Budget 2021 Wishlist
Eyes on Tax - What might we wish for?
Our BDO Eyes on Tax have collectively (and separately, we don’t all necessarily agree) had a think about what we might like to see changed, tweaked, adjusted, or added to our current tax system.
While we don’t expect to see too much on the tax front in this year’s Budget (tax changes no longer wait for Budget Day), it doesn’t hurt to start conversations and pause to Rethink. Here are a few reflections to get the ball rolling:
In calculating tax depreciation, we go through a right old process, trying to work out which rate applies to our industrial, cordless, self-charging, self-driven vacuum cleaner. Is there merit in looking at a flat rate of depreciation that applies to all, or most, items of depreciable property – perhaps a 20% diminishing value?
Fringe Benefit Tax
It doesn’t feel quite right that the 39% tax rate is to apply to only a small proportion of our population yet the FBT rules operate on the underlying assumption that all employees are 39 percenters.
The simple flat rate FBT calculation percentage is based on employees earning over $180,000. You’ll have to go through additional compliance and apply the alternate rate to prevent substantial over taxation. It’s a process that can be followed, but it is more complex. Can we go back to assuming a lower flat FBT rate, with an adjustment up for those higher rate taxpayers?
Have some of the land taxing provisions lost their teeth with a 10-year bright-line period, and others become outdated such as the semi-permanent tainting rule? For example, the 10-year tainting provisions are now largely redundant for residential land.
There are also many accidental ‘bright-liners’ where residential property owners get caught by the bright-line rule in family restructuring situations. These types of transactions are not ‘speculation’ which the rules were introduced to address – they are typical family restructures, which should be carved out (or roll over relief provided) from the bright-line rules.
Is it time to completely Rethink the land rules?
Interest Limitation Rule
Just don’t do it.
It is proposed that interest is non-deductible from 1 October 2021 for residential investment property acquired on or after 27 March 2021. Interest deductions will be phased out for existing residential investment property, and it is proposed that the rules won’t apply to “new builds”, with that definition still being designed.
Like Inland Revenue, we don’t favour this move and suggest that other levers are used to achieve the desired ‘demand side’ objectives. What we have here is retrospective change, despite the phasing out and carve out for “new builds”.
An alternative approach might be to preserve interest deductions for residential investment properties owned at the time the legislation was introduced.
Could a stamp duty be a better demand dampener, with perhaps an exemption for first time home buyers and a higher rate for foreign investment (as is applied in Australia)?
Tax Loss Carry-Back
Make this rule permanent. Allow tax losses to be carried back for a single year on a permanent basis.
As a general rule, employees are not allowed deductions for expenses incurred in earning their wage or salary. One of the Covid relief measures acknowledged that an employer may reimburse an employee, tax-free, for reasonable costs incurred in working from home. We liked this.
In light of new working (from home) practices, we question whether an employee should be able to claim a deduction for reasonable costs incurred from working from home, rather than relying on their employer to provide a reimbursement. Perhaps IR should allow a standard amount to be claimed?
Low Value Asset Write-off – Increase the Threshold
Businesses are now permitted an immediate deduction for the cost of an asset, broadly where its cost does not exceed $1,000. Our friends in Australia are working with a $150,000 threshold at the moment and the UK has introduced turbo charged deductions for qualifying assets (130% deductions), immediate write-off for plant and machinery investments not exceeding GBP1m and a 50% first year allowance (for certain, qualifying assets).
We appreciate the very different economies and set of circumstances we are working with, but $1,000 in comparison seems a little miserly. At the very least re-introduce the $5,000 limit.
Fair Dividend Rate
Adjust the 5% deemed return down to 3%. Is this more reflective of an expected/deemed risk-free rate of return? New Zealand Government 10-year bonds are running at around 2%.
Increase the mandatory GST registration threshold. Currently, if turnover exceeds $60,000 in a 12-month period, GST registration is mandatory. This may catch a lot of people out, especially in the Air BnB market.
Close Enough is Good Enough
Tax is becoming increasingly complex, especially for the small and medium sized businesses that are the backbone of the New Zealand economy, and who are already struggling under everyday pressures of running a business. We’d encourage the Government to apply a ‘close enough is good enough’ lens when designing and implementing tax policies that impact this sector.
There are many more things that our team is thinking about, with the common themes emerging on simplification and fairness, especially in the small and medium sized business space. And the more we simplify, the easier it will be to create a digital tax return platform, but that’s a discussion for another day.