This is the second in an election special series of articles to help simplify and explain the tax policies of the various parties. Having looked at Labour’s tax policy a few days ago, this article focuses on National’s policy positions. At first glance there is a lot more tax detail on National’s website compared to Labour’s.
1. Will not increase taxes or introduce any new taxes
In the last article I outlined the concept of ‘bracket creep’, which sees an increase in tax paid due to wage inflation. National does not plan to index income brackets to wage inflation, so even with no increase in income tax, it is still pulling in more tax each year. So far it seems the New Conservatives are the only party planning to index wage inflation.
2. Will lift the threshold to expense new capital investment from $5,000 to $150,000 per asset
This is a significant policy and would result in some sizeable tax savings for businesses. What it is referring to is the ‘low-asset threshold’, which allows certain assets to be immediately fully depreciated rather than depreciated over several years.
Take an example where a farmer buys a new tractor for $150,000. According to Inland Revenue’s depreciation tables, the current depreciation rate for tractors is 8.5% per year and they have an estimated life of 15.5 years. This makes for a depreciation deduction of $12,750 per year under current rules, resulting in tax saved of $3,570 ($12,750 x 28%).
Compare this to a $150,000 depreciation deduction and the tax saved in that first year of purchase would be $42,000 ($150,000 x 28%), which makes for a substantial difference.
This policy aims to help stimulate business investment in equipment and assets in a targeted way and from an accounting perspective it has a lot of merit.
3. Increase the provisional tax threshold from $5,000 to $25,000
Provisional tax is a method of spreading the payment of tax throughout the year rather than allowing in one lump sum at the end of the tax year. This policy doesn’t mean less tax is payable overall, it simply means more businesses would pay tax at year end rather than throughout the year.
This does have some merit, as there is some administrative effort to work out how much provisional tax to pay and the various methods can be confusing. However, provisional tax does serve a valuable function in keeping businesses on top of their tax payments and smoothing their cashflow throughout the year. By raising the threshold there will be a greater risk of businesses getting to tax payment time and being unable to pay. $25,000 is a big leap up from $5,000 and I would support a somewhat smaller increase to the threshold.
4. Change the timing of the second provisional tax payments for those businesses with a 31 March year-end to 28 February (currently 15 January)
Like the change to the provisional tax threshold, this doesn’t change the amount of tax to pay, it’s just about timing, though certainly for most businesses an extra 6 weeks to pay a tax bill wouldn’t go amiss.
5. Raise the compulsory GST threshold from $60,000 to $75,000
Currently if a business has over $60,000 in revenue it must register for GST. It must then file GST returns and pay GST on outputs (sales) to Inland Revenue. It can also claim GST on inputs (purchases).
The advantage of not registering for GST is administrative. GST returns and payments must be calculated and done on a six-monthly, bi-monthly or monthly basis. With a good accounting system this is fairly fast but still one more thing for a small business owner to think about. Also the $60,000 threshold has been around for as long as I can recall so it’s probably time to revise it.
6. Allow businesses to expense an asset once its depreciated value falls below $3,000
To give some background, when a business depreciates assets at a diminishing value rate, their tax value gets smaller and smaller to the point where there can be dozens of assets sitting on the asset register worth dollars and cents, which always looks a bit messy.
This policy is would allow these to be written off to NIL. It provides businesses with a tax saving as assets fall below the $3,000 threshold and helps keep the accounts clean. This is a useful policy from a business and accounting perspective.
7. Ensure Use of Money Interest more properly reflects appropriate credit rates and increase interest paid on credit amounts
Use of Money Interest (UOMI) of 7% is charged by IRD on unpaid tax balances to reflect the fact that unpaid tax is essentially a debt owed by the taxpayer to the Crown. For overpaid tax amounts the amount paid by IRD to the taxpayer is 0%.
The 7% interest rate is clearly designed to have a deterrent effect, making it unprofitable to have tax debt owing. While lowering the UOMI rate would have some benefit for businesses that get into tax debt, policy that helps avoid getting into debt in the first place is where the focus should be.
8. Increase the threshold to obtain a tax invoice from $50 to $500
This policy is to do with claiming GST. Currently to claim the GST on an expense over $50, an invoice must be held. Increasing the threshold would have a purely administrative benefit, though it is good bookkeeping practice to be holding records regardless of the Inland Revenue obligation.
Inland Revenue may not take a shine to this policy as they use tax invoices to check the legitimacy of GST expense claims. Whether $500 is the figure to settle on is debatable, it seems quite high, but it is probably time for some increase to the current $50 threshold.
9. Implement a business continuity test (rather than ownership test) to allow the carry forward of tax losses
Currently when a company’s ownership changes by more than 51%, it can not keep any tax losses it has to offset future income. The prevents companies being bought or sold for tax advantage purposes, sometimes known as ‘loss trading’.
One downside to this rule would be when a company needs to raise capital, which is often needed in difficult economic times, that can cause an ownership change which breaches the 51% threshold.
Replacing the ownership test with a ‘business continuity’ test does have merit and would bring NZ into alignment with the test used in Australia. To meet the test, the business must continue in the same or a similar way it did before ownership changed. It is worth noting that work is already underway by Inland Revenue to look into this change, so this policy is not new.
10. To consolidate the number of depreciation rates to reduce the administrative burden. Review depreciation rates for investments in energy efficiency and safety equipment.
It is hard to find fault with these little tweaks. There is a hefty document published by Inland Revenue each year called the IR265, which has thousands of depreciation rates listed for every type of asset imaginable. Some form of consolidation wouldn’t go astray here. Likewise a review of certain depreciation rates is something that should probably be happening anyway.
National’s tax policies are clearly targeted at assisting businesses and I think they do this quite well. The standout policy is the $150,000 capital asset write-off threshold, which would allow for some sizeable tax savings and would likely stimulate business expansion. Some of the other policies are more in the realm of tweaks and reviews that should be happening as a matter of course anyway.
At the time of writing there is no sign of any costing of these policies on the National website, which would be helpful especially for some of the bigger items such as the proposed $150,000 asset write-off threshold.
Overall from a small business accountant’s point of view, these are a sound set of business focused policies.
In case you missed my review of Labour’s policies, here is the link. In the next article I’ll take a look at the Green Party’s tax policy, before moving on to the other parties.
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