The main highlights from a tax perspective include the increase of tax thresholds, increase to the in-work tax credit and how the funding of the restoration of interest deductibility on residential properties and reduction of the bright-line test back to two years would be achieved.
This has resulted in a larger portion of taxpayers in New Zealand paying tax at a higher rate while not earning any additional income in real terms due to inflation.
While the change is a move in the right direction (albeit delayed by a month), this does not fully fix the problem. For instance, the lowest threshold of $14,000 is changing to $15,600 but in real terms, should be $22,820.
Having said that, the government had to balance the cost of increasing the thresholds against the significant cost that would have been created if they have moved the thresholds to account for the 63% wage inflation. They also had to be mindful of the impact of any such change on inflation, which has surged in recent times.
The increase to the threshold for the Independent Earner Tax Credit (IETC) to $70,000 is another welcome relief, as the current thresholds for IETC had resulted in it applying to a significantly smaller proportion of taxpayers. There was suggestion that this would be removed altogether given the limited application, but this has been retained and increased.
The opposition mentioned funding of the perceived tax cut for landlords through the reintroduction of interest deductibility and whether this was a valid use of taxpayer funds. While this was originally pitched as a ‘‘loophole’’ for landlords, the reality is that commercial landlords, businesses, and most people borrowing to invest and derive income are allowed an interest deduction. It would seem odd that if a taxpayer were to invest in shares, invest in a commercial building, or invest in a Portfolio Investment Entity, they would get deductibility, but if they invested in residential property, they would not.
The flipside of the reintroduction of interest deductibility is that the depreciation is being removed from commercial buildings (as is currently the situation with residential buildings). The additional tax raised through the removal of depreciation almost covers the cost of the reintroduction of deductibility of interest mentioned above based on the Budget projections.
Also, while the reintroduction of interest deductibility is often stated as a tax cut for landlords, it should be noted that the ring-fencing of residential rental losses still exists. Any tax refund generated by this will only be where the landlord has been paying current year provisional tax (tax in advance) on the residential rental. Furthermore, for those landlords with no debt, this does not impact them nor give them a tax cut.
Another welcome change for taxpayers announced earlier is the reduction of the bright-line test back to two years. The current ten year bright-line test often over-reaches and can result in taxpayers paying tax on property transactions that were not originally intended to be captured by the test, such as parents helping children into their first homes.
While this appears to favour property speculators by allowing them to not pay tax, this is often not the case as remaining land tax rules still exist and taxpayers speculating on property, buying with an intention to sell, or developing to sell may already be caught under the other land tax provisions.
While Budget 2024 was fairly predictable delivering on a number of announcements already made and outlining projected funding of these initiatives, the 2025 budget promises to be more interesting. As both parties have agreed, we are in a cost-of-living crisis and inflation has been higher than targeted. However, neither party can quite agree on how this occurred.
If the country is in a similar position in 2025, will the government make further cuts? Or will they be forced to consider other options such as increasing borrowings or sell assets? Only time will tell.
■Jarod Chisholm is managing partner — tax advisory at Findex.
