldbeintroduced.


TheGovernmentwasrighttorulethisoutasitwouldnotonlybepoliticallydifficultwithoutexemptions,butitwouldalsohavebeenlargelyincurredbycurrentpropertyownersthroughanimmediatedropinvaluewhichwouldhavebeeninequitable.

9a.Depreciationloadingshouldberemovedonnewplantandequipment.

AnnouncedinBudget2010thatdepreciationloadingwillberemoved.

Thedecisiontoremovethe20%depre-ciationloadingisunderstandablegiventhestandarddepreciationratesaremeanttoreflecteconomicusageofanasset.Withtheadditionalloadingtoberemoved,itisimportantthatallbusinesstaxpayersreviewthedepreciationratesapplicabletotheirbusinesstoensurethestandarddepreciationratesdoactuallyreflecttheusefullifeofassets.Ifnot,considerationshouldbegiventoapplyingforspecialdeterminationratesformaterialassets.



9b.Depreciationshouldberemovedforbuildingsthatdonotdepreciate.

AnnouncedinBudget2010thatdepreciationwillberemovedforbuildingsthathaveanestimatedusefullifeof50yearsormore,thisappliestoresidentialrentalhomesandcommercialbuildings.

Itisabigstepfordepreciationdeduc-tionstoberemovedformostbuildings.TheTWGidentifiedthatdepreciationofresidentialrentalhomesisquestionableasthisassetclassgenerallyappreciatesinvalue.Thereforetaxdepreciationprovidesataxsubsidytothissectorthatotherformsofinvestmentdonotobtain–itwasthereforeexpectedthatdepre-ciationchangeswouldtargetthissector.

9c.Thethincapitalisationsafeharbourshouldbereducedto60%.

AnnouncedinBudget2010thatthethincapitalisationthresholdwillbereducedto60%from2011/12incomeyear.

NewZealand’sexistingthincapitalisa-tiondebttoassetpercentageof75%isnotoutofalignmentwithothercountriesandassuchdidnotwarrantanyimmediatechange.Thischangewillcausesomeforeigninvestorsrealconcern.

10.GSTshouldcontinuetoapplybroadlywithnoexceptions.

TheGovernmentdoesnotsupportmovestoexemptGSTonfood.

WeagreewiththeTWGandtheGovernment–NewZealandhasaverystableGSTsystem;exemptingcertainitemswouldonlyleadtocomplexity.

11.IncreasingGSTto15%wouldhavemeritonefficiencygrounds.

AnnouncedinBudget2010thatGSTwillbeincreasedto15%.

TheGovernmenthasbeencarefultocompensatetaxpayersviapersonaltaxcutsandselectedchangestobenefits.Weagreethatthereshouldbeashiftawayfromtaxingpersonalexertionincomeandsavingstowardstaxingconsumption.Evidencesuggeststhattaxingconsumptionislessharmfultoeconomicgrowththanothertaxes.

12.Thereshouldbeareviewofwelfarepolicyandhowitinteractswiththetaxsystem.

NocommentintheBudget. ThishasbeenidentifiedforalongertermprojectwiththeGovernmentrightlytacklingthecurrentavoidanceareastoimprovetheintegrityoftheseregimes.Thewholeissueofeffectivemarginaltaxrateslargelyasaconse-quenceoftheWorkingforFamiliesinitiativesremainsafundamentalunre-solvedtaxissue.

13.Institutionalarrangementsshouldbeintroducedforwhenchangestothetaxsystemareconsidered.

NocommentintheBudget. Thisisatechnicalissuearoundconsul-tationandmoreconsiderationofthemacrosettings.ThisissomethingthatwasnotexpectedtobecoveredintheBudget.

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Public sectorTime to change the spending cuts game

Aloysius [email protected]+64(0)44953934

ThisBudgethasaffirmedtheFinanceMinister’smantraof“nomoremoney”forgovernmentagencies,whichhavetocopewithlessorthesameamountoffundingintheforeseeablefuture.Whiletheplanistoredirectsome$1.8billionof“lowerqualityspend”tootherhigherpriorityareasandnewoperationalspendingwillbecappedto2percentperannum,somefundamentalquestionsstillneedtobetackled.

Somegroundworkhasidentifiedscopeforagenciestoprovidebetterpublicservicesbyimprovingprocesses,removingduplicationandreallocatingpoorlyusedresourcestoimprovefrontlinepublicservices.However,responsestotheFinanceMinister’srepeatedchallengeforgovernmentagenciesto“shockhimwithnewideas”todothingsbetterandsmarterhavebeenunderwhelming.

StrategiestolowercostspermanentlyremainelusiveinthisBudgetandsofarthenewrealityhasnotyetsunkindeepenoughinthemodusoperandiofagencies.Thefocusonprocurement,reducingthenumberofagenciesandconsolidatingbackofficeswillprovideone-offgainsbutrequirematerialupfrontinvestmenttoimplementandsustainloweroperationalcosts.

Publicsectorleaderswillfinditincreasinglyhardtoachievelargesustainablecostreductionsinsuccessiveyearsunlessthereisafundamentalrethinkofcurrentoperatingframeworks,structuresandcapability.Budget-holdershavenochoicebuttorethinktheirstrategytoembedpermanentcostreductionswhileimprovingpublicservice.Someareasforattentioninclude:

Tackling the front-line:Muchofthespendingcutshereandoverseasfocusonprocurementandadmin-istrativeandsupportfunctions.Butgiventherelativemagnitudeoffrontlinecosts,agenciesneedtoproperlyengagewiththeirfrontlinestoimproveservicequalityandreducecosts.Continuousimprovementdrivenfromthefrontlineismoreeffective,sustainableandcompa-rablylessexpensive.

Governance and management of whole-of-govern-ment ICT investment:CurrentICTplanning,budgetsandinvestmentdecisionsareverymuch“stoke-pipe”,remainingwithindividualagencies.Awhole-of-govern-mentICTgovernanceandmanagementregimecandeliverbetterproductivityandlong-termefficiencythatiskeytohigherqualityspendingacrossgovernment.

Improve leadership and commercial talent:Steppedchangerequiresinvestmentinknowledge,skillsandexperiencethatarecrucialinjudgingpriori-ties,managingchange,dealingwithpoorperformance,intelligentpurchasingandassessingvalueformoney(notjustshort-termsavings).Publicsectorleadersmustbeallowedtotakerisks,andpoliticiansmustacceptthatsomefailureswillhappenifinnovationwithinthepublicserviceistobecomearealitynotjustrhetoric.

Address cross organisation boundary spending:MuchoftheGovernment’sspendingisbyagenciesoutsidecoredepartments–inCrownentities,NGOs,notforprofits,etc.Findingefficienciesacrossorganisa-tionboundariesismorelikelytoyieldbetterreturnandapplyingasystems-wideviewthatenablesre-consider-ationofhowservicesareprovidedthroughthedeliverynetworkratherthantheirsumparts.

Less focus on dollars, more on value:Whilethere’snodenyingtheneedtowatchthepennies,agenciesneedtobecomemoreknowledgeableaboutwhattheyarepayingfor,otherwisetheycannotmakeinformedchoicesnormeasuretheefficienciesgained.Properlyapplyingvalueformoneyandcosttradeoffsisessentialto“livingwithintheirmeans”.TheGovernmentandagenciesalsoneedtopaymorethanlipservicetotheneedtoproperlyaccountforthecosteffectivenessoftheirspendinginpublicreportingthantheyhavedoneinthepast.

Costreductionisnotaboutbeingabletopointtoheadcountreductionsorone-offoperationalsavingsfromstructuralchanges.Ministersandpublicsectorleadersshouldbeinsistingonprogrammesthatembedpermanentcoresavingsfoundedonhavingthebestleadership,long-termcapabilityandtherightincentivesinplace.


InfrastructureWhere will the money come from?

Duringthepast18monthstheNational-ledGovernmenthasdonemuchtomovetheinfrastructureagendaforward,andusedlastyear’sBudgettoannouncesignificantinvestmentprogrammes.Soit’sbeennosurprisethenthatthisyear’sBudgethasn’tfeaturedanotherroundofmajornewinfrastructureannounce-mentsbeyondthosealreadyunderway,particularlygiventhefocusontaxationandthereturntogrowth.

Budget announcement:Budget2010allocatesanother$1.45billionincapitalspendingin2010/11–thesecondyearofafive-year$7.5billioninfrastructurefundingplan.

Capitalspendingoverthenextfouryearsincludes:

• Broadband-$200millionfortherolloutofultra-fastbroadband

• Prisons-$337.4milliontoliftprisoncapacityandmanagejusticesectorpressures

• Schools-$177.4millionfornewschoolsandschoolproperty

• Rail-$500millionisallocatedtotheelectrificationofAucklandraillines.$250millioniscommittedtosupportthe$4.6billionKiwiRailTurnaroundPlanwith$750millioncommittedinprincipleoverthenextthreeyears

Deloitte comment:Railhassufferedfromsubstantialunderinvestmentandislikelytorequireevengreaterinjectionofcapitaltoimproveitscompetitivenessandenableittoremainrelevantinthe21stcentury.TheBudgetallocationof$250millionnowand$500millioninprincipleprovidesbothcertaintyandsomelimitedbreathingspaceforKiwiRail.Onesuspectsthattheavailabilityofthe“inprinciple”fundingisalsolikelytobeheavilydependent

onwhatisachievedwiththefirst$250million.Inthelongertermitwillhavetostandonitsowntwofeetcommerciallyandgeneratingthebalanceofthe$4.6billionofturnaroundfundingfromearningswillbeasubstantialtask.ClearlytheGovernmentwantstoseethebenefitsofitsinvestmentrealisedquickly.

Thebulkoftherestoftheinfrastructurespendingisessentiallythelatestinstalmentofcommitmentsalreadymade.TherolloutofbroadbandisalreadyunderwayandthefactthattheGovernmentwillactuallyfrontupwithsomecashinthenext12months,iswelcomebutnotexactlysurprising.Thelatest$1.45billionfundingforthe$7.5billioninfrastructureplanfallsintothesamecategory.

Newcapitalforprisonsandschoolsiswelcome,particularlywhenGovernmentisalreadylookingatnewprocurementmodels,andinparticularPPP’sinboththosesectors.Aclearmessagethattherightanswertofundingcapitalincorepublicsectorsisamixofbothpublicandprivatefunding.

What about everything else?WehavealreadyseentheestablishmentoftheRoadsofNationalSignificance,andinvestmentisunderwayonsomeoftheprojectsidentifiedin2009.ThecontinuedcommitmenttofundingthisprogrammeisaclearsignaloftheGovernment’sintentiontocontinuingitsprogressinthisarea.TheNationalInfrastructureUnithasalsobeenestablishedandhasproducedaplanforinvestmentinthenation’sinfrastructure,fromnewroadstoelectricityandwater.NewZealand’sfirstmajorPPPisalsounderdevelopmentforanewprisonfacilitytogetherwithcontractingoutofcustodialmanagementatMtEden.

Paul [email protected]+64(0)44703635

30

Infrastructure spending needs are staggering Whilethiscouldbeviewedas“sofarsogood”giventhecurrenteconomicclimate,theinfrastructureplanneverthelessmakesforsoberingreadingandthecurrentbudgetdoeslittlemoretodeliveritthanhasalreadybeencommitedinpreviousyears.Thecapitalrequire-mentstobringournationalinfrastructureuptoscratcharestaggering.Ownershipisscatteredacrosscentralgovernment,localgovernment,SOEsandotherquasicommercialorganisationsandcoordinationofinvest-mentispoor.

Withtheseenormousdemandsonitsavailablecapital,theGovernmentneedstoaskitselfwhetheritscapitalisdeployedintherightplacesandwhatothersourcesofcapitalitcanaccesstofundtheinvestmentneeded.

Ithasover$50billiontiedupincommercialassetscomprisingmainlySOEswhichdoeverythingfromelectricitygenerationandfarmingtopropertyvaluation.ApartiallistingofsomeorallofthelargerSOEswouldachieveanumberofgoals:itwouldfreeupcapitalbadlyneededforinfrastructureelsewhere,provideanattrac-tivedestinationforNewZealandinvestmentcapitalandsavingsbuildingupinKiwiSaverfundsandelsewhere,anditwouldalsosubjectkeyinfrastructureoperatorstomarketdisciplinesandfreeinvestmentdecisionsfromanyopportunityforpoliticalinterference.TherewerenosignalsinthisBudget,butclearlyitneedstobeontheGovernment’sagendaforthefuture.

With these enormous demands on its available capital, the Government needs to ask itself whether its capital is deployed in the right places and what other sources of capital it can access to fund the investment needed.

PPP model offers procurement alternativeOneencouragingsignhasbeentheGovernment’swillingnesstoconsiderPPPsasaprocurementmodel.This,essentially,dealswiththesecondpoint:providingaccesstonewsourcesofcapital.MuchhasbeenmadeofaPPP’simprovedservicedeliveryandreducedcostsandwhendonewell,theywilldeliverthis.MoreimportantlyforNewZealandisthattheyprovideaccesstoprivatecapitalforcriticalpublicinfrastructureprojectswhichhavetraditionallybeenrestrictedbecausetheydependeduponlimitedpublicsectorfunding.

Whilecapitalremainsverytight,demandsforinfra-structureinvestmenthaveneverbeenhigher.TheGovernmentappearstobetakingtheopportunitytoadoptsmarterwaysofusingpublicandprivatecapitaltoachieveitsgoals.Let’shopetheymaintainthismomentum.


SnippetsOther points of significance

WesummarisebelowwhatelsewasintheBudgetthatmaybeofinteresttobusiness.

Negative

Neutral

Positive

Other Budget announcements

Tourism

TheBudgetallocatesanextra$30milliontothetourism industry,$25millionofwhichwillbeusedto increasethemarketingofNewZealandasatourismdesti-nation internationallywith the further$5million tobeallocated to jointventureinitiatives.Tourismisavitalpartoftheeconomywithpotentialforgrowth,anditispositivetoseethegovernmentsupportingtheindustry.

Budget deficits

Operatingdeficits are forecast to reduce faster thanexpected in2009,with thegovernmentreturningtosurplusin2016.Forecastdeficitsare:

2010 $3.1b

2011 $7.1b

2012 $3.6b

2013 $2.4b

2014 $0.8b

Crown retail deposit guarantee

TheCrownhasprovided$881masat31Marchforfuturepaymentsundertheretaildepositguaranteescheme,lessexpectedrecoveries.

Kyoto ProtocolThe Crown contingent liability for Kyoto obligations has reduced from $1.8B to$1.7B.

Productivity Commission

FundingfortheProductivityCommissionwillbe$2.4m,risingto$5mby2012/13

Maori businessTherewillbe$4.5mofnewspendingtogrowMaoriproductivityandexportgrowth,andtosupportMaoriinnovation.Inadditionafurther$4.5mhasbeensetasidetosupportMaoriTourism.

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