The Budget reflects the Government’s desire to support and enhance productivity and economic growth (or at a minimum remove disincentives to growth). The centre piece initiative is an upfront 20% Investment Boost tax incentive for new business assets, projected to cost $6.6b over the forecast period to 2029. There is also a series of modest but targeted tax initiatives. Fiscal constraints have left the Government with limited options. The Government has sensibly opted to act as an enabler, supporting foreign and domestic investment in productive assets, infrastructure and technology.

While a reduction in the corporate tax rate was removed from the table some time ago – it’s just too expensive and broadbrush to make a meaningful difference, the Government has instead offered up business friendly tax changes to incentivise capital investment. There is also a push to reduce tax compliance costs and simplify taxes such as Fringe Benefit Tax (FBT).

Only time will tell whether these measures will be enough to achieve meaningful change.

Key tax changes announced (or reconfirmed) in the Budget today include:

Investment Boost tax incentive

• Targeted thin capitalisation modifications for infrastructure investments
• Deferral of taxation of employee share schemes for startups and unlisted companies
• Simplified FIF rules to retain/attract foreign migrants to New Zealand
• Relaxation of KiwiSaver rules to increase investment in private assets
• Simplification of FBT.

Investment Boost tax incentive

CA ANZ called for an accelerated depreciation allowance for new plant and equipment as an incentive to increase capital investment and improve productivity.

We are pleased to see that the Government has introduced an upfront Investment Boost tax incentive to enable businesses to immediately deduct 20% of the cost of new assets in the year of purchase.

This upfront deduction is in addition to depreciation which can continue to be claimed at normal rates on the reduced base (e.g. net 80% after incentive). This will provide a significant overall deduction when combined with depreciation in the year of purchase and is more generous than we expected, both in terms of assets covered and level of deduction. It is estimated to cost the Government on average $1.7b per annum over each of the forecast years.

The incentive starts from Budget Day, 22 May 2025, and applies to new assets purchased in New Zealand as well as assets imported from overseas (both new and secondhand). The incentive is not capped. It is intended to cover investment in machinery, tools, equipment, technology, vehicles, industrial buildings (including commercial buildings which still cannot be depreciated – a certain irony there) and other capital assets.

The incentive will not apply to land, residential buildings, assets previously used in New Zealand, assets held as trading stock, fixed-life intangible assets, and assets that are fully expensed under other provisions within the tax legislation.

The proposed incentive in addition to existing tax depreciation rates should be sufficient to entice businesses (currently waiting on an uptick in the domestic economy and to see the impact of tariffs on the global economy) to invest in the future now.

Finding the right balance in terms of tax incentive is hard given current fiscal constraints. Expectations of a full fixed asset right off even if capped were never realistic. However, the commitment made by the Government is significant with tax revenue expected to reduce by $6.6b over the budget period to 2029.

The right investment in productive business assets should help to both grow the economy and increase overall productivity. Harnessing AI’s potential would also assist with productivity.

The initiative is expected to increase New Zealand’s capital investment by 1.6%, GDP by 1% and wages by 1.5% over a 20-year period (with half of these impacts estimated to come within the first 5-years). Overall this does not seem like a lot for the investment made in reduced taxation revenue, however there is a significant need for capital investment.

Thin capitalisation settings for infrastructure

The thin capitalisation limitations will be modified to enable higher debt levels for eligible infrastructure projects in New Zealand. Two options are being considered by officials –

• A rule specifically targeted at infrastructure projects, or
• A more general rule that applies more widely to third party limited recourse debt.

Either rule would allow for full interest deductibility on third party debt. The first option is preferred by officials as it is more limited in scope, focusing on the problem (a deficit in infrastructure).

The relaxation for infrastructure projects is expected to cost $65m in lost revenue over the next 4 years (2026-2029).

Deferral of taxation

In a move to make employee share schemes (ESS) more attractive for start-ups and unlisted companies a provision will be introduced to enable employees to defer the taxing point (currently when the shares vest) until a subsequent liquidity event (e.g. sale of shares, IPO) when funds are available to meet the tax payable.

The option to defer tax at the employee’s discretion is welcomed and should address valuation and liquidity challenges. While deferral of the taxing point solves these issues, it is likely to come at a cost of increased taxation. The shares in the company and resulting taxable gain are likely to rise in value by the time of the liquidity event where the company is successful.

This initiative is projected to cost $9.9m, in essence deferred revenue over the next 4 years.

FIF – Revenue account method

Introduction of a revenue account method (RAM) was signaled prior to the Budget to attract/retain high value non-resident migrants and returning New Zealand citizens. New Zealand’s FIF rules which include the taxation of unrealised gains on foreign share investments (with certain exceptions) are unique and an impediment to the attraction of migrants.

The RAM method would be optional and would tax dividends and 70% of capital gain amounts on a realised basis. It would only apply to unlisted foreign shares held prior to being tax resident in New Zealand. Its key attraction is that tax is only payable on receipt of dividend income or the sale of shares i.e. when income is available to meet the tax obligation.

Taxation of deemed income under the FIF rules can lead to liquidity issues for taxpayers. This issue is heightened when the shares are unlisted and not easy to sell to meet tax obligations.

Increased KiwiSaver investment

The Government is working to reduce barriers that currently limit KiwiSaver funds from investing in a wider range of New Zealand businesses, assets and infrastructure.

Relaxation of the existing rules for KiwiSaver would allow greater investment. This has the potential to free up domestic funds to better support large infrastructure projects. Coupled with the initiatives to attract foreign investment this may provide the impetus to advance infrastructure construction.

FBT simplification

While the full ‘FBT reimagined’ that CA ANZ advocated for has not been delivered given the fiscal constraints, it is pleasing to see that there will be significant changes to how FBT will be calculated on motor vehicles and other “unclassified” benefits.

The calculation of the fringe benefit from use of an employer provided motor vehicle will be simplified and a classification adopted to reflect intended usage. While simpler to comply with the level of FBT payable may in fact increase for this type of benefit.

Other benefits will be easier to determine and will focus on in-kind remuneration with a cap of $200 for each benefit provided to an employee. The current cap of $300 per employee per quarter and $22,500 per employer per annum will be repealed. Overall this should reduce the amount of FBT payable on unclassified benefits.

These changes were referenced in pre-Budget announcements and are likely to be introduced as part of the annual Omnibus Tax Bill later this year.

Digital Services Tax Bill discharged

Just ahead of Budget Day, the Minister of Revenue, Hon Simon Watts, announced the discharge (withdrawal) of the Digital Services Tax Bill which was carried over and awaiting its first reading, pending a preferred multilateral OECD solution.

This is sensible as it removes the risk that New Zealand would be subject to a US retaliatory economic response.

It is worth noting that the OECD multilateral solution is also in disarray as the United States has withdrawn from the project and has taken issue with the intended 15% minimum tax that would be imposed on large multinational companies.

The withdrawal of the Bill does mean that the revenue previously banked ($120 million per annum) has had to be reversed.

Inland Revenue additional funding for compliance

The Government has committed to a further top up of funding to support Inland Revenue’s compliance and tax debt collection activities of $35m per year. It also continues funding of $27m a year which was time limited and due to expire in June 2025. This will assist the targeting of the “hidden economy” and is expected to provide a “return on investment” of $4 for every dollar spent, increasing to $8 for the 2027 year and beyond.

What’s not included

There is no targeted relief for SMEs in this year’s budget. The Investment Boost tax incentive and FBT changes will however benefit businesses of all sizes including SMEs.

SMEs bear a disproportionate tax compliance burden. In CA ANZ’s view more can be done to simplify tax administration and reduce overall compliance costs. We continue to advocate for change.

Following on from our Budget commentary in 2024 we are still waiting to see any meaningful reduction in regulation arising from the work of the Ministry of Regulation.