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Reform of outdated tax credits

As part of the Budget, the Government is proposing to abolish 3 outdated tax credits: the transitional circumstances tax credit (also known as the income under $9,880 tax credit), the housekeepers tax credit, and the children’s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—

• http://taxpolicy.ird.govt.nz/publications/type/ris

• http://www.treasury.govt.nz/publications/informationreleases/ris

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.