Economic Growth: Tax Edition

The Prime Minister kicked off the year with a statement that 2025 will bring a “relentless focus on economic growth and productivity”. Rt Hon Christopher Luxon, in his opening Statement to Parliament for the year has set out a vision where “the focus will be to say a lot less no and lot more yes”. While the Statement did not mention any new tax initiatives, the Tax and Social Policy Work Programme released in late 2024 was made up of six pillars, including “economic growth and productivity”.

Some of the items on the economic growth and productivity work programme include:

• Improvements to the employee share scheme regime
• Exploring compliance cost reductions, including improving tax compliance for small businesses
• Fringe Benefit Tax review
• Reviewing thin capitalisation settings for infrastructure
• Reviewing the Foreign Investment Fund (FIF) tax rules

In late 2024, Inland Revenue released an issues paper focusing on improvements to aspects of the FIF rules which have been deterring migrants from coming to or staying in New Zealand. Since its release there have been regular articles in the media highlighting real life examples of wealthy migrants considering leaving due to the punitive results that can arise from levying tax on unreleased gains rather than matching cashflows. Consultation is now closed, but with migrants (and the economic growth that can surround them) actively eyeing an exit from New Zealand it’s hoped that Budget 2025 will bring a solution to this problem.

A connected issue relates to Employee Share Schemes (ESS), where taxes which don’t match cashflow have once again come into the spotlight. This issues paper revisits a proposal which first surfaced in 2017 and tests the waters on deferring the tax point for shares issued under an ESS by start-up companies. Perhaps in 2025 there will be a lot less no and a lot more yes to this proposal.

With February already upon us, it’s full swing into the decision phase for what should be included in Budget 2025. This typically means that there is a flurry of activity to test last minute ideas, but then consultation is essentially locked down with decisions made and work being done under the veil of “budget secrecy”. All will be revealed when the Budget is released on Thursday 22 May.

Despite the Budget process inevitably requiring secrecy, it has become a New Zealand tradition that many hints are dropped, perhaps to test reactions prior to a final decision. We reported in our December 2024 Tax Alert that Budget 2025 will include some type of tax announcement for the charitable sector. More recently both the Prime Minister and Minister of Finance, Hon Nicola Willis, have given a glimmer of hope to business owners that a company tax rate reduction may be on the agenda. This has prompted a flurry of reaction, generally either strongly in favour or strongly against. The company tax rate has not been touched since Budget 2010, so kicking the tyres on the costs and benefits of such a move is a welcome endeavour.

Also relevant is that Budget 2025 falls in the middle of the election cycle. This is the critical year for the Government to be seen to be getting the job done before electioneering restarts in 2026. To that end, if a headline company tax rate cut doesn’t make the Budget, we might still see tax announcements which may “move the needle” in other ways. The work programme includes compliance cost reduction work (we’d put fringe benefit tax in that camp also), and it’s understood that a laundry list of small but meaningful changes have been submitted to Inland Revenue to consider as part of these work streams. While a tax cut is always welcome, many business owners may also be happy with rules which streamline and simplify tax compliance, giving them the gift of time to reinvest into their businesses.

Tax Alert will continue to cover all tax announcements and Deloitte will be bringing full coverage of Budget 2025 on Thursday 22 May.

For more information contact your usual Deloitte advisor.