Unlike the past three years, where one party had the ability to set the policy agenda, policies will now need sign-off from all three parties, all of whom have differing policy priorities. Promises have been made and compromises will be necessary, so nothing is certain until it is law. 

Below, we discuss the policies in the coalition agreement that will have an impact on business, as well as general tax policies. 

Residential property changes 

The coalition agreements include the reversal of two major tax changes involving residential properties.

Firstly, a two-year bright-line test will be restored. National’s tax policy indicated this would take effect on property sales occurring from 1 July 2024, and we assume this will continue to be the case. As noted, this will not be definite until there is amending legislation passed.

Secondly, interest deductibility on residential rental properties will be gradually restored. Sixty percent interest deductibility will be available in 2023/24, 80% interest deductibility will be available in 2024/25, with full interest deductibility restored by 2025/26. We assume the phase-in will include loans entered after 27 March 2021 and that new build property owners will retain full interest deductibility during the transition period.

Depreciation on commercial buildings

While not explicitly addressed in the coalition agreements, the fact that National campaigned on removing depreciation deductions on commercial buildings and the coalition agreements don’t mention this point mean that depreciation deductions on commercial properties will cease from the end of the 2023/24 year. This is one of the few policy changes for which there had been bipartisan support.

Similar to what happened in 2010 when depreciation deductions were removed for the first time, there may be some unpleasant impacts to the financial statements of taxpayers subject to IFRS.

Foreign buyer’s tax

New Zealand First successfully negotiated the retention of the existing foreign buyers ban on residential real estate and accordingly, the foreign buyer’s tax proposed by National is off the agenda.

Individual tax cuts

From 1 July 2024, income tax thresholds will be moved upward as follows: 

The independent earner tax credit of up to $520 per annum will also continue to apply unabated up to $66,000 (currently $44,000), with the same abatement rate applying from $66,000 to $70,000 as currently applies to abatement from $44,000 to $48,000.

From a more technical angle, historic tax changes that have taken effect partway through a year have resulted in blended tax rates. For wage and salary earners this did not matter too much in days gone by as new PAYE tables would come into force on the date the tax changes applied, and this would usually be treated as the final tax payable. With Inland Revenue’s new system and associated changes, everyone will either have an automatic assessment or a requirement to file a 2025 income tax return and so nasty surprises could be in store – especially for those who receive a healthy pay increase after 1 July 2024.

The tax threshold changes are designed to account for inflation since 2020. The coalition agrees that by 2026, there will be an assessment on the impact inflation has had on the average tax rates faced by income earners.

Working for Families changes

Working for Families changes slated for 2026, which primarily constituted increasing the abatement threshold, have been cancelled. Those proposed changes were separate to the recent announcement of an automatic increase owing to inflation.

The FamilyBoost childcare tax credit, worth up to $150 per fortnight, will still be available. We assume the relevant thresholds (25% of childcare costs up to $300 a week, with abatement for households earning more than $140,000 per annum) will still apply.

Thirty-nine percent rate on trusts

Given the relative silence from National on this point, and the fact the coalition agreements do not discuss this point, it is safe to assume the 39% tax rate on trustee income derived by trusts will still come into force on 1 April 2024 (subject to the necessary legislation passing). Some opportunities exist around utilising the 33% trustee rate up to 31 March 2024, but the window is fast closing, and we recommend discussing this with your Baker Tilly Staples Rodway advisor sooner rather than later.

Inland Revenue audits

New Zealand First has negotiated for more funding for Inland Revenue audits. A combination of more funding, Inland Revenue’s new system and the end of the pandemic means far more Inland Revenue activity can be expected in the coming years, with pressure from government for results.

Inland Revenue has had increased interest in tax avoidance matters associated with the increase in the top personal (and shortly trust) marginal tax rates to 39%, with Inland Revenue review letters having been recently sent out to selected personal services companies.

GST on “listed services” rules (also known as the “App Tax”)

After initial uncertainty, the government has indicated that the new GST on listed services rules (the so-called “App Tax”) will continue to come into force on 1 April 2024. Broadly speaking, these rule changes will mean that platforms such as Airbnb and Uber will need to account for New Zealand GST on services provided, regardless of whether the underlying driver or property owner has turnover in excess of the GST registration threshold. This will inevitably put up the price to end-consumers.

Employment matters

The new government will be restoring 90-day trial periods for new employees for all businesses and will be repealing the Fair Pay Agreement regime by Christmas 2023. The coalition will also maintain the status quo that contractors who have explicitly signed up for a contracting arrangement cannot challenge their employment status in the Employment Court. ACT negotiated for the removal of median wage requirements from Skilled Migrant Category visas.

The coalition agreements also state there will be “moderate” increases to the minimum wage each year.

Comment

After three years of a one-party government and six years of a left-leaning government, the next three years will be interesting.

It is great to see that the bracket creep problem is finally being addressed in part by government. Fourteen years of wage growth and inflation had meant fulltime workers on the minimum wage were on the verge of being subject to 30% marginal tax rates, while fulltime workers on the living wage were already subject to 30% marginal tax rates. Once the economy improves, it would be good to see further tax threshold changes to take into account inflation in the years prior to 2020.

Some of the changes (notably the residential rental interest deduction changes) are expected to have retrospective impact. Commentators have mentioned that when paying their second instalment of 2024 provisional tax (due 15 January 2024 for most landlords), landlords will need to determine whether they are comfortable paying a reduced amount of provisional tax based on the announcements in the policy, or paying a higher amount of provisional tax based on law as it currently stands. Using a tax pooling intermediary such as TMNZ reduces the risk somewhat as top-up tax can be purchased from the pool at a lower rate of interest than the Inland Revenue use of money interest rate, while surplus tax can be sold to the pool at a higher rate of interest than the Inland Revenue use of money interest rate (all subject to specific rules).

Increased Inland Revenue audit activity makes it important to have your affairs in order. Tools such as short process and binding rulings enable taxpayers to get Inland Revenue sign-off on items where there may be uncertainty (examples include restructuring, property transactions and transfer pricing matters), and therefore reduce risk of unfavourable Inland Revenue audit results.

The retention of the GST on listed services rules will mean a level playing field will exist between the likes of Uber and Airbnb, and traditional taxi companies and hotels, but with added complexity for both the platforms and the underlying service providers in some circumstances.

If you have any queries regarding the government’s planned changes and how they may impact you, please contact your Baker Tilly Staples Rodway advisor.