The Big Tax Shake-Up

The results of the special votes count are finally out, and we wait as the exact form of the expected National – Act – NZ First coalition Government continues to be negotiated. Tax was hotly contested in this year’s election with this coalition likely to shake things up. But the question is in what way exactly? We have focused in on four potential changes: personal income tax cuts, residential property rules, depreciation on commercial property, and online casino gambling.

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Personal income tax cuts

?All three parties are in favour of reductions in personal income taxes. Of course, they all want this done in different ways. National and NZF want to index tax rates to inflation. NZF wants to start this as early as 1 April 2024, and for adjustments to be made every three years. National’s policy is for new personal income tax rates to take effect from 1 July 2024. The proposed new personal income tax rates are:

·??????? 10.5% up to $15,600

·??????? 17.5% on $15,601 to $53,500

·??????? 30% on $53,501 to $78,100

·??????? 33% on $78,101 to $180,000

·??????? 39% on $180,001+

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NZF wants to push tax cuts even further by proposing to make the lowest income tax bracket (currently $14,000 pa) tax-free no later than 1 April 2027.

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ACT’s take on tax cuts is more radical compared to the other two parties. ACT’s most recent proposals include a gradual decrease of the number of tax rates and a reversal of the highest 39 per cent rate introduced by the previous Labour Government. By 2026/2027, ACT envisions having only three tax rates with the highest rate set at 33% for those earning an annual salary of 180,000 or more. It can be remembered that ACT initially proposed a two-rate system but re-jigged their plans after further analysis of the state of the country’s books in the lead up to the election.? It should also be remembered that during the election campaign, ACT expressed a concern about introducing income tax cuts too quickly and adding fuel to the current cost of living crisis fire.

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So it seems almost certain that some measure of personal income tax relief is on the horizon in the short to medium term.? When these will kick in, how much the cuts will be and whether indexation of income tax rate brackets will be legislated all remains to be seen.?

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Residential Property

?There is consensus all across all three parties that interest deductibility should be reintroduced and that the bright-line test rules should be rolled back. National is proposing a two-year bright line test for residential property and interest deductibility for residential property to be phased in. Properties acquired before July 2022 if sold after July 2024, will not be subject to the bright-line test. NZF also supports reinstating interest tax deductibility. ACT is proposing to fully abolish the bright-line test and reinstate interest deductibility immediately.? It therefore seems inevitable that interest deductibility for residential property will be re-introduced at some point in time and that the 10-year bright-line will be reduced.? Again, it seems to be a question of when.

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As was discussed extensively during the election campaign, National is proposing to repeal the foreign buyer ban on houses sold for more than $2m but with a 15% foreign buyers' tax on the purchase. Foreign buyer ban retained for properties less than $2m and sensitive land tests are proposed to be retained. The views of ACT and NZF with respect to this policy are unknown, but the largely economically nationalist view of NZF casts some doubt on whether they would be willing to sign up to an easing of foreign ownership restrictions.

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Depreciation on Commercial Buildings

?National is proposing to end depreciation for commercial buildings. ACT wants these deductions to remain, while NZ First position on this is unclear. Depreciation of non-residential buildings was re-introduced in 2020 as part of a temporary COVID-19 relief for businesses. Interestingly, the Labour Government also went into the election with the same policy.? We therefore expect that the repeal of depreciation on commercial buildings is inevitable.

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Online Gambling

National’s pre-election tax policies included a proposal that would require online casino gambling operators to register and report their earnings for income tax purposes. These proposals came from the perceived imbalance between domestic and foreign gambling operators. This is because domestic casinos are also required not only to account for GST but also to pay income tax, and other levies. If similar tax treatment on domestic gambling operators is also introduced to foreign gambling operators, then foreign operators will be subject to a company income tax rate of 28% and duties of 4% on gross profits. The proposal also indicates that foreign casinos will be geo-blocked if they do not comply with the proposed reporting and tax obligations. NZF is opposed to this proposal. NZF’s position during the campaign was that this policy will inadvertently boost the profits of offshore wagering corporations, at the expense of the funding of NZ racing, sport, and the community. National will have to arm wrestle with NZF on this, especially if National are expecting to collect NZ$179 million every year in taxes from this proposal.

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What will not be introduced?

Despite the uncertainty about what tax relief and new taxes might be introduced by the new National-led coalition Government, we at least have some clarity about what tax changes the new Government will not introduce.? There will be no comprehensive capital gains tax nor any form of wealth tax. Further, the GST regime will not be adjusted to remove GST from fresh food.? These policies of the left of centre parties are not supported by National, ACT or NZF and therefore we can safely expect that they will never see the light of day – at least for the next three years!

Bruce Bernacchi & John Alcantara, 6 November 2023