The Minister of Finance, Nicola Willis, said the government is expecting growth of 1.2% in the year to June 2026, 2.3% in the year to June 2027 and 3.2% in the year to June 2028. Tax revenue is expected to be $9 billion higher over the next four years than previously forecast. Debt is expected to peak as a percentage of GDP in 2027/28, and an OBEGALx surplus is expected in 2028/29 instead of 2029/30.

For taxpayers, Budget 2026 does not provide one big reform, but instead a series of smaller reforms. Most of these changes had been previously signalled in consultation documents and government pronouncements.

Fringe Benefit Tax changes

Comprehensive changes are planned to the Fringe Benefit Tax rules with respect to vehicles. After decades of a system where any private use of a motor vehicle gave rise to a Fringe Benefit Tax obligation, a new system of categories will exist for vehicles from 1 April 2027. The new categories will be:

• Vehicle mainly for private use – 100% FBT
• Vehicle mainly for business use – 35% FBT
• Vehicle mainly for business use and used on farms – 35% FBT
• Vehicle for business use only (apart from commuting) – 20% FBT
• Vehicle for business use only (apart from travel to multiple worksites) – 0% FBT
• Vehicle for business use only – 0% FBT 

There will be specific requirements around vehicle branding and what would constitute permitted private use, particularly around the farming and travel to multiple worksite categories. Logbooks will no longer be required. And, in a major change, it seems any type of vehicle can be a work vehicle, not just utes or modified wagons. Sign writing will still be required, and sign writers should be celebrating tonight as many more cars can be branded to get favourable tax treatment. 

The calculation of FBT will also change, with different methods applying for different fuel types. When calculating the value of a motor vehicle benefit, a lower percentage will apply to hybrid and electric vehicles, compared with traditional petrol and diesel vehicles, reflecting their lower running costs.

None of the other changes consulted on last year are taking place.

Not-for-Profit changes

A sigh of relief from the not-for-profit sector was heard over Wellington this afternoon when Ms Willis announced that member subscriptions and levies would remain non-taxable.

This is welcome news following Inland Revenue’s earlier issues paper which indicated member subscriptions and other mutual transactions might be taxable.

For organisations that meet the definition of not-for-profit, an automatic $1,000 deduction from income normally deals with any minor investment income and ultimately means that small member organisations have little tax to pay. From the 2027/28 income year, this automatic deduction increases to $10,000. This is a welcome change for the otherwise overworked not-for-profit community and will significantly reduce compliance costs for those who are eligible.

Further changes mean that from the 2027/28 income year, there will be no requirement to file a tax return if a not-for-profit organisation has no taxable income as a result of applying the $10,000 deduction against income. NFPs can file if they wish, particularly if they have carried forward losses, but otherwise, this is great news for the sector.

New Zealand has a relatively generous donation rebate scheme whereby 33% of eligible donations are refunded to the donor. However, for donations made on or after 1 April 2027, the rebate is going to be limited to the lower of $100,000 or a person's taxable income. For example, if you earn $500,000 and donate $500,000 to a charity, the rebate will be limited to a maximum of $33,333.33. We remain cold on this one.

Foreign Investment Fund changes

The Budget includes anticipated and welcome changes to the foreign investment fund (FIF) rules, building on last year’s introduction of the revenue account method (RAM), which had relatively limited application. 

The proposals reflect the Government’s continued focus on attracting and retaining highly skilled individuals to New Zealand, while also incorporating measures to reduce compliance costs for existing taxpayers. 

A key feature of the proposals is the expansion of access to the RAM. Under the proposals, all New Zealand residents would be able to apply RAM to unlisted foreign shares, with tax payable only on realised gains and dividends received. This is an expansion from the current rules, which only allow new migrants and some returning New Zealanders to use RAM. This is a welcome development and moves the taxation of FIF interests closer to a cash-based outcome.

Further changes are aimed at simplifying compliance. The FIF de minimis threshold is proposed to increase from $50,000 to $100,000 (based on cost of the investments), which will remove smaller investors from the compliance costs of the regime. 

All proposed changes to the FIF rules are expected to apply from 1 April 2026, for the 2026-27 income year.

Financial arrangements rules changes

There have been years of complaints from Kiwis about foreign denominated bank balances, bonds, mortgages and credit cards giving rise to “dry income” due to foreign exchange movements, even if gains are never realised. Now the government is planning to tweak the financial arrangements rules to reduce the impact of foreign exchange rate movements on individuals. Specific new rules will include: 

• The ability for some taxpayers to reduce their exposure to unrealised exchange rate gains and losses by calculating income under the financial arrangements rules in a foreign currency.
• Special rules to protect certain individuals who are exposed to cross-border double taxation because of the accrual basis of the financial arrangements rules.
• A new calculation method for arrangements acquired for the purpose of meeting the Active Investor Plus visa requirements.
• Removal of low-risk, common foreign currency arrangements from the financial arrangements rules altogether. This would include personal bank accounts, mortgages on private homes and credit cards with foreign banks. 

These rules would largely apply from 1 April 2027, apart from changes associated with the Active Investor Plus visa, which would be backdated to 1 April 2025.

Shareholder loan changes

While the government did not proceed with the arguably extreme shareholder loan proposals that were consulted on in the summer, there will be an amendment to tax legislation which will confirm that outstanding shareholder loan balances will be taxable income six months after a company is removed from the Companies Register. This would include loans to directors of a company and close relatives of shareholders and directors of a company. This new rule would take effect for companies removed from the Companies Register on or after 4 December 2025.

Non-resident Contractors Tax changes

Non-resident Contractors Tax is a tricky part of the tax rules, with high compliance costs, especially for businesses that are smaller or low-risk. The government has recognised this and announced the following changes to the rules:

• Increasing the monetary exemption threshold from $15,000 to $75,000.
• Implementation of a single-payer view of the monetary and day count thresholds – this would mean that New Zealand entities would only need to consider their own contractual activity with a non-resident contract in a 12-month period when applying the de minimis thresholds.
• Excluding low-risk, non-resident contractors from the rules, including branches, limited partnerships and representative offices if they can prove they have taken steps to be tax compliant.
• Introduction of a bespoke non-resident contractors’ tax code, making non-resident contractors’ tax more visible in Inland Revenue systems. 

These changes would apply from 1 April 2027.

More funding for debt compliance activities

The government has announced $60 million of funding over the next four years to increase investment in Inland Revenue’s debt compliance activities. There is an expected return of 3:1. As most will know, Inland Revenue compliance activity has significantly increased in recent years and now they want to fund more collection activities. Expect more audits, more risk reviews and a further crackdown on outstanding debt.

Somewhat ironically, Inland Revenue has also been asked to find $63 million in baseline savings over the next four years.

Our comment

It is great to see that in spite of an uncertain global environment, it appears that New Zealand is about to turn an economic corner. On a positive note for taxpayers, government looks set to balance the books by 2029 without the need to engage in the type of revenue-gathering measures that featured in the recent Australian budget.

Even better are the suite of small-scale proposals that have been announced. It is clear that the government is listening to comments received when feedback is sought and is keen to remove unnecessary hurdles for talented individuals to move to New Zealand. These changes should also remove some uncertainty, as there were a lot of consultation documents that had been issued that appeared to have stalled.

We are disappointed that the donation tax credit cap is coming back (from the distant past) and are concerned about the potential negative impact it will have on philanthropy by high-income individuals. It is evident this was designed to address concerns about abuse of charitable entities by some, but we think a more targeted approach could have been adopted.

While Inland Revenue has released fact sheets on these proposals, the detailed information will not be available until the relevant legislative amendments are brought before Parliament, and the devil is often in the detail.

If you have any queries in relation to the Budget proposals and their impact on you, please contact your Baker Tilly Staples Rodway tax advisor.