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Tax
Tax Alert - special update
Business tax review discussion document – where is the innovation?
By Thomas Pippos and Mike Shaw
The Government today released its long awaited “Business Tax Review”. Given the time and build-up leading to the release of this document, it was about time that the “deep dark secrets” which weren’t hidden in the 2006 Budget were finally revealed.
Heralded as including “very bold measures” and being “innovative”, the Business Tax Review is more of a disappointment given the high expectations set for it by its creators. Far from being comprehensive, the Business Tax Review is a 26-page once over lightly of a few possible options, some new, but many of the suggestions have been lingering around for years – hardly the innovative creation we’d all be expecting.
However, the Business Tax Review is not about providing a tax lolly scramble (these seem restricted to election years and social initiatives like Working for Families). Rather, it’s about using the tax system to target the areas where New Zealand can achieve the biggest bang for its buck.
If you’re not familiar with the Business Tax Review, its genesis comes from the confidence and supply agreements signed between the Labour Party and United Future and New Zealand First, which both specified the Government would:
“Review the current business tax regimes with the view of ensuring the system works to give better incentives for productivity improvements and improved competitiveness with Australia.”
Ultimately the Government wants the views of businesses about which of the proposals outlined below – or proposals they have not yet considered – should be considered priorities. However, it has been made very clear that only that which can be afforded will be implemented, hence the focus on the estimated costs of proposals. Consistent with the announcements at Budget 2006, what is implemented will depend to a certain degree on tax forecasts and who is correct, Treasury who is predicting a more lean tax take or Inland Revenue who are predicting greater surpluses.
The key proposals contained within the Business Tax Review include:
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Proposal
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Estimated Annual Cost
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Our View
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Dropping the company tax rate from 33% to 30%
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$540m
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This is a positive step forward. Tax reductions can increase economic growth resulting in more revenue being earned by the Government.
An interesting question is whether the Government should decrease the company tax rate beyond the 30% mark currently used in Australia. The Government considered this but then rejected it.
A lower company tax rate is an important feature for promoting NZ as an investment location. The corporate tax rate has the highest commercial visibility amongst tax rates.
Disappointing is that there is no ultimate goal in this area.
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Targeted tax
credits for:
- R&D
- Export market development
- Skills improvement
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$45m - $350m
Uncertain*
Uncertain*
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Targeted policies designed to support companies in their spend on research and development, investment in productive plant and staff development will help increase the level of NZ exports.
These rules will result in winners and losers, depending whether your activity falls within the definition of qualifying expenditure. It will undoubtedly increase compliance costs given the complex boundaries regarding what expenditure and activities qualify for the incentive.
Given the limited detail this is really food for thought and probably the crux of the targeted tax relief.
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Deferring losses from significant upfront expenditure
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Uncertain*
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This appears to simply be an extension of deductibility provisions introduced last year and already effective from 2005/06 year. A positive move that will not be applied often. Effectively this allows certain entities to effectively carry forward tax losses despite breaches in shareholder continuity.
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Deduction for ‘blackhole’ expenditure, such as losses on buildings
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$150m - $300m
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Currently not providing deductions for black hole expenditure is notable difference when comparing the New Zealand and Australian tax regime; Australia has provided a five year amortisation for expenditure that cannot be deducted elsewhere in legislation.
The changes proposed in respect of research and development (R&D) and blackhole expenditure are pleasing, yet just common sense. Tax should be payable on the best reflex of income – this is a net concept and taxable income should be calculated net of all R&D costs. To continue with the ludicrous situation of certain types of R&D expenditure being non-deductible would defy common sense (especially where other countries have generous tax incentives for R&D expenditure).
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Increasing the depreciation loading on new assets to:
- 30%
- 40%
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$120m
$230m
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More proposed changes to depreciation rates! At the end of the day the real benefit will is the net present value of the increased depreciation deductions in earlier years less the reduced depreciation in later years.
The expectation is that this will only apply to assets acquired after a particular date – positive – but not bold – particularly as the likelihood is that this is one of the initiatives that will be dropped under prioritisation.
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Decreasing the depreciation loading on new assets to:
- 10%
- 0%
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($120m)
($250m)
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To highlight the focus on the fiscal considerations, it was also suggested that a reduction in depreciation could be implemented to assist funding other measures! (for example the corporate tax cut). Unlikely to find a huge support base.
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Aligning depreciation loading at 20% on new and secondhand assets
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$90m
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This will be a good thing and will lead to a reduction in compliance costs and complexity to taxpayer. Like the most of the other depreciation changes, this is a timing benefit only.
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Increasing low value asset write-off thresholds (e.g. from $500 to $1000)
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$170m
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This will be a good thing and will lead to a reduction in compliance costs and complexity to taxpayer. Like the most of the other depreciation changes, this is a timing benefit only. Bold and innovative?
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Reducing compliance costs for assets with low depreciated values
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Uncertain*
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This will be a good thing and will lead to a reduction in compliance costs and complexity to taxpayer. Like the most of the other depreciation changes, this is a timing benefit only. Bold and innovative?
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Increasing the threshold for taxpayers allowed to submit an annual FBT return
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Nil
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Not the type of thing one would expect in this document. Unlikely to be the reason corporates come to New Zealand.
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* It is not possible to give accurate costings for these proposals at this stage.
Now before leaving the above table if history has taught us anything it is that the fiscal projections stated above will be wrong – reflect on that.
What is not in the Business Tax Review?
Possibly of most significance from your personal perspective is a lack of proposals in respect of personal tax thresholds and trustee tax rates. In the lead up to the release of this document there had been indications that proposed downward movements in corporate tax rates could also lead to reductions in other tax rates to prevent any increase in the tax wedge, however now the party line seems to be that changes to personal taxation are once again outside the scope of the Business Tax Review. But brace yourselves as they will be part of the 2008 Budget or foreshadowed as part of the election. Part of the reason that the above business tax measures may not seem that generous is that headroom needs to be retained for personal tax movements.
Also of significance, but this time positive, is the non-inclusion of payroll tax in the proposals. In their media release Dr Cullen and Hon Peter Dunne stated that payroll tax had been considered and rejected due to the number of problems it would cause and the inability for such a tax to contribute to the promotion of productivity and growth.
Further topics that could have been brought to light with the review but were however passed over include:
- The active passive exemption for Controlled Foreign Companies and NRWT rates, these were both mentioned in the review and are stated as relevant but outside the scope of the review.
- CGT is not on the agenda even as an option. Nor is a change in the GST rate. Justifiably or not these are two material leavers that are out of play – at least from a Government standpoint.
- Removal of penalties relating to voluntary disclosure. This would encourage disclosure and consequently result in the correct tax positions being taken and correct amounts of tax being paid by taxpayers. Use of money interest of 13.08% is punitive enough without adding penalties. However, we expect movement in respect of penalties as a separate tax project.
- Mutual recognition of imputation credits would attract greater Australian capital in New Zealand and also increase investment opportunities for New Zealand businesses. Unfortunately such an initiative needs to gather enough support on both sides of the Tasman before it can progress further.
- Withholding tax rates on non residents, this was not mentioned.
Other issues which would help to improve the ability of business to grow and compete in the global economy but have not been discussed in the current review need to be identified and submitted on – but time will likely work against anything materially different to what is contained in the document.
Where to from here?
The proposals in the document are to follow the generic tax policy process, i.e. they are to undergo public consultation, prior to being converted into legislative form with an intended application date of 1 April 2008. In order to meet such timeframes the initial consultation period will be short, with submissions open until 8 September 2006. A decision on which of the proposals will proceed is expected in early 2007 with legislation expected in mid-2007.
While the Business Tax Review is not what we would consider to be “bold and innovative”, it has to be seen as the beginning and not an end. While it does not set out the destination, it does set out the next step in the journey.
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Email: vharley@deloitte.co.nz.
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