The buoyant covid subsidy funded days are behind us, New Zealand has entered a ‘technical’ recession. This was reinforced by the recent announcement that New Zealand’s corporate tax paid was almost 11% down in the 11 months to May relative to Government expectations.
A drop in the corporate tax take reflects the declining profits of businesses, coinciding with a decline in output. While profits have declined, there is little to ease the tax burden for businesses with no relief measures in place in a volatile market.
From all the industries feeling the pinch of economic downturn, the construction sector has arguably been hit hardest. As property prices decline, construction costs continue to rise sharply, impacting margins and the ability of property focused businesses to service debt.
Many builders and property developers will be holding land that has dropped in value within months of acquisition. By valuing closing stock at “market selling value” most businesses are able to claim a tax deduction for the drop in the value of their inventory prior to sale, as long as the value is supported by market data. However, as land is specifically excluded from the trading stock rules, businesses that derive income from the sale of land cannot deduct losses in value until the land is sold. The misalignment in treatment is arguably a kick to an industry that is already down.
One of the temporary tax measures introduced in response to Covid-19 enabled tax losses to be carried back to the prior year to recoup previously paid tax. A strong 2022 financial year followed by a volatile 2023
raises the question whether a similar loss carry back scheme could be implemented now to cash out current year losses when businesses need it most. With the next 12 months showing little signs of an economic boom, it could be a few years before some businesses can claim current period losses under the current tax rules.
With operating costs growing, investment in capital is being reconsidered and potentially delayed. The ability to claim an immediate tax deduction for small capital items could incentivise businesses to proceed with projects. The reintroduction of a higher threshold for low value assets at $5,000 or more is another option for the government to encourage investment in productive assets that create more opportunities. This could be further extended similar to the relief measures Australia provided where small businesses had the potential to temporarily write-off assets to the value of $150,000 encouraging investment at a greater scale.
While the timeframe for such write-off’s has ended in Australia, similar to New Zealand, these relief measures during the pandemic illustrated how tax can be used to drive business investment and reduce the tax burden on businesses during an economic downturn.