On 17 March the Government released its $12.1 billion fiscal and economic response to the COVID-19 pandemic. This is equivalent to around 4% of New Zealand’s annual GDP.
The bulk of the package comprises spending of:
The Government’s expectation is that yesterday’s OCR reduction and deferral of additional bank capital requirements should help banks to better support New Zealand businesses.
The additional spending, which is front-loaded with support for businesses to keep staff and for the low income, is intended to provide a short-term stimulus to the economy. Importantly, it should support the necessary isolation measures to slow down the spread of COVID-19.
The Government is to provide further responses in Budget 2020 (to be delivered on 14 May) which will be focused on economic recovery and rebuilding.
Included in the Government’s response are a number of tax measures:
Importantly, legislation is required to implement these tax measures. This will be introduced shortly and will proceed under Parliamentary Urgency to ensure prompt enactment. This does raise the risk of unintended consequences but is understandable given the need to act sooner rather than later.
The tax measures in the overall fiscal package, although limited, are not cheap.
They will help those making taxable profits in the current environment. Reinstating building tax depreciation and increasing the low value asset tax write-off will reduce business’s taxable income at an estimated fiscal cost of around $2.8 billion over four years. However, those with current tax losses will have those increased for future use. Assistance for loss making businesses will be through the direct assistance measures in the wider package.
The provisional tax threshold change is long overdue. It will produce a small interest saving for those able to use the new threshold. However, to the extent it means there will be larger end of year tax payments, it may create future cashflow problems. (As a quick reminder, the change to the threshold does not remove the liability to pay tax, it just changes when the tax is due without interest and penalty costs.) As an aside, those who have paid provisional tax in the 2021 income year but have been adversely impacted by COVID-19, should consider filing early if a tax refund will be due.
The interest write-off for those in financial difficulties as a direct result of COVID-19 will be welcome. However, the key will be how easy will it be for those affected to use the new rules as this relies on the Commissioner exercising her judgement. If it is hard to get Inland Revenue to write off interest, the cost of requesting and justifying the write off may be greater than the benefit. We understand the intention is to make the process as straightforward as possible, potentially using the MyIR online interface for write-off requests. Unfortunately, this will not be known until legislation has been enacted.
We make comments below on the announced tax measures and also analyse some potential alternatives.
Ultimately, there are limits to how New Zealand’s tax system can be used to respond to an event like this, keeping in mind that its primary purpose is to raise revenue. The tax measures should, therefore, be viewed in the context of supporting the wider package, by making it easier for businesses to operate during what we expect will be a stressful and difficult period for many.
The Tax Working Group recommended that building depreciation be reinstated. The recommendation was one of those the Government put into the “further consideration” basket last year. The problem was its fiscal cost (estimated at around $2.1 billion). When there is pressure to spend elsewhere, implementing this recommendation required either reduced spending, increased tax rates or a new tax base, such as a capital gains tax. (Conversely, the removal of building tax depreciation in 2010 was accompanied by a reduction in the company tax rate.)
The need to deal with the economic impacts of COVID-19 has allowed the recommendation to be implemented as an emergency measure without the normal trade-offs. A good example of “not wasting a crisis.” The measure is targeted at commercial and industrial property (including hotel and motel buildings) – effectively “business premises”. The Government will be hoping that this helps New Zealand businesses, directly or indirectly, by lowering a key cost of business.
Interest on tax late payments
The interest charged on late and underpayments of tax is significantly greater than interest paid on over payments. This is deliberate – to discourage non-payment of tax. With yesterday’s OCR cut to 0.25% and the likely flow on impact on bank lending rates, the usual process of Inland Revenue setting its rates can be expected to produce a lower underpayment rate. That will also be of some help.
However, of greater assistance, to all taxpayers, would be a narrowing of the margin between under and over payments, and the removal of the penalty aspect of the underpayment rate. This option has not been taken. It should be revisited.
Reducing the GST rate
An apparently simple change is to temporarily reduce the GST rate from 15% to 12.5% or 10%. The thinking is that this would help support consumer spending (it should not impact business spend, as most businesses can claim back the GST cost).
This should be simpler for business to implement as GST systems are more flexible than at the time of the last rate change. However, it is unlikely that business would be able to do this switch quickly. The economic effect may therefore be delayed with consequences for timing of spending decisions.
This may delay buying decisions as consumers wait for the price to go down. Further, there would likely be a spending surge prior to any return to the 15% rate. This would make timing of any subsequent increase problematic as it would have the potential to stall the recovery (as spending drops in the period immediately after the rise). Japan’s recent experience with increasing its consumption tax rate, which resulted in a dramatic slowdown in consumer activity, may be illustrative here.
GST is a tax on consumers. A reduction would need to be accompanied by measures to ensure businesses passed on the reduction. A GST rate reduction would also only help businesses if it leads to increased demand. There is no guarantee that this will be the case, particularly if the public health response to COVID-19 requires more stringent isolation measures such as those seen in parts of Europe, or that any increased demand would be across the board such that all business could benefit.
Direct business assistance is a better solution, in our view, in the current environment.
Cashing up tax losses
In New Zealand, tax losses can only be carried forward to future years – they reduce future tax payments. Businesses with tax losses will not benefit from the tax measures announced. (The direct assistance measures announced may help reduce losses or prevent them arising.)
Tax loss businesses would be helped if tax losses could be carried back to offset taxable income of prior years or if the tax losses were cashed up. This is particularly important for businesses that might not otherwise survive any economic downturn. Tax losses would be of no use if there is no future business. A tax loss carry-back or cash up would assist by providing additional cash-flow.
There is no indication that such a measure has been considered and, if so, why it has been discarded. If a second-round response is necessary, it should be seriously considered.
© 2021 KPMG, a New Zealand Partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
For more detail about the structure of the KPMG global organization please visit https://home.kpmg/governance.