The New Zealand Government billed Budget 2025 as the “no BS Budget” in the weeks prior to the budget and they made it known that they would not be splashing around much in the way of new spending. Budget 2025 certainly delivered on the fiscally conservative front, but it also delivered a major surprise with the “Investment Boost” tax deduction for new assets.
Spending and the state of the economy
Net new spending is the lowest seen in a decade at around $1.5b as the Government keeps its spending in check as it seeks to return to surplus. With plenty of spending needed on priority areas like health and infrastructure but little new spending to play with, there has been a major reshuffling of the deck. Total new spending in the Budget is actually $6.7b, meaning that $5.3b of savings needed to be found elsewhere to bring the total new expenditure within the $1.5b limit.
Low new spend is a double-edged sword. On the one hand, the Government keeping its spending under control will help keep the lid on inflation. Less inflationary pressure means more room for further interest rate reductions and the Finance Minister made a not-so-subtle hint to the Reserve Bank in her speech about interest rate deductions. On the other hand, a bit of extra spending would have helped the economy, which is at best flat. This is especially important since some of the major spending announced for defence and rail upgrades will inevitably be spent overseas.
Despite global uncertainty due to the US-led trade war, Budget 2025 is forecasting the economy to grow 2.9% for 2025/26 and 3% the year after. These growth figures seem optimistic based on recent global events and sluggish domestic performance.
Tax announcements
Funding for the Inland Revenue
As a pre-Budget announcement, it was announced that IRD would investigate changes to remove some constraints for offshore funding of infrastructure projects. This was announced on Tuesday, and the IRD have already released a consultation paper in relation to this. The scope of the first paper has left some room for changes beyond large infrastructure projects. I suspect that this is paving the way for more Public Private partnerships as there was a noticeable absence of big infrastructure projects in the Budget.
Another pre-budget announcement was to progress the introduction of measures to defer the taxation of employee share schemes for start-up companies. Changes in this space have been talked about for some time, so this is not a surprise. Given the nature of start-ups, it will be a challenge to design a workable process here.
Following the success of the $27m in funding given to IRD last year, a further $35m in funding has been allocated to the IRD for investigations and debt collection activities. This is budgeted to gather a $8 dollar return for every dollar spent, and this would be in line with prior IRD investigations initiatives. With this in mind, we can expect that the IRD will remain very active and visible like they have been in the past year or so.
Tagged onto the IRD’s budget announcement it was confirmed that the Government has announced its intention to proceed with improvements to the FBT regime which are already under consultation. Changes here are directed at simplifying the FBT regime and bringing the FBT regime back to its original purpose of taxing salary sacrifices rather than being an annoying tax on any benefits provided to employees, so this is great news for businesses and accountants alike.
Investment boost
The big surprise of Budget 2025 was the announcement that that an immediate income tax deduction will be allowed for 20% the cost of a new depreciable asset in the year of purchase. While the Finance Minister referred to this as a tax credit in her speech, this will work as an accelerated depreciation claim. There are also a few other assets that are not depreciable that are included, but I will come back to that below.
Quite importantly, this starts for assets purchased on or after today!
There is no cap on these deductions, but it is important to note that it does not apply to assets that have previously been used in New Zealand. No reason is advanced for why secondhand assets are excluded, but I’d guess that it is a simple anti-avoidance measure to stop this being gamed.
One quirk of these rules is that it will apply to most new commercial and industrial buildings even though these are no longer depreciable (well technically they are depreciated at 0%). This will be great news for the struggling construction industry.
Buildings commenced before 22 May 2025 will also qualify so long as they are completed and first used on or after 22 May 2025. There are some carve-outs for certain types of commercial buildings such as rest homes and hotels.
Improvements to existing assets (including qualifying commercial buildings) will also qualify for the deduction.
Farming, forestry, aquaculture, and horticultural improvements will also qualify for the accelerated deduction.
No accelerated depreciation is allowed on intangible assets.
Because these deductions are accelerated depreciation claims, depreciation recovery income could apply on the sale of the asset.
This change is a welcome surprise for business, and it should encourage new spending which should have a positive impact on the economy, but that could come with some upward risk on inflation. Retailers for the likes of durable goods, vehicles, and plant & machinery will be especially pleased to see this change. Here is a link to the IRD’s factsheet on these changes.
KiwiSaver
From 1 April 2026 employee and employer default contributions increase to 3.5%.
From 1 April 2028 employee and employer default contributions will increase to 4%.
There will be an option for employees to opt to stay at the 3% rate in some circumstances.
From 1 July 2025, the maximum Government contributions will halve for most savers down from just over $520 to just over $260. Government contributions will be removed altogether for KiwiSaver members earning over $180,000. This saves the Government billions, but it will not be popular.
Working for Families changes
As per normal, the abatement thresholds for Working for Families have been inflation adjusted.
Income testing has been added to the Best Start part of Working for Families.
Prescriptions
A small but useful change is that prescriptions for repeat medicines will be increased from 3 months to 12months. This is a change the medical industry has been campaigning for years. Hopefully this will help ease some of the burden on primary carers.
Further rates relief for SuperGold card holders
The income testing abatement threshold for the existing rates rebate scheme will lift from $31,510 to $45,000 expanding the reach of the scheme.