On December 15th Statistics New Zealand released the latest Institutional Sector Accounts report, showing that New Zealand households have begun saving money for the first time in over a decade.

The newly released statistics indicate that in the year up to March 2011, New Zealand households saved NZD 200 million more than they spent. The savings are equivalent to approximately 0.2 percent of net disposable household income in New Zealand. In comparison, in the year up to March 2010, New Zealand households spent approximately NZD 1.6 billion more than they earned.

New Zealand has not seen overall savings since the year up to March 2000. Over the last ten years, the difference between spending and incomes peaked in 2006, with households spending approximately NZD 6.85 billion more than recorded incomes. The difference in earnings and net spending was fueled by borrowing and extra debt.

Mark Smith, the Senior Economist at ANZ Bank, commented on the latest savings result, saying that recent financial turmoils have scared New Zealanders into paying off the debts they incurred over the last 10 years. Shamubeel Eaqub, principal economist at the New Zealand Institute of Economic Research suggested that New Zealanders were becoming better savers, but he added that net savings of NZD 200 million was still a small amount, and New Zealanders needed to keep increasing the amount of money they save each year.

Photo by o5com

In line with the results of a public consultation held last year, the new bill contains changes to filing rules, which will allow New Zealand business to file more of their annual obligations online. The move towards electronic filing will allow the Inland Revenue Department to instate a stronger infrastructure for information sharing and data verification. The move is should make significant reductions in compliance costs for taxpayers and the IRD.

Amongst the proposals contained in the bill is a change to the tax treatment of software development projects. If passed, the bill will ensure that software development projects remain tax deductible, even if they are abandoned and cannot be used at the end of the project. Industry analysts say that the change will help foster a stronger IT sector in New Zealand.

Kiwisaver contribution rates will also be changed, with the minimum employee and employer rates rising from 2 percent to 3 percent.

The bill also contained a wealth of minor changes to clarify and update elements of the GST system.

Photo by Pauli Antero

On the February 1st the government appointed Savings Working Group (SWG) released its long awaited final report, with suggestions on reducing New Zealand’s overall reliance on overseas debt. According to research within the report, the country’s net foreign liability currently stands at 85 percent of the GDP. Comparatively, Australia is only at a level of 58 percent. The comparatively large liabilities level means that New Zealand is particularly vulnerable to large overseas financial movements. According to the SWG, urgent action is needed to address the situation.

The report recommends that the national savings level should increase to 3 percent of the GDP, amounting to approximately NZD 5 billion annually. The government should lead the way in these efforts, shifting to a fiscal surplus before the projected date of 2016. This level should also be maintained for the medium term.

The SWG suggested a series of changes to the Kiwisaver regime, which should encourage a greater number of people to voluntarily join the system, although the Group did not go far as to say that it should be mandatory. The report stated that it should not be allowed for employers to offer employees increased wages in return for not joining Kiwisaver. Additionally, rule changes should be carried out on the scheme to allow for partial early withdrawal from Kiwisaver for individuals with low-life expectancies.

Within the report it was claimed that the government should shift the national taxation focus away from income taxes and towards consumption taxes. This would have the double effect of increasing production and encouraging savings. The SWG claimed that the GST level should rise to 17.5 percent, with compensatory tax system changes for low-income earners. Prime Minister John Key has already replied, saying that the GST rate would not be increased.

It was suggested that interest rates be reinstated on student loans, on the condition that the charges are only applied upon commencement of employment. The Prime Minister has already stated that such changes would not be considered unless the National party was reelected for a second term.

Photo by tkw954

On May 10th the Maxim Institute released Lifting the Bucket: Tax policy and economic growth, a report detailing the Institute’s proposed changes to the New Zealand economy. The report was accompanied by the results of a survey profiling national tax payer’s opinions regarding taxation levels and Government spending on public projects. According to the releases, the New Zealand tax system is overly-reliant on taxes that are harmful to growth, and New Zealanders are unwilling to institute changes if they result in reductions in public projects and Government spending.

Among its many proposals the report revolves around a series of key changes. Primary alterations include lowering corporate and trust tax rates to 27 percent. The personal income tax structure would be altered to a two tier system with a starting rate of 10 percent and a top rate of 27 percent, with a top-band earnings threshold of NZD 27 000. Goods and Service Tax (GST) would be increased to 15 percent, and Government spending would be limited to 30 percent of national GDP. Justifying the changes the report stated “We need to move toward a system that relies more on consumption taxes, like GST, and less on income and corporate taxes, so that the tax system is more growth-friendly on the whole.”

According to the results of the survey accompanying the report, the majority of New Zealanders are opposed to the types of changes recommended by the Maxim Institute. The suggestion of reducing Government spending with reductions in Working for Families, KiwiSaver, interest free student loans, “20 Hours Free” early childhood education and New Zealand Superannuation was met with the most opposition among those surveyed. Similarly, GST increases and land taxes were not supported, even if they are counterbalanced with decreased personal taxes. The Maxim Institute claimed that the spending should be addressed and rebalanced to restore efficiency and cut wasteful expenditures.

Photo by Casey Serin

Key suggestions brought forward by the 2025 Taskforce report include lowering the current top tax rate of 38% and the corporate tax rate of 30% to 20%. If suggestions in the report are followed, Government spending in 2012 and 2013 will be reduced to 29% of GDP, from its current estimated 37%. In an effort to materially reduce the Crown’s operating expenses, a medium-term target will be set and the Minister of Finance will be required to publicly report what steps are taken to achieve this goal. Welfare reform should be undertaken to reduce the number of working age individuals who are currently receiving government benefits. Kiwisaver subsidies should be abolished and the eligibility age of New Zealand Superannuation should be increased progressively. Road congestion charges should be introduced, in order to fund road development. Early childhood education has been recommended to lose its government subsidies and tertiary student-loans are to be charged interest again.

John Key, New Zealand Prime Minister, displayed skepticism regarding the report, even before its publication. Specifically, he voiced concerns regarding some of the suggestions acting directly against promises made by the National Party during their election campaign. He said “It’s not to say we can’t pick our way through the report and find something that might add to New Zealand’s economic performance, but where we specifically campaigned on something I’m not going to break my word”.

Photo by tony_the_bald_eagle

The Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill was first introduced to parliament in March, 2008. It was intended to be a far reaching Bill, encompassing and amending many areas.

Peter Dunne, Revenue Minister, stated in regards to the bill “The reforms are aimed variously at reducing tax costs for businesses, bringing tax law up to date with today’s commercial environment, protecting our revenue base, ensuring the law works as effectively as possible, or supporting a culture of charitable giving in New Zealand.”

Changes include amendments that ensure that insurance providers are taxed on profits in comparable ways to other businesses. Kiwisaver laws have also been altered to allow $15,000 to be paid from a person’s account in the event of their death. Volunteer and community groups will be subject to new tax treatments, aimed at easing their daily business requirements. Charitable donations will also come into new systems of law, with employees of scheme enrolled employers receiving tax benefits from their donations on pay day.

New Zealand Finance Minister Bill English and New Zealand Finance Minister Bill English singed a Memorandum of Understanding on the 16th of July, indicating that both governments formally acknowledge their intent to implement into law provisions for superannuation portability.

Legislative changes are still required before the superannuation portability can become a reality, this is expected to occur mid-2010. Conditions upon the portability are still to also fully be determined, although some have already been determined in regards withdrawal ages and the matter of Kiwisaver member benefits and kick-start amounts.

An agreement in these talks could see a complete set of portability rules in regards to the superannuation of residents of either country permanently moving to the other. Bill English has stated that the envisaged set of rules will allow for the movement of Kiwisaver funds an appropriate compatible Australian counterparts. As the details have yet to be discussed between appropriate parties, future solutions are purely speculation, but it is thought that portability will work both ways with no strong restrictions, and serve to aid the Single Economic Market Programme between Australia and New Zealand.

The Australian Tax Office currently over A$13 billion in “lost accounts” in the superannuation system of Australia. It is believed that a significant part of this must belong to New Zealanders who have since transfered back to New Zealand. These talks could lead to these people being able to transfer their money across.

The changes to taxation brought about by the new budget have been passed through Parliament under the Taxation (Budget Tax Measures) Bill. It was introduced under urgency n the same day as the budget, the 28th of May, it passed and received Royal Assent the following day. The weekend and public holiday meant that it was only enacted on the following work day, the 2nd of June.

The Taxation (Budget Tax Measures) Bill repealed sections of the Taxation (Urgent Measures and
Annual Rates) Act 2008, which pertained to future cuts to personal taxation, as promised by the National Party during their election campaign.

The second section of the Taxation (Budget Tax Measures) Bill deals with the abolishment of the Kiwisaver mortgage diversion facility. Specifically, every section pertaining to the enactment of mortgage diversion now reads that to sign up one had to apply before the 1t of June, effectively rendering it an impossible task.

The new Government’s first Budget has been released amongst poor economic conditions and threats of credit rating downgrades. No particular surprises were featured, that have not been circulating over the previous weeks.

The promised personal tax cuts for 2010 and 2011 have been deferred, with no set date. To some analyst this has suggested these cuts be in perpetual deference, as John Key has talked of working to build a government surplus over the coming 5 years.

The Kiwisaver mortgage diversion facility has also been withdrawn due to its compliance cost and participation numbers of only 600.

Automatic contributions to the New Zealand Superannuation Fund have been suspended, with future payments being decided upon on a year by year basis.

The Health Sector will receive a further $3 billion. Education will $1.3 billion extra. Broadband infrastructure has $290 million of its $1.5 billion required set aside. State Highways maintenance has received $1 billion over the next three years.

Home insulation will receive an upgrade with 180,000 homes being eligible for a $1,800 grant towards insulation and heating. This grant can be expanded to $3,000 for Community Service Card Holders.