Media Release - 19 May 2011

Clare Farrant
Senior Communications Manager
Ernst & Young
+64 274 899 700
+64 9 300 7065
clare.farrant@nz.ey.com

NZ Budget 2011: Tought, Tight, and Optimistic

 
19 May 2011

Budget 2011’s stated aims are to achieve higher and more sustainable growth, to “tilt the economy towards exports, savings and investment and away from borrowing and consumption.” 

The Government’s projections assume that New Zealand will transition into a growth economy over the next two to three years,  But the journey to surplus by 2013/14 is not going to be an easy one and the up-beat words and watered down savings measures belie the challenges in growing the economy.

Overall it’s an optimistic budget to kick start a growth path for economy but the Government is putting its credibility on the line by asking voters to decide whether or not they accept the measures proposed in this budget

Growing the economy

Businesses need to actively engage in growing the economy for the Government’s projections to come to fruition.

“The need for engagement is best illustrated by the tax projections.” says Ernst & Young tax partner Jo Doolan. “Between 2011 and 2015 the Government is relying on tax revenues growing by over $17 billion”. 

Over the next four years taxes paid need to increase by 34%. This translates to a growth in taxes paid of around  8.5% growth per year.

New Zealand has 3.343 million taxpayers who are paying $22.8 billion of personal tax.  The sobering figures are that 87% of these individuals or 2.9m earn $70,000 or less and this group pay 49% of the tax take or $11.176m.   We then have 424,000 individuals who are more fortunate and earn over $70,000 a year. This group of 13% contributes 51% of the personal tax take, or $11.634m a year.

Australia has long since been hailed as the lucky country luring New Zealand’s best and brightest to its shining lights. But the reality is, with the high personal tax rates in Australia anyone earning over $150,000 will pay less tax in New Zealand.  While this is hardly enough to break into a rendition of Fred Dagg's song “you don’t know how lucky you are” it illustrates the progress we have made with the reduction in our personal tax rates.

KiwiSaver

The changes to tough issues like KiwiSaver and Working for Families are a not as hard as they could have been.

The big surpise is that $1,000 up front Government funded contribution to KiwiSaver remains unaltered, as are the changes to the taxation of employer contributions. 

Not only is the government contributing less (through a reduced tax credit) but now the government will take up to a third of the employer's contribution in the form of Employer Superannuation Contribution Tax (ESCT). 

The compulsory contributions to KiwiSaver (unlike contributions to other super funds) have previously been excluded from ESCT.  Take an employee earning $80,000 as an example. Even though the employee and the employer are each contributing an extra $800 to KiwiSaver post-1 April 2013, the total contributions to the fund increase by less than $400 because the government has halved its contribution and then taken around $700 from the employer's contribution.

Employers will need to ensure that their payroll systems are updated to cope with the first changes from 1 April 2012 and may wish to take the future increase in their compulsory contribution rate into account in negotiating and determining employment remuneration from 1 April 2013.

Working for Families (WWF)

The Working for Families changes as announced are projected to apply gradually. But their impact must also be considered in conjunction with the significantly widened concept of family income which applies for these purposes since 1 April 2011. 

The widened concept of a family  income may include income such as trust income and income of companies controlled by such trusts, attributable types of fringe benefit from a company controlled by the person, certain passive income derived by dependent children, foreign-sourced income of non-resident spouses/partners, tax-exempt salary and wages, certain income equalisation scheme deposits, 50% of non-taxable pensions and annuities and other payments used to replace income or meet a family’s living expenses (if they exceed $5,000 per year per family). 

Tax changes for farmers

The big surprise is the proposed tax changes for farmers which include a broader range of employee benefits in the definition of income for Working for Families tax credit purposes. And there could also be changes to the rules to tax benefits that are essentially salary sacrificed.

Farmers need to cope with losing the ability to switch between livestock two valuation methods.  At present farmers, by using both methods, can get a deduction for decreases in the valuation of their livestock but not be taxed on the increase in market valuations. 

Holiday homes and boats could be targeted, with the Minister considering it unfair that some taxpayers are enjoying the benefits of taxpayer subsidised holiday homes and boats.  

Final words

“Overall it’s an optimistic budget and we can hope this is the beginning of the kick start of the growth path we so desperately need. While the Government is putting its credibility on the line by asking voters to decide whether or not they accept the measures proposed in this budget, if the savings and growth levels can be achieved we can look forward to a bright and optimistic future,” says Doolan.

For more information please contact Clare Farrant: 0274 899 700 or clare.farrant@nz.ey.com 

-ENDS-

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