Monteck Carter summarises the 2015 budget announcement so you can understand how these changes might affect you.
KiwiSaver kick-start ended
“The KiwiSaver scheme has been successful in attracting 2.5 million members. It also has considerable costs, with the Government spending over $850 million this year on two subsidies – the annual subsidy of up to $521, and the $1,000 kick-start payment for new members. To reduce this cost, the Government has decided to remove the kick-start payment, which has cost taxpayers a total of $2.5 billion since the scheme began.
This change is effective immediately, but I want to stress that it does not affect existing KiwiSaver members in any way.
The other incentives in the scheme – matching employer contributions and the annual government subsidy – will remain as they are. These incentives also provide a strong reason to join KiwiSaver. Removing the kick-start payment for future enrolments will save over $500 million over the next four years, with little or no effect on the number of people expected to join the scheme.”
Removal of the KiwiSaver kick-start payment is perhaps one area of genuine surprise in the Budget. Such a significant change was not signalled in the pre-Budget release of changes Ministers had indicated would be announced in therationale for removal of the KiwiSaver kick-start raises an interesting dynamic with other Budget changes. The rationale is premised on the assumption that this particular government subsidy does not influence behaviour (i.e. that members of the workforce in all likelihood will continue to join KiwiSaver despite the absence of the kick-start contribution).
A contrast may be seen with the measure to extend the income tax base to gains on the sale of residential property, not being the main home, if sale is within two years of purchase. This strategy could be seen as using a taxation lever to try to cool an over-heated residential property market. It seems to be thought that the Government cannot influence the uptake in KiwiSaver membership but that it is possible to influence the investment levels in residential housing.
Removal of the kick-start payment may prompt some concern about long-term government support for the KiwiSaver system. Government support now consists of the annual subsidy of $521, the exemption for Australasian share sale profits and the top tax rate of 28%. Should the current sentiment (that people will always join KiwiSaver regardless) become further entrenched, the areas of concession may well be further whittled away. The concern would be that over time KiwiSaver may become a comprehensively taxed savings system that does not enable members to accumulate significant balances for retirement.
One additional dimension to the removal of the kick-start contribution could be the implications for the voluntary membership feature of KiwiSaver. In the past, compulsory membership of KiwiSaver was resisted on the ground of excessive fiscal cost. That perspective loses its force when removal of the kick-start contribution significantly diminishes the fiscal cost.
ACC and income tax cuts
“The Government has already reduced annual ACC levies for households and businesses by $1.5 billion since 2012. The Budget allows for further levy cuts of $375 million in 2016 and an additional $120 million in 2017. Final decisions on the levies will be made after public consultation, but we anticipate the cuts will cover all levied accounts and therefore reduce annual costs for businesses, workers and motor vehicle owners. As an illustration of how levies are falling, the average motor vehicle levy, including the annual licence fee and petrol levy, could fall to around $120 in 2016, which is about a third of what it is now.”
“The healthy state of the books means the Government is keeping operating allowancesremain at $1 billion for Budgets 2015 and 2016 before rising to $2.5 billion in 2017. The higher allowance in 2017 provides options for modest income tax reductions should fiscal and economic conditions allow.”
The announced reduction to ACC levies is not accompanied by any detail. The detail is left to a public consultation process. It may be observed that annual reductions of $375 million and $120 million in 2016 and 2017 are unlikely to go far. To spread these amounts over the entire workforce is unlikely to result in any perceptible change for the self-employed and for employees. Under the current rate structure, employees are levied on earnings up to $118,191 and the self-employed on income up to $116,089 at a rate of $1.226 per $100 of earnings. To be meaningful to the workforce, the reduction to the thresholds and the rate would need to be far greater than the total projected reduction of $495 million over 2016 and 2017.
The indication of a possible reduction in income tax in 2017 might be seen by some as being more in the nature of a political gesture. With the adoption of any such measures being two years away, and then only if fiscal and economic conditions allow, the statement perhaps simply signals that income tax reductions, and not tax increases, is the underlying policy objective. Nonetheless, the statement should connote that the Government recognises that fiscal discipline needs to be maintained in order to achieve the announced objective.
The Budget statement suggests one further thought: that the reference to modest income tax reductions is directed at reducing personal tax rates. The possibility of a reduction in the company rate of income tax does not appear to be contemplated. Any such reduction is likely to be very modest regarding that taxpaying sector.
The company tax rate can be expected to be important in any planning of the country’s tax rate structures. To attract foreign investors to invest in New Zealand, maintaining an internationally competitive rate of corporate income tax is desirable. There is always downward pressure on the corporate tax rate, as national governments use this as a tool to facilitate foreign investment.
Working for Families credit adjustments
“While two-thirds of children in more severe material hardship live in beneficiary families, the other third live in low-income working families. So on 1 April next year, there will also be changes to Working for Families, to give more financial support to lower-income working families not on a benefit.
- As a result:
Low-income working families earning $36,350 or less a year, before tax, will get $12.50 extra a week from Working for Families, and some very low-income families will get $24.50 extra.
- Working families earning more than $36,350 will get extra from Working for Families, but it will be less than $12.50 a week, with the exact amount dependent on their family income.
- Families earning more than $88,000 a year will get slightly lower Working for Families payments, with the average reduction being around $3 a week.
In total, these changes to tax credits will benefit around 200,000 lower-income working families who are not dependent on benefits. Around 50,000 of these families earn $36,350 or less a year, and will therefore get the full $12.50 a week increase.”
These proposals appear to be directed at more sharply focusing the Working for Families tax credit. Noticeable increases in the tax credit are to be made available for those on a low income, with a shaving of the credit for those at the other end of the income scale. The adjustments are scheduled for introduction on 1 April 2016.
Monteck Carter is always available to answer any questions or concerns you might have on the impact of these budget changes to you as an individual or a business. Do not hesitate to give us a call 09 273 3682.