David Farrar: It’s a tax delay, not a tax break

Newsroom reports:

It’s audacious. It’s astounding. We’re doing the time warp again.

Even ministers struggled to comprehend the scale of the tax incentive scheme they’d signed off in the Budget. Shane Jones left his own noisy beer-and-crayfish Budget night party, upstairs in Parliament Buildings, to return to the House to check with other ministers whether there really was no cap on the size of an asset that could receive the 20 percent tax deduction.

Then he calls back, jubilant. Yes, he confirms, even a massive gas rig will be eligible. “These gas rigs, it’s a billion dollars for one. It’s been 600 or 700 hundred million, can go up to a billion.”

Yes, he agrees, combined with the $200 million for equity shares in gas fields, it’s Think Big all over again. “It’s certainly got elements of the Crown coming back into the market in a way that Muldoon formally helped develop natural resources and de-risk co-investors,” he says.

Got your eye on a fleet of company cars? Or a nice shiny skyscraper to house your business? Commercial buildings are also eligible. Developers are just talking through the nitty-gritty, now, like whether that extends to seismic strengthening.

There’s a debate to be held about whether or not there should be a cap on the Investment Boost scheme, but the article sort of misses the point when it paints this as a bottomless hole.

The scheme just really allows depreciation to be claimed earlier than is normally the case. This affects cashflow, but doesn’t in the long run change the amount of tax paid.

Let’s say you purchase a $100,000 asset with a 20% straight line depreciation rate. You would currently get the following “back” for it:

• Year 1 – $20,000 x 28% = $5,600
• Year 2 – $20,000 x 28% = $5,600
• Year 3 – $20,000 x 28% = $5,600
• Year 4 – $20,000 x 28% = $5,600
• Year 5 – $20,000 x 28% = $5,600

So after five years you have claimed back $28,000 from tax.

Under the new scheme it is:

• Year 1 – $40,000 x 28% = $11,200
• Year 2 – $20,000 x 28% = $5,600
• Year 3 – $20,000 x 28% = $5,600
• Year 4 – $20,000 x 28% = $5,600

So after four years you have also claimed back $28,000 in tax. The same amount of tax gets paid.

From a business point of view, it is definitely useful for cashflow getting that extra 20% in Year 1 – especially for longer lived assets which might only depreciate say 7% a year.

From the government’s point of view of view, it doesn’t cost much in the longterm. There is a cash flow impact as you get less tax early on, but over time you end up collecting the exact same amount of tax. The only real fiscal impact long-term on the government is the cost of borrowing over the time period.

If we take the example above, the government has to wait five years for its $5,600. It borrows at 3.5% so the cost is $196 a year or $784 so a $100,000 asset costs the government around $800 not $20,000.

David Farrar runs Curia Market Research, a specialist opinion polling and research agency, and the popular Kiwiblog where this article was sourced. He previously worked in the Parliament for eight years, serving two National Party Prime Ministers and three Opposition Leaders