Taxation (Budget Measures) Bill

  • enacted

Explanatory note

General policy statement

Reform of outdated tax credits

As part of the Budget, the Government is proposing to abolish 3 outdated tax credits: the transitional circumstances tax credit (also known as the income under $9,880 tax credit), the housekeepers tax credit, and the children’s active income tax credit. The tax credits are being abolished as they are fiscally expensive but have long since ceased to have a strong policy justification. These reforms apply for the 2012–13 and later tax years.

The quick application is possible because, by and large, these tax credits are claimed only at year-end. It is possible, however, for 2 of the credits—the transitional circumstances tax credit and the children’s active income tax credit—to be claimed by employees during the year through reduced Pay As You Earn (PAYE) deductions. Transitional rules for these taxpayers provide that the applicable PAYE rules continue until the end of the 2012–13 tax year. Such employees will benefit from the credits for the year if they do not file a tax return. They are not required to file a tax return as a result of receiving the credits; but if they do file a return, they may be assessed as having tax to pay.

In place of the children’s active income tax credit, a new exemption is created for children, using the same eligibility criteria as for the abolished credit. This exemption applies to income for which there is no withholding requirement, if the total of such income for the child is less than $2,340. A child earning over $2,340 of such income is required to pay tax on every dollar of that income.

This new rule aligns more closely with the original objective of the children’s active income tax credit: reducing compliance costs for children by not forcing them to file income tax returns for small amounts of income. The present approach does not achieve this goal as many children file tax returns solely to gain access to the tax credit—generating unnecessary compliance and administration costs.

Abolition of elections to leave herd valuation scheme

As part of the Budget, the Government is also proposing to abolish the ability of farmers to change the valuation method for a type of specified livestock from the herd scheme to another livestock valuation method. Elections will not be effective if made on or after 18 August 2011. On that date, tax policy officials released for consultation a detailed issues paper, Herd scheme elections, which made it clear that the current situation was not acceptable to the Government.

In deciding on the application date for the change, the Government took into account that current prices for sheep, beef, and dairy cattle are relatively high, which might be seen by farmers as a last opportunity to exit the herd scheme in the 2012–13 income year. Elections for such a change were required by the end of March 2012. The first tax payment that could be affected by the abolition will be the first instalment of provisional tax for the 2012–13 income year.

Legislation providing for the detailed consequences of the abolition will be introduced in a later taxation bill and subjected to the usual Parliamentary process.

Student loan scheme: Repeal of 10% voluntary repayment bonus

This Bill also gives effect to the announcement in Budget 2012 to repeal the 10% voluntary repayment bonus for any repayment of $500 or more above a borrower’s repayment obligation.

The objective of the bonus scheme was to encourage faster repayments by borrowers who were slow to repay their student loan, by encouraging them to pay off their loan more quickly and, as a consequence, to reduce the costs to the Government of the Student Loan Scheme.

The voluntary repayment bonus does not appear to be improving the value of the Student Loan Scheme, and the level of savings from the voluntary repayment bonus is lower than originally estimated. The take-up of the policy has largely been by individuals who were already paying back their loans quickly, and not by those who were slower to repay their loans. The bonus also appears to be encouraging some students to borrow when they do not need to do so. For example, a group of borrowers were in effect using the scheme to discount their annual fees, which was not the intention of the policy.

Regulatory impact statements

Inland Revenue produced regulatory impact statements to help inform consideration of the reform of outdated tax credits and the abolition of elections to leave the herd valuation scheme. The Ministry of Education produced a regulatory impact statement on 10 May 2012 to help inform the main policy decisions taken by the Government relating to the repeal of the voluntary repayment bonus as part of the Student Support package.

A copy of each regulatory impact statement can be found at—

Clause by clause analysis

Clause 1 is the Title clause. The Bill is intended to be divided at the end of its committee of the whole House stage, and enacted as the following 2 Acts:

  • Taxation (Budget Measures) Act 2012—Parts 1 and 2:

  • Student Loan Scheme (Budget Measures) Amendment Act 2012—Part 3.

Clause 2 states when the clauses come into force.

Part 1
Amendments to Income Tax Act 2007

Clause 3 provides that Part 1 amends the Income Tax Act 2007.

Clause 4 inserts a new section CW 55BB, providing that income of certain minors is exempt income if there is no withholding requirement and the minor derives less than $2,340 in the tax year. The prerequisites for a minor to be eligible for the exemption reflect the existing prerequisites for the children's active income tax credit. The exemption applies for the 2012–13 and later tax years.

Clause 5 amends section EC 8. New subsection (3) provides that a person who elects to begin using the herd scheme, for a type of specified livestock for an income year, may not change to another valuation method, for the type of specified livestock and the same or a later income year, except by an election made before 18 August 2011.

Clause 6 repeals sections LC 3 to LC 12. Section LC 3 provides for a tax credit for children. Section LC 4 provides for a tax credit for transitional circumstances, which is available to a person engaged in full-time work for part of a year. Section LC 5 gives the meaning of engaged in full-time work. Section LC 6 provides for a tax credit for housekeeping payments for the services of a housekeeper. Section LC 7 gives the meaning of housekeeper. Section LC 8 gives the meanings of other defined terms. Section LC 9 gives the amount of tax credit available to a person if the person is absent from New Zealand for part of a year. Section LC 10 provides for a person who makes a return of income for a period other than a year. Section LC 11 gives the amount of tax credit available to a person if the person is a non-resident for part of a year. Section LC 12 provides for the assessment of a person who is a non-resident.

Clause 7 amends section YA 1 by repealing various definitions that are not needed as a result of clause 6 and removing cross-references to sections repealed by clause 6.

Clause 8 amends schedule 2 by removing references to the tax code ML, which is not used as a result of the abolition of the tax credit for transitional circumstances.

Part 2
Amendments to Tax Administration Act 1994

Clause 9 provides that Part 2 amends the Tax Administration Act 1994.

Clause 10 amends section 24B(3), by deleting a cross-reference and repealing a reference to a tax code, as a result of the abolition of some tax credits by clause 6.

Clause 11 repeals section 24H(7), which refers to the tax code relating to the abolished tax credit for transitional circumstances.

Clause 12 amends section 41A, by deleting cross-references to repealed sections and removing references to housekeeping payments.

Part 3
Student loan scheme: Repeal of 10% voluntary repayment bonus

Clause 13 provides that Part 3 amends the Student Loan Scheme Act 2011.

Clause 14 states the purpose of Part 3.

Part 3 amends the Student Loan Scheme Act 2011 to—

  • remove eligibility for, and entitlement to, a 10% bonus (a reduction in the loan balance by an amount equal to 10% of a borrower's excess repayment for the relevant tax year) in respect of an excess repayment made for the borrower for the 2013–14 or a later tax year; but

  • ensure any excess repayment bonus from an excess repayment by payments made for the 2012–13 tax year is determined and credited under the provisions that Part 3 repeals on 1 April 2013 for later tax years; and

  • ensure a borrower's overseas-based repayment obligation for the 2013–14 tax year is assessed taking into account any 2012–13 tax year excess repayment bonus of the borrower.

Repeals of provisions on 10% bonus

Clauses 15 to 17 repeal sections 118 and 121(1)(a) and (2)(a) and Part 3, subpart 1, which relate to the 10% bonus. The repeals are accompanied by application provisions to ensure that 2012–13 tax year repayments are the last ones eligible for the 10% bonus.

Consequential changes to overseas-based repayment obligation

Clauses 18 and 19 make consequential changes to sections 110 and 111 on the overseas-based repayment obligation. The changes are accompanied by application provisions to ensure that 2013–14 is the last tax year for which a 10% bonus for the previous year affects an overseas-based repayment obligation.

Consequential repeals of spent amending provisions

Clause 20 repeals consequentially spent amending sections 31(2), 32, 37, 39, and 40 of the Student Loan Amendment Act 2012.