Hot off the Press – Budget 2012
As expected, Budget 2012 contains few tax measures.
The main tax measures announced in the Budget reflect proposals which were previously well signalled to tighten perceived loopholes round livestock valuation options and mixed use assets. The Budget announcements do not contain much specific detail. As is often the case, the devil is likely to be in the detail of the relevant legislation.
Other tax changes focus on individuals, rather than the corporate business sector.
Inland Revenue will be provided with an extra $78.4 million over the next four years to increase tax compliance activities in relation to the hidden economy, debt collection and following up on unfiled returns.
Other announcements which may interest the business sector include the following.
- New disclosure rules will require fund managers to report performance, returns, fees, costs, assets and portfolio holdings, liquidity, liabilities, key personnel and conflicts of interest in a standardised format on their websites. The rules will apply from 1 April 2013 and will require quarterly reports to be published within 10 working days from the end of each quarter and annual reports to be published within 90 days after balance date.
- Review of KiwiSaver default providers, with any changes to be implemented ahead of 30 June 2014 when current default provider contracts expire. Terms of reference for the review have been released and a discussion paper is to be issued later in 2012, with opportunity for public submissions.
- Auto enrolment of all employees will be deferred. It had previously been suggested such enrolment could occur from the 2014-15 year.
Science, innovation and resource funding
The government’s aim to build a more competitive and productive economy is reflected in Budget 2012’s provision for $250 million new operating funding and $76.1 million in capital funding over four years for science, innovation and research.
The new funding over the next four years includes:
- Funding to create an Advanced Technology Institute to link business with science by working with the high-tech manufacturing and services sector ($76.1 million capital funding and $90 million operating funding).
- A National Science Challenges initiative to use multi-disciplinary teams to find innovative solutions to some fundamental issues ($60 million operating funding)’
- Additional research funding to increase the Performance-Based Research Fund to $300 million by 2016.
The Energy Efficiency and Conservation Authority will reprioritise some funding with the aim of improving business energy efficiency, spending an extra $2.5 million on that programme in 2012-13. The biodiesel grants scheme, however, will come to an end, as previously scheduled, with greater focus on advanced biofuels.
The tax measures included in Budget 2012 affect the following.
Mixed use assets
- As expected, Budget 2012 announces proposed changes to taxpayers’ ability to claim deductions for costs on assets which are used both for private and rental use, but which are often unused while available for either purpose. Typical examples are holiday homes, boats and aircraft.
- An apportionment approach will apply for deductions of general costs, based on the actual income earned and private use. The example given is that a taxpayer would be able to claim 50% of their costs if they rented out their holiday home for 30 days in a year and used it themselves for 30 days in that year. By comparison, they may have been able to claim approximately 90% of their annual costs under present rules on the basis the items remain available for income-earning use.
- No start date for the new mixed use asset rules was announced.
Livestock valuation elections
- As had already been announced on 28 March 2012, changes to the farm livestock valuation provisions will generally prevent taxpayers continuing to use the ability to elect out of the herd scheme in order to realise untaxed capital gains. Such elections will be permitted only in limited circumstances
- The March announcement stated herd scheme elections would be irrevocable unless taxpayers were changing the nature of their livestock farming operation to fattening operations.
- The March announcement also stated transferors’ herd scheme elections and base herd numbers would generally have to be adopted by associated person transferees unless there is a complete intergenerational change in ownership. That change is proposed to apply to transactions from 28 March 2012.
- The change will apply to prevent any elections to exit the herd scheme for the 2012-13 income year being effective if made from 18 August 2011 when the issues paper was released.
- The initial change will be included in Budget legislation to be introduced after the Budget is presented today. Other details will be included in the next general tax Bill.
Individual tax credits removed
Three long standing individual tax credits are to be abolished from the current 2012-13 tax year, although transitional rules are proposed for those claiming such credits through the PAYE system in the current year:
- Income under $9,880 credit – originally introduced to ensure low income taxpayers were not made worse off by the 1986 tax reforms.
- Children’s earned income credit – originally introduced in 1978 to ease PAYE compliance in respect of children’s part-time employment. A limited tax exemption will be introduced although the changes will not allow children to claim refunds for tax already paid by way of PAYE or Resident Withholding Tax.
- Childcare and housekeeper credit – The amount of this credit was last increased in 1984-85. The government considers it has largely been superseded by other policies, such as early childhood education and Working for Families support.
Excise on tobacco
- Tobacco excise taxes will increase by 10% per year on 1 January in each of the four years 2013 to 2016, in addition to annual inflation-indexed increases.
Given the fragility of the economy and the uncertain global outlook, the Australian 2012-13 Federal Budget Brief asks: Is this the surplus we had to have?
The Indian Budget in March 2012 introduced various measures to protect the domestic tax base including imposing tax on indirect Indian company share transfers effective from 1 April 1962. Furthermore India is introducing a General Anti-Avoidance Rule and treaty override provisions.
The Canadian Budget in March 2012 includes a number of major international tax measures aimed at thin capitalisation, foreign affiliate dumping, base erosion rules, and transfer pricing.
The UK Budget in March 2012 was generally business friendly reducing the main rate of corporation tax. The introduction of a General Anti-avoidance Rule was confirmed with likely application from 1 April 2013.
U.S. tax reform including the release of the Obama Budget in February 2012 which contains business tax changes and the release of the Obama Business Tax Reform Framework for development and consultation.
This year’s budget is about enabling long-term sustainability – to ensure a more robust, much stronger and more productive economy for the future.
In his fifth and final budget the Financial Secretary John Tsang retained the role of a prudent captain seeking to safely sail Hong Kong through stormy waters.
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