As expected, the price for the two agreements supporting the National, ACT and New Zealand First Government is a tax policy that has required compromise from the three coalition partners – and we expect more compromises may be needed as some of the finer detail is worked through. The reality of needing to fund tax cuts has also played its part.
As promised by incoming Prime Minister Christopher Luxon, Nicola Willis is our new Minister of Finance. Simon Watts is the Minister of Revenue.
Income tax cuts for individuals
National campaigned on providing tax relief to the “Squeezed Middle” by adjusting the income tax rate brackets and increasing tax credits for low-income earners and families with young children.
Although there were widespread concerns about the ability to deliver on any tax cuts under current fiscal conditions, this was a bottom line for National with Nicola Willis going so far as staking her job as Minister of Finance on it.
While not explicitly confirmed today, we expect that tax brackets will be adjusted with effect from 1 July 2024, as follows:
Although all three parties have the top 39% marginal tax rate in their sights, the Government simply cannot afford to repeal that in the short to medium term. Similarly, there is no money in the kitty to back-track from the Labour Government’s proposed increase (from 33% to 39%) to the trustee tax rate. We expect that neither ACT’s proposal for a flattened two-rate tax system nor NZ First’s proposed exemption for the first $14,000 of income earned were seriously contemplated.
Residential property wins, but will commercial property lose?
The coalition partners have agreed to ACT’s policy to accelerate the rate at which interest deductibility for rental properties is restored. We expect to see deductibility at 60% of interest incurred in 2023/24, increasing to 80% in April 2024/25 and 100% in 2025/26.
While not confirmed today, we expect the bright-line test will be rolled back to two years with effect from 1 July 2024, which would mean properties acquired before 1 July 2022 would no longer subject to it. Although ACT campaigned on a complete repeal, that had no realistic prospects given the bright-line test was introduced by the previous National-led Government.
The position of commercial property owners is less clear. National proposed removal of the so-called “tax break” of depreciation deductions for commercial buildings with effect from the 2024/25 income year. Strong lobbying has opposed that change, with ACT also opposed. Whether or not commercial property depreciation is removed was not confirmed today.
Foreign Buyer Tax bites the dust as does repeal of the “App tax”
National’s proposal to partially repeal the foreign buyer ban to allow non-residents to purchase residential properties over $2 million and introduce a 15% foreign buyer tax on such purchases was arguably the most controversial of its tax policies.
There was widespread scepticism as to National’s projections of the proposal’s revenue impact (estimated to be at least $715m per year, totalling $3 billion, over the next four years). While ACT may have been supportive, NZ First was not so the foreign buyer tax joins the likes of capital gains and wealth taxes (at least for now) on the scrapheap.
National campaigned to repeal of the “App Tax” that is set to take effect from 1 April 2024. That repeal will not now go ahead.
We still expect to see the removal of the Auckland regional fuel tax, the clean car discount and the “Ute Tax”.
A big question remains largely unanswered – where will revenue come from to fund the tax cuts? Prime Minister Luxon indicated we will see a combination of spending reprioritisation and additional revenue measures. What those additional measures might look like remains unclear, although looks set to include an anticipated return on more funding for tax audit activity.
Where to from here?
The real work begins now that the coalition arrangements have been finalised. Inland Revenue and Treasury will be under enormous pressure to deliver at speed the legislation and administrative framework that is required to develop and implement the agreed policies. It is likely that any immediate tax policy priorities will be implemented by way of Supplementary Order Papers to the lapsed (but soon to be resurrected) Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Bill, with no/little time for public consultation. The Generic Tax Policy Process may well prove to be the biggest victim of this coalition agreement.