The public are none the wiser after the mini-Budget when it comes to what two tax cut policies central to National’s pre-election campaign will look like.
It remains unclear whether existing income tax brackets will in fact be adjusted for inflation.
There are also question marks over how much mortgage interest residential property investors will be able to deduct as an expense from their tax bills, and when they’ll be able to make these write-offs.
Why the uncertainty? National and Act don’t see eye-to-eye on exactly how to go about providing tax relief.
In the new year, the Government will confirm how the interest limitation rule will be phased out, before it finalises what income tax cuts will look like at the Budget.
Property investors will receive their tax cuts before income earners, as changes to the interest limitation rule will be made in line with the tax year (which starts in April), while changes to income tax settings will be made in line with the fiscal year (which starts in July).
Income tax cuts
Finance Minister Nicola Willis stressed the Government would ensure individuals received the level of tax relief National campaigned on ahead of the election.
National’s policy to adjust income tax brackets for inflation would’ve seen low-income earners receive relief of between $112 and $980 a year, and medium- to high-income earners receive $1043.
It also campaigned on broadening eligibility for the Independent Earner Tax Credit.
However, National agreed, in its coalition agreement with Act, to: “Ensure the concepts of Act’s income tax policy are considered as a pathway to delivering National’s promised tax relief, subject to no earner being worse off than they would be under National’s plan.”
Willis is receiving advice on how to fulfil this commitment.
Act ultimately wants three, rather the current five, income tax brackets.
It wants to introduce a new tax credit for low- to middle-income earners, who would otherwise be left out of pocket by Act lifting the bottom income tax rate from 10.5 to 17.5 per cent.
Together with distributing revenue from the Emissions Trading Scheme to individuals, Act says no household would pay more tax under its plan.
Willis is looking at how to cater to Act’s desire to have a flatter tax system, smoothed out with the use of tax credits.
Accounting consultant Geof Nightingale believed Act’s approach favoured the principle of efficiency over progressivity.
He said the tax credit would need to be designed so it was phased out smoothly the more someone earned.
He also said the Government would need to look at how the tax credit intersected with other supports, like Working for Families and the student allowance.
Act leader David Seymour is keen for people to pay less tax on their next dollar earned, as he believes their marginal tax rates affect their decisions to work, save and invest.
He said he was grateful the Government was investigating whether there might be a better way of providing tax relief than what National proposed.
Interest limitation rule
Coming back to the Government’s commitment to once again allow property investors to deduct interest as an expense, governing parties are still deciding how to make the change.
Act campaigned on getting rid of the interest limitation rule (which is still being phased in) in one go, while National campaigned on phasing it out to save the Government money.
In their coalition agreement, the parties agreed to phase out the rule, but do so more quickly than National wanted.
They agreed to: “Restore mortgage interest deductibility for rental properties with a 60 per cent deduction in 2023/24, 80 per cent in 2024/25, and 100 per cent in 2025/26.”
The pinch, and possibly the reason Willis hasn’t finalised the plan, is that the above would have a retrospective effect.
In other words, the Government would be changing how much tax people would have to pay in the current tax year to March 2024.
Nightingale said it typically wasn’t good to pass laws that had retrospective effects.
However, because the change would save taxpayers money, rather than spring a new cost on them, it would be more acceptable.
The other issue is that the previous Government made decisions around how to spend money in 2023/24 based on the assumption it would receive a certain amount of tax revenue due to the limitation rule.
Seymour wouldn’t detail where he thought the situation would land, but acknowledged the coalition agreement had to be translated into fiscal policy.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.