Axing the admin: Will slashing compliance costs be a focus for Budget 2025?
By Robyn Walker
There has been a clear signal from the Government that the cupboard is pretty bare when it comes to funding for new initiatives.
The small additional operating allowance in Budget 2025 is unlikely to be splashed in the direction of the tax system - that was the job of Budget 2024.
However, the Government’s Going for Growth project launched earlier this year hinted tax complexity is on its radar: “In order to enable economic growth, the administrative burden placed on those who drive growth must not be excessive. Tax is a key area where the Government has heard concerns about complexity of rules and the incentives for businesses to invest and innovate. The Government will look at how tax settings can deliver better outcomes for New Zealanders, be less complex, and support growth.”
Could Budget 2025 include announcements to make tax simpler and reduce compliance costs, without reducing overall tax collections?
With our main taxing act (the Income Tax Act 2007) just short of 4,000 pages, it’s not surprising people can be left feeling the tax system is overwhelming. At the start of the century, the equivalent legislation was under 1,500 pages.
The explosion in volume and complexity of tax rules means there is plenty of room for improvement. Even simple things like determining when employee mileage can be reimbursed tax-free can be deceptively complex.
The cost to society of complying with tax laws can be inherently hard to measure. A 2024 Inland Revenue study estimated small businesses (with turnover below $30 million) were spending 32 hours per year on tax compliance and incurring an estimated total compliance cost of $5,749 (including external advisor costs). Larger businesses will have higher absolute compliance costs.
Small changes, big savings?
Tax changes don’t always have to come at a fiscal cost.
There are many simple changes which could be made with minimal or no cost, while giving back precious time to business owners to focus on growth and productivity. Some examples of potential compliance cost savings which may have no, or only a small, fiscal cost include:
- Changing tax payment dates so that tax no longer falls due on 15 January when many businesses are closed;
- Reducing the number of depreciation rates businesses must choose from to make it easier to select the right rate. The current list of rates runs to 62 pages;
- Expanding the types of expenditure where taxpayers can take deductions without detailed tax analysis. For example, legal fees below $10,000 are automatically deductible. This threshold has not changed since it was introduced in 2009;
- Having greater alignment between tax and accounting treatments, removing the need to make tax return adjustments for things like accrued expenditure and prepayments. The existing prepayment thresholds have not been updated since 2009;
- Simplifying non-resident contractor tax rules, placing more obligations on the supplier rather than the payer;
- Reviewing and simplifying the withholding tax rules for contractors;
- Increasing thresholds allowing more taxpayers to use simplified rules. For example, the threshold to be a ‘cash basis person’ under the financial arrangement rules has not moved since 1999.
Fringe benefit tax (FBT) and entertainment rules are also frequently cited as a cause of excess compliance costs. Inland Revenue has recently undertaken consultation on much needed improvements to these rules. These proposals are designed to recalibrate the rules without changing the total tax collected.
While we don’t know whether compliance cost reduction will make it into Budget 2025, we do know tax changes for charities are off the table for now, with the Minister of Finance citing too many complexities for relatively small gains.
But the expectation is that there will still be some form of tax announcement come May 22 - it’s a rare year when there is nothing.
