While the 2011 picture looks bleak – with a forecast operating deficit of $16.7 billion – Budget 2011’s focus is on pushing the economy ahead and back into the black by 2014/15.

As predicted in our May 2011 Tax Today, Budget 2011’s focus is on the rebuilding of Christchurch – with the establishment of a Canterbury Earthquake Recovery Fund – and encouraging growth in the economy.

The majority of the tax changes in Budget 2011 were signalled in advance, including changes to KiwiSaver and Working for Families. Changes are also made to the student loans scheme, and measures to make the tax system fairer have been flagged.

FISCAL IMPACT – GETTING BACK IN BLACK

The forecast 2011 operating deficit of $16.7 billion is $5.6 billion worse than that foreshadowed at the Half Year Economic and Fiscal Update announced in December 2010 – largely as a result of the Christchurch earthquakes. However, on the flip-side, Budget 2011 forecasts an operating surplus of $1.3 billion in 2014/15 – one year earlier than was forecast at the 2010 Half Year Economic and Fiscal Update, and contributions to the NZ Superannuation Fund will resume in 2016/17, two years earlier than expected. Net core Crown debt is expected to peak at 29.6% of GDP in 2014/15 and then decline steadily to be eliminated by 2024.

As noted by the Hon Bill English during the Budget lock-up, the Government is borrowing $380 million per week. Budget 2011 is expected to reduce this to $100 million per week over the next three years.

To achieve these goals the Government is planning on rebalancing the economy towards the tradable sector, extending the Mixed Ownership Model to four State-owned electricity companies and reducing its majority shareholding in Air New Zealand, as well as better targeting of programmes such as Working for Families (WfF), KiwiSaver and student loans. It has also made a commitment to infrastructure projects including ultra-fast broadband.

Budget 2011 seeks $5.2 billion of operating efficiency savings in the public sector over five years. Almost $4 billion of these savings are being directed to new initiatives, mostly in health and education frontline services, and the remaining savings will be used to reduce the deficit.

Extending the Mixed Ownership Model (partial privatisation) is expected to realise between $5 billion and $7 billion.

Changes to programmes such as WfF and KiwiSaver are expected to produce savings over four years of $448 million and $2.6 billion respectively. Changes to the student loan scheme are expected to produce savings of $447 million over five years.

CONCLUSION

There weren’t many surprises in Budget 2011. From a tax point of view, one unexpected tweak to the KiwiSaver regime will see the tax-free treatment of certain employer contributions being axed from 1 April 2012.

Initial reaction from Standard & Poors is that Budget 2011 is “consistent with the assumptions that feed into our sovereign ratings on New Zealand”. Standard & Poors, which has New Zealand’s rating on negative outlook, signalled that achieving stated fiscal targets will be an important component of avoiding a downgrade.

Many of the Budget 2011 changes do not take effect until after the November election, thereby giving people a chance to vote on them.

Alan Scott
Partner

This change has the greatest impact on unfair dismissal qualifying periods.  Businesses that are no longer regarded as small businesses will not be able to rely on the small business unfair dismissal exemption.  This exemption stipulates that an employee must have been employed for at least 12 months before qualifying for unfair dismissal coverage.  Instead, employees will able to qualify for such coverage in six months.

It is important to determine whether your business qualifies as a ‘small business’.  If it does not, seek professional advice in order to come up with the best employment strategy.

• Every employer will be required to keep a copy of every signed employment agreement from 1 July 2011.  Failure to produce a copy of the agreement can result in a fine being imposed.

• A 90-day trial period is introduced for new employees.  During these 90 days, the employer may dismiss the employees without them having a right to a grievance complaint, but only if all legislative requirements have been followed precisely.

• The Employment Relations Authority will apply a new test in determining whether the dismissal of an employee was justified.  The test is what a ‘fair and reasonable employer could have done in all the circumstances’, thus widening the factors that may be taken into account.

An increase in assessments and audits, as well as collaboration with international taxation departments this year, is expected to reveal a high number of New Zealand residents currently involved in tax evasion. Those caught will be subject to shortfall penalties of up to 150%, and may even face prosecution.

Voluntary disclosure by residents with thus far unreported offshore income will result in substantially lower penalties, and will help New Zealand residents to avoid legal complications. It is recommended that any residents currently receiving unreported income from an international source speak to their accountant about the best way to volunteer the necessary information to Inland Revenue as soon as possible.

A non-payment penalty is 10 % of the amount outstanding and applies when non-payment continues after the IRD issues a notification. A further 10 % penalty will be added each month the debt remains outstanding.

Employers experiencing financial difficulties are advised to contact the IRD before the due date to set up an instalment arrangement to avoid penalties. Once the amount outstanding has been paid in full, or an instalment arrangement has been set up, the last 10 % penalty will automatically be reduced to 5 %.

Employers are also reminded to file their EMS by the due date, or risk paying a late filing penalty of $250 for each schedule received late.

New RWT, secondary tax, RSCT and extra pay rates from 1 April 2010
$0 – $14,000
12.5%

$14,001 – $48,000
21%

$48,001 – $70,000
33%

$70,001 and over
38%

Current RWT deductions at the rate of 19.5 % will automatically be moved to the new 21% rate – employees with an expected income under $14,001 or over $48,000 should change their RWT rate accordingly. Incorrect RWT rates might lead to unwanted tax bills.

New secondary tax codes and thresholds from 1 April 2010
$0 – $14,000
Tax code (no student loan): SB

$14,001 – $48,000
Tax code (no student loan): S
Tax code (with student loan): S SL

$48,001 – $70,000
Tax code (no student loan): SH
Tax code (with student loan): SH SL

$70,001 and over
Tax code (no student loan): ST
Tax code (with student loan): ST SL

Employees can change their secondary tax codes by obtaining a Tax code declaration form (IR330) from their employer. If you use payroll software, these new rates should be incorporated into your payroll package for pay periods ending on or after 1 April 2010.

• relocation is required as a result of new employment or a change of location.
• the employee’s existing home is not within reasonable travelling distance
• the expensive is part of the eligible relocation expensive list
• the payment is no more than the actual expenditure
• the expenditure occurred before the end of the tax year during which the employee relocated

Overtime meal allowances are tax-free when:

• the employee’s contract or employer’s policies specify overtime meal allowances
• the payment is no more than the actual cost incurred
• the employee has worked at least two hours of overtime

Sustenance allowances are tax-free when:

• there is an established policy of paying sustenance allowance
• the employee works a minimum of 7 hours per day
• the employee is required to work outdoors, away from their employment or is required to undertake a long period of physical activity in travelling
• it is not practical to provide sufficient sustenance to the employee

Under IFRS, forecasts should include information about underlying assumptions that drive topline numbers, and asset revaluations and impairments should include an explanation of methodology. IFRS aims to provide the investor with an insight into management thought and company performance.

The International Financial Reporting Standards for financial reporting purposes were adopted in New Zealand in 2005, and made mandatory from periods beginning on or after 1 January 2007 for entities that have to comply with generally accepted accounting practice (GAAP).