WK Bell Gully 2024

2024 New Zealand Budget Report

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.

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

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In this Budget Report

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Budget Highlights

Personal tax cuts confirmed in Budget 2024

The coalition government’s first budget has been delivered against the backdrop of a declining economy.

The much-anticipated detail of changes to personal tax thresholds have finally emerged. The Government made no secret that tax relief was on the way for New Zealanders, however, exactly what form those changes would take has remained a mystery until now. Touted as delivering relief to New Zealanders struggling with the cost of living, the changes to personal income tax thresholds are detailed below:

The tax relief is expected to cost $2.57 billion dollars annually and will be funded by savings, spending reprioritisation and new revenue measures.

The independent earner tax credit will be extended to an additional 420,000 people by increasing the income limit to $70,000 from 31 July 2024. Currently, those earning between $24,000 and $48,000 are entitled to the credit. The in-work tax credit will also increase by up to $50 per fortnight from 31 July 2024.

The FamilyBoost childcare rebate, which was announced ahead of the Budget, will deliver up to $75 per week to families to assist with the costs of childcare. The rebate will be administered by Inland Revenue.

The government is also boosting Inland Revenue’s audit and investigation capabilities by committing further funding over the next 4 years. The additional funding is expected to strengthen audit activity with particular focus on the hidden economy and debt collection.

Other key announcements include:

„ Education

$1.48 billion in funding to build new school and upgrade existing ones. new funding of $153.3 million for 35 existing and 15 new charter schools over 4 years to improve educational outcomes for students.

$477.6 million of funding for the school lunches programme for the next 2 years. implementation of a structured literacy programme ($67 million over 4 years).

„ Health

$24 million invested over the next 4 years towards mental health counselling services for young New Zealanders.

$1.77 billion in additional funding for Pharmac.

„ Housing

additional funding of $140 million to go towards 1,500 more social houses to be provided by social housing providers, partly funded by the scrapping of the First Home Grant.

„ Corrections

$1.94 billion in funding for frontline correction officers, prisoner rehabilitation programmes and increasing prison capacity.

$424.9 million towards better pay for frontline police officers and new police vehicles.

„ Transport

$4.1 billion of Crown funding for the National Land Transport Fund and $1.2 billion for the new Regional Infrastructure Fund.

„ Defence

the defence force will receive an additional $571 million ($163 million towards remuneration improvements and $408 million towards equipment and infrastructure upgrades).

Economic outlook

Treasury’s Budget and Economic Fiscal Update notes that:

„ Economic growth has been weaker than previously predicted in the Half Yearly Update Economic and Fiscal Update (December 2023).

„ The Budget tax package, easing inflation and a recovery in tourism is expected to improve the economy gradually over the second half of 2024.

„ GDP growth is expected to increase to 1.7% in the year to June 2025, and average 2.9% per annum over the remaining forecast period.

„ The Operating Gain Before Gains and Losses (OBEGAL) is expected to return to a surplus of $1.5 billion by 2027/28.

„ Unemployment is predicted to peak at 5.3% by the end of 2024 and will gradually ease thereafter.

Tax reductions

Ministerial statement

Our Government will raise income tax thresholds to help compensate for wage growth, expand eligibility for the independent earner tax credit, introduce the FamilyBoost childcare payment and increase the inwork tax credit for low to middle-income working families.

Personal income tax rate thresholds increased

Ministerial statement

On 31 July this year, New Zealanders will experience tax relief for the first time in 14 years. This relief is well overdue and will help hardworking Kiwis who have endured a prolonged cost of living crisis.

Editorial Comment

From 31 July 2024, personal income tax rate thresholds will increase. This is the first increase in personal income tax rate thresholds since 2010.

The proposed new thresholds align with the thresholds proposed in the National Party’s Back Pocket Boost tax policy document released last year prior to the general election. The adjustment in the personal income tax rate thresholds proposed by the Budget is as follows:

The rationale for increasing personal income tax rate thresholds is fiscal drag. Fiscal drag refers the process by which wage growth moves taxpayers into higher tax brackets. This has impacted a significant number of New Zealanders, especially given the higher rates of inflation experienced in the last couple of years. For example, the Minister of Finance, Hon Nicola Willis noted in her Budget Speech that:

The median full-time wage and salary earner now earns $73,000 a year and is in the one of the highest tax brackets. A minimum wage worker can face a marginal tax rate of 30 per cent.

However, the Budget does not propose to automatically index the personal income tax rate thresholds to inflation going forward. Any such future adjustments to personal income tax rate thresholds will have to be undertaken at a later date.

As the current personal income tax rate thresholds prior to the Budget will apply for the first 3 months and 30 days of the 2024–25 tax year, the proposed thresholds outlined above will apply for the remaining 8 months and one day of the 2024–25 tax year.

There are composite rates for income amounts arising between the old and the new personal income tax rate thresholds. The composite rates will only be used for the 2024–25 tax year. The proposed composite rates are as follows:

The implementation date for the personal income tax rate threshold increases has been pushed back by 4 weeks from the date proposed in the Back Pocket Boost. This was on advice from Inland Revenue that payroll providers required more time to make necessary changes to their systems.

Consequential changes in the rates of fringe benefit tax (FBT), employer superannuation contribution tax (ESCT), retirement scheme contribution tax and prescribed investor rates will need to be made in light of the increase in the personal income tax rate thresholds.

The proposed thresholds for FBT are:

The proposed thresholds for ESCT are:

Consequential changes will also apply to the rates of RWT with effect from 31 July 2024. Taxpayers who have elected higher RWT rates in respect of interest and dividend income are likely to advise the payers of resident passive income that they wish to change their elected RWT rate to align with the increase to the personal income tax threshold.

Finally, the Minister of Finance, Hon Nicola Willis’ ministerial statement noted consideration of flattening the income tax rate scale (an ACT Party policy noted in the Coalition Agreement) commenting that:

This has a lot of merit but was not possible to achieve in a way that benefitted people as the National plan did. It remains, however, an idea for the future.

The Minister’s statement foreshadows potential reconsideration of such flattening of the income tax rate scale at a future date. Watch this space!

Extension of tax credits

Editorial Comment

The independent earner tax credit (IETC) provides eligible persons with a tax credit of up to $20 per fortnight. The IETC is available for persons earning between $24,000 and $48,000 per year. From 31 July 2024, the upper limit of eligibility for the IETC is being extended from $48,000 to $70,000 per year. Abatement of the IETC kicks in from when a person earns in excess of $66,000 per year. The Minister of Finance, Hon Nicola Willis’ Budget Speech notes that the extension will “help an estimated 420,000 additional people, most of whom will get the full $20 a fortnight”.

The in-work tax credit (IWTC) is a tax credit that supports low-to-middle income working families with children. The Budget proposes to increase the IWTC by $50 per fortnight from 31 July 2024.

FamilyBoost

Editorial Comment

From 1 July 2024, FamilyBoost, a new childcare payment, will be available to support low-to-middle income families with children aged 5 and under to help with the cost of early childhood education (ECE). Eligible families will be able to obtain a reimbursement of up to 25% of their ECE fees, up to a maximum of $150 per fortnight (taking into account the 20 hours of ECE and the Ministry of Social Development’s childcare subsidy). The maximum amount of $150 per fortnight reduces for families with incomes over $140,000 per year. Families with incomes over $180,000 are not eligible.

Digital services tax (DST)

Editorial Comment

The Budget papers note that:

The current Government is still to decide whether or how to progress the DST.

The previous Government introduced the DST Bill prior to last year’s general election, in response to delays and uncertainty around sufficient progress being made on the implementation of the OECD’s Pillar One. The proposed DST would apply to companies with global digital services revenue greater than €750 million per year and NZD 3.5 million a year from digital services provided to New Zealand users. Whether the DST Bill will proceed under the current Government will largely depend on whether satisfactory progress towards implementation of the OECD’s Pillar One solution can be achieved.

Economic and fiscal update

The Budget papers set out the economic and fiscal outlook of the Treasury. The outlook is based on all Government decisions up until 9 May 2024.

The economic update commences with the prediction that real GDP for the economy will contract 0.2% for the year to 30 June 2024. For the 2025 income year, real GDP growth is forecast to rise to 1.7% followed by an average of 2.9% per annum for the years June 2026 to June 2028.

Annual inflation was at a rate of 4% at the start of calendar 2024. By the end of September 2024, the annual inflation rate is expected to fall below 3%. With inflation pressures abating, interest rates are expected to begin easing gradually from late 2024. Ultimately inflation should reduce to the mid-point of the 1% to 3% target range.

Annual inflation is forecast to be around 2% by mid-2026.

The fiscal outlook comments in the Budget papers forecast a continuation of the current trend of an increase in net core Crown debt but with the position recovering after the year to June 2025.

The operating balance before gains and losses is expected to reach $13.4 billion by June 2025 and then gradually improve to return to a surplus of $1.5 billion by June 2028. Net core Crown debt as a share of GDP is expected to peak at 43.5% of GDP for the year to June 2025 before declining to 41.8% of GDP by June 2028.

The Budget papers note that the fiscal forecast incorporates the measures announced in Budget 2024. The gross cost of the measures to June 2028, incorporating both tax reductions of $3.7 billion and new spending initiatives of $5.4 billion, is on average $9.1 billion per annum. That gross cost is partially offset by savings and revenue raising initiatives averaging $5.9 billion per annum. This gives a net cost to Budget 2024 of $3.2 billion per annum.

The savings initiatives cover a reduction in agency baselines, expiring contingencies and the closing of both the National Resilience Plan ($0.4 billion per annum) and the Climate Emergency Response ($0.2 billion per annum).

Fiscal performance helps the Government to assess its ability to sustain public finances of a credible and serviceable position over the long term. The performance should show whether the Government can maintain its current level of expenditure without major adjustments or whether its policies would lead to an excessive accumulation of public debt.

Total Crown revenue is forecast to increase from $153 billion in 2022/23 to $196.4 billion in 2027/28. As a share of the economy Crown revenue should be an average of around 39% of GDP.

Approximately 75% of Crown revenue is from tax revenue. Of that figure, 70% comes from individuals and companies together with a contribution from indirect taxes such as GST. Sales of goods and services contribute 14% of Crown revenue with the remaining 6% coming from ACC levies, the Emissions Trading Scheme and other sovereign revenue (eg fines and levies).

Compliance and enforcement

The initiatives taken as part of Budget 2024 include the savings options requested of Government departments. Each department was provided with a target of 6.5% or 7.5% of its eligible baseline to exclude expenditures on low value programmes, programmes not aligned with the Government’s objectives and non-essential back-office functions. The result achieved by the departments was $1.5 billion in operating savings each year over the 2024-25 to 2027-28 period.

Inland Revenue was tasked with a 6.5% savings target. Over the period to June 2028, Inland Revenue identified reductions in operating expenditures totalling $58.4 million. The areas of reduced expenditures covered travel, training, accommodation, overtime and consultants.

Inland Revenue was also able to identify an additional reduction of $60 million for reduced systems maintenance and efficiencies in aligning change capacity work (the programme for delivery of the Government’s tax and social policy work).

At the same time, Inland Revenue was allocated a total of $116 million to June 2028 for its compliance activities. These compliance activities concern both tax and overseas student loan borrowers (including those who return to or visit New Zealand).

The Budget papers added that an additional $10.1 million has been allocated to fund the development and administration of the crypto-asset reporting framework. The framework is a global minimum standard developed by the OECD to assist national tax administrations to enforce their laws on the taxation of income from trading in crypto assets.

The Budget papers refer to the release of a Revenue Strategy as part of Budget 2024. This document would help inform the development of priorities of the Government’s tax and social policy work programme. The document was not available for review in this Budget night report.

A further savings initiative identified in the Budget papers was stopping the temporary in-year payments loan scheme provided for under the research and development tax incentive. The loan scheme was available to a business awaiting the issue of a tax credit for the research and development tax incentive. The justification given for termination of the loan scheme was that, due to administrative complexities, it provided low value for money. The tax credit itself remains, running at a cost of approximately $772.1 million per annum.

Regional development initiatives

The Government has a range of initiatives in mind to boost resilience and productivity at the regional level.

Regional Infrastructure Fund

Ministerial statement

Budget 2024 also invests $1.2 billion over three years in the new Regional Infrastructure Fund, as championed by New Zealand First. The Fund will invest in resilience infrastructure and regional projects that support economic growth. Among the first projects to be funded and get underway will be flood protection and resilience projects across the country.

Editorial comment

There are two types of project that the fund will cover:

„ Projects that enhance a region’s ability to withstand and adapt to stresses and shocks, such as flood protection works and energy security.

„ Projects that support broader economic outcomes, such as increasing productivity in regional economies.

As a backstop, a portion of funding will be held back to enable the Government to react to circumstances that occur in the future.

Those areas of New Zealand adversely affected by weather events such as Cyclone Gabrielle are the first target for the new Regional Infrastructure Fund, the East Cape region and parts of Northland being prime examples. The erection of floodwalls and stopbanks is intended to prevent disruption of communication with and access to a region should a weather event occur, as well as protecting agricultural land. The Minister for Regional Development, the Hon Shane Jones, has signalled that protective work of this nature is within the ambit of projects covered by the fund.

Although not all details have been announced, it is clear that the Government wants to see prompt action. Eligibility criteria for applicants seeking assistance from the fund are to be made public by the end of June, while the fund will be open to applications on 1 July 2024.

National Infrastructure Plan

Ministerial statement

A comprehensive programme of work is underway to establish a 30-year National Infrastructure Plan, develop a new consenting framework to get infrastructure built faster, and utilise new funding tools like tolls, PPPs and value capture so we can make that pipeline of projects even bigger.

Editorial comment

To address a perceived infrastructure deficit, the Government will provide investment in a range of areas, including road, rail and public transport, educational institutions, defence capability, prison facilities and social housing.

A new National Infrastructure Agency, for which $5 million has been allocated, is intended to connect domestic and offshore funding with New Zealand infrastructure projects. Reference to a new consenting framework suggests that speedier processing of project applications is a priority.

In her speech delivering Budget 2024 the Minister of Finance noted that changes to the Resource Management Act 1991 would be made to allow “nation-changing projects” to be implemented without lengthy delays caused by legal matters.

Social investment

Ministerial statement

The biggest part of this Budget is not, in fact, tax relief. It is investment in public services.

Health

Ministerial statement

Health will get a significant funding boost of $16.68 billion across three Budgets as part of our plan to invest in frontline services such as emergency departments, primary care, medicines and public health to ensure New Zealanders can get the healthcare they deserve.

Editorial Comment

The Budget sets aside $3.4 billion for hospital and specialist services and $2.1 billion for primary care, community and public health provided through Health New Zealand.

$1.77 billion in funding is provided to Pharmac to ensure that New Zealanders can access the medicines that they need.

The free breast screening programme currently available for women aged 45 –69 is being extended to include women up to the age of 74. Expanded screening will mean about 120,000 additional women will be eligible for screening every two years and is expected to save an extra 65 lives per year once fully implemented.

$24 million has been set aside to provide young people with free mental health counselling through the Gumboot Friday initiative.

In addition, the Budget pre-commits $11 billion in new health funding across Budget 2025 and Budget 2026. The funds have been pre-committed in order to allow the healthcare sector to better plan and deliver frontline health services, to retain the health workforce and to have greater confidence to invest and plan for the future.

Education

Ministerial statement

The coalition Government is investing $2.9 billion of new funding in education over the next four years to improve student outcomes.

Editorial Comment

Of the $2.9 billion of new funding earmarked, $1.5 billion will go to building new schools and classrooms and to maintain and upgrade existing ones. $163 million will go to maintaining IT infrastructure and services in schools.

The Minister of Education, Hon Erica Stanford notes that the focus on additional investment in school property is focused on ensuring that:

kids can learn in safe, warm and dry schools and that the school property portfolio can expand to accommodate more students.

$478 million has been set aside in the Budget to continue the Healthy School Lunches Programme for a further two years.

In addition, the prior Government’s first-year fees free policy is being scrapped. It is being replaced with a final-year fees free policy to support and encourage students to successfully complete their qualifications. This change to the fees free policy is forecast to generate an annual average saving of $220 million.

The Budget proposes that from 1 April 2025, the student loan scheme base interest rate is increased by 1%, for five years. This increase is to reflect the inflation adjusted loss in value to the student loan scheme arising from the high levels of inflation experienced over the last three years.

Law and Order

Ministerial statement

We are serious about cracking down on crime and keeping communities safe so people can go about their lives in peace. We back our Police and are giving them more of the tools they need to do their incredibly hard job.

Editorial Comment

The Budget papers note that the funding boosts for Police will help deliver on the Government’s commitment to law and order. The Budget proposes to invest $2.9 billion to restoring law and order.

As noted in the Coalition Agreement, 500 additional police officers will be trained up and put on the frontlines. The 500 additional Police officers will increase the number of sworn Police officers to 10,711. $191 million is set aside over four years to fund the recruitment and retention of the additional 500 officers and $34.6 million in capital to ensure that those officers are equipped with vehicles and body armour to do their jobs.

A further $424.9 million is set aside in the Budget to support frontline policing. $242.2 million will be used to increase pay for Police.

The Minister of Police, Hon Mark Mitchell noted that:

We’re cracking down on crime and ensuring there are real consequences for offenders. We’re bringing in tough new laws to go after gangs and tackling youth offending and ram raiders.

The Budget includes $69 million of funding to address serious youth offending. This includes funding for a military-style academy pilot programme.

$1.9 billion is proposed to be invested in more frontline Corrections officers, to rehabilitate offenders to turn away from a life of crime and for greater prison capacity. Waikeria prison is to be expanded from its current capacity of 455 up to a total capacity of 1,865 beds. The Budget proposes to have an 810-bed extension. This is in addition to the 600 beds under construction following funding under the previous Government.