Last week, Finance Minister Bill English delivered the National government’s eight Budget. We take a look at the key points discussed and its implications.
Business transformation
The National government’s eighth Budget, delivered on May 26 by Finance Minister Bill English, has the long game in mind.
Revenue Minister Michael Woodhouse has secured a net $857 million to deliver a modern tax system over the next four years. A major business transformation is planned, aimed at making it easier for all New Zealanders to meet their obligations.
As Woodhouse says, “It is important that our tax system keeps pace with changes in New Zealanders' expectations and changing business models.”
No one ever won a popularity poll by making it easier to pay out money but a great tax system does matter for our economy. Updating our approach for the digital age is the right call.
Woodhouse wants small businesses to be able to devote more time to business rather than tax. “Businesses will find that meeting tax obligations will become part of their normal processes, rather than a separate activity.”
Inland Revenue budget cuts
What Woodhouse chooses not to emphasise is the extent to which the business transformation depends on finding savings from existing Inland Revenue budgets. Alongside the $857 million additional funding, Inland Revenue faces a $284 million by 2020. That saving will be recycled back into business transformation.
What that means to the shape of the existing department isn’t yet clear. We think it will mean staff cuts. In five years’ time, the IRD is likely to look different with fewer document processing centres and fewer debt collectors and auditors, and reduced corporate overheads as the result of increased digital and automated compliance.
A pound of fiscal flesh
It would be a mistake to ignore the main purpose of the tax system: to raise money. The government expects $250 million extra tax through better compliance as a result of the IRD’s business transformation. That revenue is kicking in from 2019 and English has already booked the money.
International tax
No changes yet, but we have been warned. English sets out his position in stark terms: “We are making further changes targeted at multinational companies.” He hasn’t specified what these changes will be but it is clear that information exchange is high on the list after the government’s recent signing of the multilateral competent authority agreement to apply a common reporting standard with other tax authorities.
We were concerned we’d see a rushed reaction. Taking a careful look at our international tax settings is the right approach for New Zealand.
Tax simplification for SMEs
The main SME tax package was announced in April 2016 as part of the wider business transformation programme. It includes a pay-as-you-go option for provisional tax for small businesses from 2018 onwards and eliminating or reducing use-of- money interest for several taxpayers.
Contractors can also choose a withholding rate, rather than having a rate set for them. New debt incurred from April 1, 2017 will not be subject to the one per cent monthly penalty but subject only to immediate penalties and interest charges for late payments. This package is expected to cost $187 million over the next four years.
In summary, the government is focused on maintaining a healthy fiscal spending policy and allowing the economy to bubble along at a respectable 2.8% growth rate.
Sanjay Kumar is an Executive Director and Vidya Garimella is a Senior Consultant at EY