Jo Doolan’s View:
Against a background of anticipation and trepidation Finance Minister Bill English promised a tough budget rather than a lolly scramble. What we got is the most radical tax reform since the mid to the late 1980’s.
The anticipated cuts in personal tax and the GST increase to 15 per cent were almost a given as were the changes to the property investment.
The big surprise was the drop in the corporate tax rate to 28 per cent. Unlike Australia who delayed their drop in corporate tax rates by up to two years, ours apply from the 2011/12 income years. This means for those with a 31 December balance date the new rates apply from 1 January 2011.
The Australian Corporate tax cuts apply to small business from 2012-13 and are phased in for other companies 29% for and 28% from 2014-15 for other companies.
Borrowing to fund the tax cuts is a slight concern and the package of new tax measures are not revenue positive until 2013/14.
The question is we investing for future growth or borrowing for day to day living. Something that can only be judged with the benefit of hindsight. If we receive growth figures of over 3% compared to the expected 1.8% we will all be better off. With promises of higher incomes per household of around $7000 and more jobs along with lower deficits that are anticipated to peak at 4% and returning to surplus three years earlier.
The personal tax cuts, and the Company tax drop, even after the compensating revenue raising adjustments, mean a $460m shortfall in 2010/11 $90m in 2011/12 and $40m in 2012/13.
There is off course a balancing act that assumes the projections fairly reflect what will happen in practice. For example if our spending patterns alter dramatically then the Governments expectations surrounding the revenue it will raise from the GST increase will be uncertain.
A big balancing act comes from assumptions that spending patterns will not dramatically alter as a result of the GST increase. There are also other targeted changes that will mean some are worse off.
These include a wide range of measures to – in the Minister’s words broaden the existing tax bases and make effective tax rates more uniform across sectors.
The 20% depreciation loading is now gone for all new assets acquired after budget day. Buildings with an expected live of 50 years will now have a zero depreciation rate. This is in effect a retrospective change as it applies to building brought prior to budget day.
If you think the depreciation changes are minor think again these measures will over the next four years raise $3.12 billion in additional tax revenue. To put this in context, the GST increase is expected to raise $11.025 billion over the same period. Even if you are not yet concerned consider this in the context that the company tax rate reduction over the four year period is costing $1.115 billion.
The breakdown of the impact of the depreciation changes between companies and others will remove some of this out of the company arena but the upshot of this could well be the effective tax rate for many will be increasing while the headline rate decreases.
Debt to equity ratios for companies are changing from 75% to 60%. This will restrict the ability of companies to deduct interest costs if they exceed the debt to equity ratios. What cannot be forgotten is businesses that are benefiting from the new active business exemptions under the controlled foreign company rules, also have to apply thin capital ratios so these changes will apply to them. The budget commentary on these changes could almost lead you to believe only foreign owned companies are impacted by these changes.
The changes to the debt to equity ratios put us at a competitive disadvantage when compared to Australia. They are however more in line with the rules in other countries like the USA.
Another point that cannot be ignored is over the four year period the Inland Revenue will be expected to bring in another $745m from increased audit and compliance activity. Meaning taxpayers can expect to be subjected to increased audit activity.
One can only hope this also includes a stronger emphasis on the cash economy that is expected to increase given the GST rate increase. The tax office’s track record of recovering $5 of tax revenue for each $1 they incur in costs is seen as justifying an increase in their funding to go after more untaxed dollars.
Along with the promise of much stronger enforcement the rules will be tightened for qualifying for working for families and student loans.
The trust tax rate stays at 33 per cent and the margin between the company rate and the company rate is not considered as being enough to result in widespread tax planning and to the extent this happens there are promises of robust enforcement from the tax office. Meaning if you want to engage in this you need to budget for the added costs of defending your position.
Overall; full marks, this is a very positive budget with something for all. With an anticipated 73% of our income earners now having a top tax rate of 17.5 per cent or less one can only hope this starts our real journey on the road to economic transformation where we see sustainable growth that is funded by increased savings and productivity investments.
Joanna Doolan is a Tax Partner with Ernst & Young the views expressed are her own and not necessarily those of Ernst & Young. firstname.lastname@example.org