Nicola Willis described Budget 2025 as a “No BS” Budget. That’s true, to the extent that it lacked the stratospheric BS that characterised the political spin of the Ardern/Robertson budgets. That was the good news.
The not-so-good news is that the budget lacked substance and was devoid of the economic reform that this country needs to reverse its long-term economic decline. It tinkered with the problem.
Much was made of the “Investment Boost” policy that Nicola Willis described as follows:
To raise productivity, lift incomes and drive long-term economic growth, New Zealand needs businesses, big and small, to invest in machinery, tools, equipment, technology, vehicles, industrial buildings and other capital assets. Investment Boost is a new tax incentive that will increase capital investment in New Zealand.
Investment Boost allows a business to immediately deduct 20 per cent of the cost of a new asset from its taxable income, on top of depreciation. This means a much lower tax bill in the year of purchase.
The remaining book value is depreciated at normal rates. Since a dollar now is more valuable than a future dollar, the cashflow from investments is more attractive and the after-tax returns are better. More investment opportunities stack up financially, so more will be made.
Over 20 years, Investment Boost is expected to lift New Zealand’s capital stock by 1.6 per cent, GDP by 1 per cent and wages by 1.5 per cent. These are orders of magnitude, not precise values.
But officials estimate that roughly half the impacts happen in the first five years…
It is estimated to cost an average of $1.7 billion per year in reduced revenue across the forecast period. To manufacturers, farmers, tradies and other Kiwi businesses, my message to you is this – our Government is helping you invest for your future and our country’s future.
The policy enables a business to make a one-off 20% depreciation deduction in the year of purchase, in addition to the rate that would normally apply.
For example, if an asset with a 10% depreciation rate costs $100,000 and is acquired at the start of a financial year, then the depreciation claim that year would be $20,000 (20% of $100k) plus $8,000 (10% of $80k). So the total depreciation claim would be $28k, instead of $10k under the old rules. The depreciation claimed in years 2 and beyond would be less than under the old rules because of the $20k claimed upfront (in advance) in year 1.
Let’s be clear what the depreciation expense is – it’s an estimate of the annual loss in value of an asset used to generate taxable revenue. It’s an estimate because the expected life of the asset is more than one tax year. It is an expense to be deducted from taxable income – it is not a tax credit.
On the disposal of the asset, the true extent of the loss in value of that asset becomes known, and an adjustment is made to reconcile the estimated sale value (depreciated book value). Additional depreciation is claimed if the asset is sold for less than its depreciated value, but if the asset sells for more than its book value then the excess depreciation claimed is “paid back” (depreciation recovered).
The rate of depreciation that can be claimed is prescribed by the IRD, which has done a good job of estimating the appropriate rate of depreciation based on an assumed average use. I have found more often than not, the depreciated value more or less approximates the market value at the time of sale.
I therefore question how much of a boost Investment Boost really is and question whether it deserved the headline billing given to it by Nicola Willis.
In effect, the policy shifts the depreciation claim forward to the first year and is likely to create a situation where the book value is less than its market value at the time of sale. That means the tax “benefit” on the one-off depreciation claim is likely to be clawed back by the government when the asset is sold.
The policy will be welcomed by business, especially long-term commercial property investors who have not been able to claim depreciation at all since 1 April 2024.
Ironically, the policy offers the least benefit to those businesses that use assets with a short lifespan (like plant and equipment) and benefits those who hold assets for a very long time.
After understanding how the mechanics of depreciation work, it is easy to see why the government took this approach, rather than the more widely favoured approach, which was to provide permanent benefits to businesses by reducing the corporate tax rate.
The second area of tinkering relevant to businesses is a change to the KiwiSaver settings. The key features are:
- The government will halve its KiwiSaver contributions, dropping from $521 to $260.72. Those earning more than $180,000 will not receive any government contribution.
- From 1 April 2026, the default rate of employee and employer contributions will rise from three per cent to 3.5 per cent, and rise to four per cent from 1 April 2028.
These changes do nothing to address the major issue of retirement savings and the sustainability of National Superannuation.
Substantial reform is necessary if the issue is to be resolved. Regrettably, the “solutions” to date, like raising the age of eligibility to 67, have been lazy and unimaginative. Reform is necessary and may well include an overhaul of KiwiSaver so that it becomes central to retirement savings in the future.
It seems the current political establishment lacks both the imagination and the courage to do what is necessary, and what will be of most benefit to the nation’s future prosperity.
The fine print: The Investment Boost
The qualifying assets include:
- New assets purchased in New Zealand or imported (new or used) from overseas.
- New commercial and industrial buildings, despite their 0% depreciation rate for tax purposes.
- Capital improvements to existing assets, including seismic strengthening for commercial buildings.
- Certain land improvements, such as fencing, planting of horticultural plants, and improvements for aquacultural, forestry, petroleum, or mineral mining development.
Assets that do not qualify include second-hand assets already in the country, residential buildings, land (except for specific land improvements), and intangible assets.
All businesses are eligible, and there is no cap on the value of eligible investments or the number of assets.
Assets under construction before May 22, 2025, qualify if they are available for use on or after that date.