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”.