Wolters Kluwer Budget Report 2023

2023 New Zealand

Budget Report

Thursday, 18 May

This Budget Report has been prepared by Wolters Kluwer in-house analysts with the assistance of specialist practitioners from Bell Gully. It covers announcements of interest to tax practitioners and the business community.

Wolters Kluwer

Wolters Kluwer (WKL) is a global leader in professional information, software solutions, and services for the health, tax & accounting, governance, risk & compliance, and legal & regulatory sectors. We help our customers make critical decisions every day by providing expert solutions that combine deep domain knowledge with specialised technology and services.

Bell Gully

Bell Gully is a leading New Zealand corporate law firm with extensive commercial, corporate, taxation, finance, banking, litigation and commercial property experience. We are consistently recognised as the market leading legal tax team in New Zealand. We provide general corporate tax advice, including advice on corporate restructuring, acquisitions and divestments, securitisation and financing, help clients resolve tax disputes at all levels and advise them on indirect tax, customs and excise matters. Our clients rely on our tax specialists for their technical excellence, practical guidance and responsiveness in time critical situations.

In this Budget Report

Prepared by Wolters Kluwer in-house analysts with the assistance of specialist practitioners from Bell Gully.

Budget 2023 – trustee tax rate heading north!

The headline tax change in Budget 2023 is the raising of the trustee tax rate from 33% to 39% — effectively bringing the trustee rate in line with the top marginal tax rate. The increased rate takes effect from the 2024–25 income year.

Noting that some taxpayers had taken advantage of the misalignment in tax rates once the top tax was raised in 2021, the Minister of Revenue pointed to the Inland Revenue’s recent High Wealth Individuals research:

“New information from Inland Revenue has shown an almost 50% spike in income subject to the trustee rate, from $11.4 billion in the 2020 tax year to $17.1 billion in the 2021 tax year.”

The legislation will contain measures to ensure that deceased estates and trusts for disabled persons are not subject to the 39% rate.

Tax cuts, and any moves to change the tax thresholds, have been firmly ruled out on the grounds that any relaxation of tax rates would fuel inflation.

The gaming sector is given a boost with the 20% tax rebate for video game development. The 20% rebate will be available for game development studios who qualify and meet the minimum $250,000 expenditure threshold per year. Individual studios will be able to receive up to $3 million per year in rebate funding, and the scheme will be backdated to 1 April 2023.

Infrastructure

Predictably, New Zealand’s ageing infrastructure is a central focus for much of the Budget spend, with $71 billion committed over the next 5 years to new and existing infrastructure projects over schools, hospitals, public housing, rail and road networks. An additional $6 billion is allocated for a National Resilience Plan with a focus on rebuilding after weather events.

Other key announcements include:

„ Education

extending the 20-hours-free early childhood education (ECE) currently available to 3–5-year-olds to include 2-year-olds (at a cost of $1.2 billion over 4 years)

pay parity for ECE teachers

„ Health

removing the $5 prescription charge for all New Zealanders from 1 July 2023 (at a cost of $618.6 million over 4 years)

free public transport fares for children under 13 and half-price fares for those under 25 from 1 July 2023

Economic outlook

Treasury’s executive summary notes that:

„ Treasury no longer anticipates a recession during 2023, although growth remains low and labour market conditions will begin to deteriorate

„ the economy is forecast to grow by 3.2% in the year to June 2023 but slows to 1.0% in the June 2024 year, and averaging 2.7% thereafter

„ net debt is expected to peak as a percentage of GDP in 2023–24 at 22.0%

„ a surplus is forecast for the 2024–25 financial year

„ inflation peaked at 7.3% in June 2022 and is forecast to fall to 4.5% by the end of 2023

Tax changes

Trustee tax rate

Ministerial statement

Budget 2023 also includes tax changes that improve the integrity of our tax system by bringing the trustee tax rate in line with the top personal tax rate.

The change will help ensure that the top marginal tax rate applies more comprehensively to individuals with income over $180,000.

This approach was recommended by officials when the top income tax rate was increased. Ministers undertook to monitor the situation and we are now acting.

It is interesting to note that just 5% of trusts accounted for 78% of income in the 2021 tax year. This change addresses a potential loophole while also ensuring more equity in our tax system.

Editorial comment

This measure proposes that the rate of tax on trustee income will increase from 33% to 39% with effect from 1 April 2024.

The rationale of the proposal obviously is to buttress the 39% rate applicable to income over $180,000. Absent alignment of the trustee rate with the top personal tax rate, a tax advantage would be obtained if an individual

potentially exposed to the 39% rate could earn income through a trust.

As part of the change, it is proposed that beneficiary income derived by certain private companies will be taxed as trustee oncome. This can be seen as an anti-avoidance measure intended to ensure that the new 39% rate for trustee income cannot be sidestepped by distributing trust income to a company taxed at a 28% rate.

Two exceptions are proposed to prevent overreach. One is for the income of a deceased estate and the other is in relation to a trust established for beneficiaries who are disabled.

Under the first of the exceptions, the Inland Revenue’s press release indicates that there will be a 12-month grace period for the taxation of estate income. Income derived during the 12-month period following the date of death will be taxed at the personal tax rate of the deceased. This should ensure that income not able to be distributed to estate beneficiaries during the 12-month period (because incomplete administration of the estate does not permit distribution) does not become exposed to the 39% trustee tax rate.

The Inland Revenue’s press release indicates that the measure is projected to raise approximately $350 million per annum. The measure is incorporated in a Budget night tax bill (see further below).

Video game developer rebate

Ministerial statement

The Game Development Sector is a growing part of our economy. In 2022 it contributed $400 million to GDP and is the source of high-value jobs that are driving export returns.

The sector is an internationally competitive one, and we are at risk of losing our talent overseas. Budget 2023 includes $160 million to establish a 20% rebate for video game developers, which will help grow and protect New Zealand’s domestic game-development sector. Individual game developers will be able to access up to $3 million as part of the scheme.

Editorial comment

The details released in the Budget 2023 papers indicate that the criteria for eligibility include a minimum of $250,000 of eligible expenditure per annum. If eligible, the video game developer will be able to receive up to $3 million per annum in rebate funding. The rebate is scheduled to commence with effect from 1 April 2023.

BEPS Editorial comment

The Budget papers project additional tax revenues of $25 million for 2027 in relation to BEPS Pillar Two. Under BEPS Pillar Two, a large multinational enterprise operating in New Zealand may be subject to additional New Zealand tax where the worldwide income of the enterprise bears an effective tax rate of less than 15%.

Clearly the Budget papers envisage the adoption of BEPS Pillar Two that incorporates a minimum tax rate of 15% for entities subject to the regime.

The Budget papers refer to another BEPS topic. This concerns a possible digital services tax (DST).

The papers note that the 136 countries that have input on the OECD’s DST project agreed to a moratorium on introduction of such a tax until 31 December 2023. This was to enable the OECD-led Pillar One Amount A solution a chance to be successfully implemented. In that regard, the Budget papers note that a multilateral convention is currently being worked on for Pillar One Amount A with potential for being ready for signing in mid-2023. The papers add that the government may consider a DST if the OECD solution falters.

Infrastructure planning

Ministerial statement

„ $6 billion initial funding for a National Resilience Plan to focus on building back better from recent weather events

„ $100 million for the new infrastructure delivery agency — Rau Paenga

„ Ensuring New Zealand’s infrastructure is resilient and safe

„ Government’s Infrastructure Action Plan released

The Government is setting aside $6 billion to build back better with greater resilience from the recent Auckland floods and Cyclone Gabrielle, and protect New Zealanders from increasingly severe and unpredictable weather events.

Editorial comment

Budget 2023 provides funding for immediate recovery by regions which suffered major damage in recent months. The unwelcome arrival of Cyclone Gabrielle brought the need for a strong disaster protection and recovery programme into sharp focus. A National Resilience Plan aims to ensure communities will not in future be isolated by loss of communications, electricity and roading access.

A new agency, Rau Paenga (Central Crown Infrastructure Delivery Agency) will receive $100 million over 5 years to help government organisations deliver infrastructure projects. This agency formerly functioned in relation to the Christchurch rebuild. Experience gained in that capacity is expected to aid organisations facing major infrastructure tasks for the first time.

Another step sees the release of the Infrastructure Action Plan by the government. The plan is a response to the New Zealand Infrastructure Strategy (Rautaki Hanganga o Aotearoa) which aims to transform New Zealand’s infrastructure over the next 30 years.

6 2023 Budget Report

Minister Megan Woods noted the areas in which the plan will operate:

„ infrastructure, whether rebuilt or newly built, that is resilient when climate change, natural disasters, and extreme weather events occur

„ strengthened infrastructure investment decision-making and governance

„ strengthened partnerships with Māori, local government, and the private sector, and

„ capability of the government and the infrastructure workforce to deliver and maintain infrastructure.

Electric vehicle (EV) charging strategy

Ministerial statement

“We’re making sure there are more locations for people to ‘tank up’ their EVs, with a nationwide network of public electric vehicle charging hubs, with multiple fast electric vehicle chargers”.

“We’ll also ensure rural and regional communities have more options to charge up EVs so a lack of chargers is no longer seen as a barrier to electric vehicle adoption as we decarbonise our energy system”.

Editorial comment

According to the Ministry of Transport, as at March 2022, there were 38,117 EVs in New Zealand. However, the uptake of EVs is likely to have accelerated over the last year especially considering the government’s changes to the Clean Car Discount, allowing persons to qualify for a rebate on vehicles with zero or low emissions from April 2022. (Previously, only the first registered person of an eligible vehicle qualified for a rebate).

However, until now, many households may have been reluctant to switch their fossil fuel vehicle to an EV due to uncertainty regarding access to charging facilities when needed. The proposal to expand New Zealand’s EV charging network in Budget 2023 will resolve this uncertainty.

Budget 2023 delivers $120 million over 4 years to fund the expansion of New Zealand’s nationwide EV charging infrastructure network. The government has announced that it will be partnering with the private sector to build thousands of new EV chargers across the country.

Implementation of the EV charging strategy will see:

„ an increase in the national network of EV charging hubs (which contain up to 20 EV chargers), by adding 25 EV charging hubs

„ EV charging hubs every 150 to 200 kilometres on main highways

„ EV chargers for every 20 to 40 EVs in urban areas, and

„ EV chargers at community facilities for all settlements with 2,000 or more people.

The EV charging strategy is a welcome development. Implementation of the EV charging strategy will increase confidence among households who are thinking of buying an EV. This should help facilitate the transition away from fossil fuel vehicles and towards EVs.

This increased uptake should support the government’s target of reaching net zero carbon emissions by 2050, noting that emissions from New Zealand’s light vehicle fleet are the single largest source of transport emissions in New Zealand.

Furthermore, the increased uptake of EVs should reduce New Zealand’s reliance on global fossil fuel markets and should help reduce inflationary pressures. Minister Woods notes that switching to EVs would “make a big difference for household budgets”.

Science hubs developed

Ministerial statement

„ Three new multi-institution hubs to increase collaboration in research and science

„ Major investment in science and scientists

„ Fellowships and funding to develop more than 260 future science leaders

„ Budget 2023 positions the New Zealand economy for a low-emissions, high-wage future with a major investment into our science, digital and horticultural technology sectors.

Editorial comment

The Government has announced 3 science hubs will be created covering:

„ climate change and disaster resilience

„ health and pandemic readiness, and

„ technology and innovation.

For the first of these, there is to be a national centre for research on climate, oceans and hazards. Participating bodies include the National Centre for Water and Atmospheric Research, the Institute of Geological and Nuclear Sciences Limited and universities.

The second initiative involves a “health and wellbeing corridor”, part of which will have a new pandemic centre designed to deal with public health emergencies. Information is to be shared between universities and other relevant bodies such as the Institute of Environmental Science and Research and Callaghan Innovation.

For the third hub, a research, technology and innovation park is planned for Gracefield, Lower Hutt, with an emphasis on sharing expert research in advanced manufacturing and materials, energy futures and biotechnology. 8 2023 Budget

Backing up this development is a $55.2 million fund for research fellowships to be undertaken by PhD students who will be New Zealand’s future science leaders.

All 3 science hubs are to be in the Wellington area. The Minister referred to physical space and facilities being provided as part of the programme.

Ministerial statement

“We will be one of the first non-European countries to offer our researchers access to the European Union’s largest-ever research and innovation programme on equal terms with European scientists.”

Editorial comment

The European Union science centre, Horizon Europe, is the EU’s programme for science and innovation. It has funding of €95.5 billion. Climate change is a principal target along with sustainable development. New Zealand researchers will have access to this body of learning, but it is envisaged they will also contribute by partnering their European colleagues.

Budget 2023 provides $37.6 million over 4 years for New Zealand’s association with Horizon Europe.

Economic and fiscal factors

Editorial comment

The Budget papers touch on several economic and fiscal topics. Brief reference may be made to some of the more significant matters.

It is anticipated that the economy will not enter into a recession during 2023. It is noted that it is expected that there will be around $9 billion of cyclone-related rebuild and recovery investment activity over the period to 30 June 2027 (with an additional $1 billion after 2027). The rebuild activity will support demand with a consequent increase in GDP.

The papers note that the estimated cost of the North Island weather events ranges from $9 billion to $14.5 billion for the damage to physical assets. In addition, the loss of output is estimated to be in the range of $400 million to $600 million.

Interest rates are expected to remain elevated. The current official cash rate of 5.25% is expected to remain at that rate for the remainder of 2023 before starting to ease.

The Budget papers observe that the labour market currently is very tight as reflected in the current unemployment rate of 3.4%. Slow economic growth is expected to reduce labour demand over the next 2 years, causing the unemployment rate to rise to 5.3% by late 2024.

The sensitive area of house prices also attracts comment. Higher interest rates and weaker wage growth are expected to lead to a further decline in house prices, which have fallen as at 31 March 2023 by 16.7% from their November 2021 peak. A further decline of 4.6% through to mid-2024 is predicted.

The housing sector is also expected to experience a downturn in investment. Residential investment is expected to fall a further 3.6% over 2023. It is observed that falling house prices and elevated construction costs have reduced residential construction. Any net increase in net migration (forecast at 25,000 per annum) is expected to have a limited impact on residential construction in light of the significant increase in housing supply over 2021 and 2022.

The current account deficit, as the measure of the difference between net income flows arising from the trade in goods and services, and from investments at home and abroad, was at a record 8.9% of GDP for the year to 31 December 2022. The stock of net foreign liabilities reached 50.7% of GDP as at that date.

It is anticipated that the deterioration in the current account deficit will reverse. The recovery in tourism together with the decline in global inflation (particularly in oil and food) leading to lower import values are factors that should ameliorate the deterioration.

The fiscal outlook projects total Crown revenue for the year to 30 June 2023 to total $155.6 billion. Tax revenue contributes $114.6 billion to that total. The tax rate can be broken down to comprising 70% from individuals and corporates with the remaining 30% from GST and other indirect taxes (eg customs duties).

Some $22.6 billion is derived from the sale of goods and services by entities such as stated-owned enterprises. The commodities sold include, in particular, electricity and air travel.

Core Crown tax revenue is forecast to grow steadily. For example, for the period 2023 to 2027, interest revenue is expected to grow by $3.1 billion due to the impact of higher interest rates and the growth in ACC levies. In addition, source deductions (mainly PAYE) are forecast to grow at a rate of $3.9 billion per annum on account of wage growth and fiscal drag. GST is expected to increase by $2 billion for the year to 30 June 2023 with a modest increase of $400 million for corporate and other taxes for the same period.

On the expenditure side, core Crown expenses are expected to remain elevated at $128.2 billion (being 32.5% of GDP) for the year to 30 June 2023. Core Crown finance costs are expected to increase from $2.9 billion for the year to 30 June 2021 to $6.3 billion for the year to 30 June 2023. Benefit expenses such as for New Zealand superannuation are expected to increase by $2.9 billion for the year to 30 June 2023.

In total, expenses are expected to exceed revenue earned by $6.4 billion. At the same time, significant revaluation gains are anticipated. Predicted is a net gain on financial instruments of $5.9 billion, primarily from investment gains achieved by the portfolios held by the ACC and the New Zealand Superannuation fund. A gain of $3.4 billion is also forecast from a revaluation of the NZ ETS liability.

To cover the Crown’s cash deficit, the government will continue with its bond programme. Over the period 2023 to 2027, the bond programme is forecast to raise $142.3 billion.

Social welfare measures

Some of the headline social welfare measures introduced in Budget 2023 include:

1. Free and discounted public transport

„ From 1 July 2023, children aged between 5 to 12 will incur no fares while travelling on public transport. In addition, fares for passengers between 13 and 24 will be charged at half price. Along with existing programs, almost 1.6 million New Zealanders should be saving money by travelling on public transport. This will cost the government $327 million over 4 years.

2. Scrapping prescription co-payments

„ Removal of the $5 co-payment for prescription medicines which will cost $619 million over the next 4 years. The change is estimated to impact 3 million New Zealanders. In 2021–22, an estimated 135,000 adults did not collect their prescriptions due to cost being a barrier, especially for low-income families. This should ensure that New Zealanders are able to access the medicines prescribed by their doctors.

3. Extending early childhood education (ECE) subsidy

„ Currently, the subsidy of 20 hours of ECE is available for 3- to 5-year-olds. Budget 2023 extends this to include 2-year olds. At a cost of $1.2 billion over 4 years, the extension of the ECE subsidy should result in families receiving childcare subsidies saving an estimated $133.20 a week in childcare costs where the child attends ECE for at least 20 hours a week.

4. Paid parental leave KiwiSaver contributions

„ Paid parental leave recipients will receive a matching KiwiSaver ‘employer’ contribution from the government. Payment of the ‘employer’ contribution recognises the unpaid nature of childcare responsibilities and incentivises parents to save for their retirement. Women on average have lower KiwiSaver balances than men and one cause is because of parenting. The payment of the ‘employer’ contribution helps address this gender inequity. This will cost the government $20 million over 4 years.

Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill (the Multinational Tax Bill)

Ministerial statement

“Taken together, the underlying theme of the measure in this bill is adjusting the tax system to achieve fairer results for taxpayers”.

Editorial comment

On the night of Budget 2023, the Multinational Tax Bill was released.

In addition to the headline tax changes including the increase in the trustee tax rate to 39% and the BEPS changes, the Multinational Tax Bill proposes to introduce the following:

1. Rollover relief for certain business assets destroyed by the North Island floods.

„ Profits and depreciation recovery income arising when insurance or compensation proceeds are received for business assets destroyed (irreparably damaged / useless for income earning purposes) by the North Island flooding events may be deferred provided the assets are replaced. Normally such insurance or compensation proceeds would give rise to depreciation recovery income on a depreciable asset or income on an asset held on revenue account.

„ This rollover relief is similar to that provided for assets destroyed by the Canterbury and Hurunui-Kaikoura earthquakes. However, unlike the Canterbury and Hurunui-Kaikoura tax relief, this rollover relief for the North Island floods does not include a requirement that the replacement land and buildings be located in the same region in New Zealand.

„ The taxpayer will need to elect to apply the rollover relief provisions and notify the Commissioner of their election. This must be done by the date their tax return is required to be filed for each income year that they elect to use the rollover relief.

„ The rollover relief is effective for the 2022/23 and later income years, ceasing in the 2027/28 income year.

2. Double tax agreement (DTA) source rule.

„ Amendments to the DTA source rule would ensure that this rule does not apply to: technical services fees provided by a non-resident and performed outside New Zealand (which arise in relation to New Zealand’s DTA’s with India, Fiji and Malaysia because of a special “fees for technical services” provision in those DTA’s); and certain payments made to another contracting state but connected to a permanent establishment in a third state.

„ The amendment is effective for income years commencing on or after 1 July 2018.

3. Transitional residents holding New Zealand financial arrangements.

„ Amendments would create a deemed acquisition of New Zealand sourced financial arrangements held by a non-resident when they become New Zealand transitional resident. Currently, any base price adjustment at the end of that financial arrangement will incorrectly include gains and losses in the period before the person became a New Zealand resident.

„ This particularly impacts immigrants who are required to hold New Zealand sourced financial arrangements (such as New Zealand Government bonds) to meet their visa requirements and acquire these prior to moving to New Zealand.

4. Backdated ACC and MSD entitlements.

„ Alternative tax treatment for backdated ACC and MSD entitlements paid on or after 1 April 2024. The alternative treatment is designed to reflect the current unfairness where a person is artificially pushed into a higher tax bracket for a single year on the payment of those backdated amounts.

5. RWT-exempt status of charitable entities.

„ A remedial provision provides that all entities registered under the Charities Act 2005 automatically have RWT-exempt status for the duration of their registration. Currently, the legislation only specifically provides RWT-exempt status for charitable trusts registered under the Charities Act 2005.

Tax Principles Reporting Bill

Ministerial statement

“Inland Revenue’s recent High-Wealth Individuals Research Project revealed a startling disparity between the effective tax rates paid by the super-wealthy compared with other New Zealanders.”

“This bill continues the good work of shining a light on the fairness of our tax system. The public deserves to have this information, so people can use it to assess claims made by politicians about tax fairness.”

Editorial comment

In addition to the Multinational Tax Bill, the Tax Principles Reporting Bill was also released on the night of Budget 2023.

The Tax Principles Reporting Bill proposes to introduce a set of generally accepted tax principles and requires that the Commissioner reports (in the form of an interim report annually or a full report triennially) on how the tax system is operating, as measured against those principles.

The generally accepted tax principles are consistent with those that have been articulated in several tax working group reviews both in New Zealand and overseas. The taxation principles put forward in the Tax Principles Reporting Bill include:

„ Horizontal and vertical equity

„ Efficiency

„ Revenue integrity

„ Certainty and predictability

„ Flexibility and adaptability, and

„ Compliance and administration costs.

The objective of the Tax Principles Reporting Bill is to increase the public’s understanding of how the New Zealand tax system operates and to contribute to informed debate and discussion about the future of the tax system.

Contact information:

Wolters Kluwer New Zealand

Level 2, 8-12 The Promenade

Takapuna, Auckland 0622

New Zealand

Phone: 0800 500 224

Email: nz-marketing@wolterskluwer.com

Please visit www.wolterskluwer.co.nz for more information.