Business and Tax Updates May 2025: IBBZ Accounting

Summary:

With the new tax year underway, now is an ideal time to review your financial affairs, complete any outstanding records, and evaluate your current tax position. Taking a proactive approach early can improve outcomes and help mitigate compliance risks throughout the year.

We also remind that we regularly share financial insights and tax updates on our official YouTube channel, Tax Accountant. If you haven’t subscribed yet, we encourage you to join us online and stay informed with content designed to support your financial journey.

At IBBZ Accounting, we remain committed to delivering expert guidance and tailored solutions that meet your personal and business needs. As May draws to a close, it presents a timely opportunity to reflect on your financial progress and take action to ensure a strong start to the new financial year. We look forward to supporting you every step of the way.

Thank you for your continued trust in us.

Key Business Updates

1. Key Highlights from New Zealand’s 2025 Budget Announcements

The New Zealand Government has unveiled several significant initiatives in the lead-up to the full release of Budget 2025. Key announcements include: 

• $6.8 Billion Capital Investment: An increase in capital expenditure, focusing on health, education, defence, and transport sectors, with the net capital allowance rising from $3.6 billion to $4 billion.

• $577 Million Boost for the Film Industry: Additional funding for the International Screen Production Rebate, bringing the total to $1.09 billion, to support New Zealand's film sector amidst global competition.

• $190 Million Social Investment Fund: Establishment of a fund aimed at improving social services delivery to vulnerable populations, forming part of a $275 million commitment over four years.

• $164 Million for After-Hours Healthcare: Investment over four years to expand urgent and after-hours healthcare services, ensuring 98% of New Zealanders have access within an hour's drive.

• $604 Million for Pharmac: Additional funding over four years to cover up to 54 new medicines, including 26 cancer treatments, benefiting approximately 175,000 people in the first year.

• $774 Million for Abuse Survivors: Allocation to improve the current compensation system for survivors of abuse in state care, following recommendations from the Royal Commission.

• $1 Billion Reduction in Operating Allowance: Halving the operating allowance from $2.4 billion to $1.3 billion, reflecting a tight fiscal environment and prioritization of essential services.

These measures indicate a strategic focus on strengthening core services and targeted investments, balancing fiscal responsibility with essential sector support.

2. Key Highlights of the Second Budget 2025 – New Zealand
The KiwiSaver default rate will remain at 3% for now but will be phased up over the next few years:

• From 1 April 2026, it will increase to 3.5%

• From 1 April 2028, it will increase to 4%

• The government contribution to the KiwiSaver member scheme, which is currently around $520 per year, will be reduced to $260 per year. This reduction is expected to save the government about 50% of the current cost of contributions.

• KiwiSaver members earning over $180,000 per year will no longer be eligible to receive the $260 government contribution. While this may seem insignificant to high earners, it will result in cost savings for the government, making it a practical decision.

• These changes will not apply to the current year. Government contributions for this year will still be made as usual in July and August. The proposed changes will take effect from next year.

Support for Business Investment:

• The government wants businesses to invest more in productive assets and technology that create jobs and boost national productivity.

• As part of Budget 2025, an additional 20% tax deduction will be allowed for investments in productive assets.

• This deduction is over and above normal depreciation and will be available over a shorter period, enabling businesses to plan for tax savings more effectively.

• The aim is to give businesses more cash in hand, allowing them to reinvest in further productive growth. 

Employee Share Scheme:

• Changes are being proposed to improve the Employee Share Scheme, helping Kiwi businesses compete internationally and attract top talent.

• More detailed guidance on how this scheme will work is expected to be released at a later stage.

3. OCR Cuts Boost Business Confidence and Housing Market Activity

The Reserve Bank of New Zealand has eased monetary conditions significantly, cutting the Official Cash Rate (OCR) by 200 basis points since August 2024, with projections suggesting a further reduction to 3% in the coming months. This sharp drop in borrowing costs has lifted business confidence and supported early signs of economic recovery, including improved Purchasing Managers’ Index (PMI) figures and stabilised building consents. 

In the housing market, lower interest rates have improved affordability, encouraging renewed demand from first-home buyers and owner-occupiers, with investor activity also picking up modestly. House prices have increased steadily, with April showing a 0.4% monthly rise, and forecasts suggest average annual price growth may return to around 6%.

However, economic growth overall remains subdued, mainly due to weakened household demand, particularly in discretionary spending categories such as hospitality and home goods. While momentum is building in key sectors, recovery in broader consumer activity is expected to remain gradual.

Important Tax Updates

1. Bright-Line Rollover Relief Rules Updated

IRD has clarified how bright-line rollover relief applies to transfers of residential land between associated persons from 1 July 2024 (QB 25/15). If rollover relief applies, the transfer is treated as occurring at the transferor’s cost, and the transferee inherits both the transferor’s bright-line start date and main home use history. Rollover relief applies if the parties were associated (under ss YB 2–YB 13) both at the transfer date and for at least two years beforehand, or if the transfer is to a trust where all beneficiaries are associated persons or charities. Relief can be used only once per 2-year period.

2. Updated QWBAs on Bright-Line Test and Land Sale Rules

IRD has released updated Questions We’ve Been Asked (QWBAs) addressing various aspects of the land sale rules, with a focus on the 2-year bright-line test reinstated for residential land disposals from 1 July 2024. Key updates include:

• Intention-Based Taxation (QB 25/08): Profits from land sales are income under s CB 6 if land was acquired with any intention of disposal, even if not the dominant purpose. This aligns with prior guidance on other saleable assets.

• Regular Pattern Rule (QB 25/09): A person cannot rely on the residential or main home exclusion if there is a regular pattern of buying and selling homes they live in. Generally, three or more similar prior transactions with consistent timing may constitute a regular pattern.

• Date of Acquisition (QB 25/10): The acquisition date depends on land type and legal interest. For standard freehold purchases, it is the date a binding agreement is entered. This date may differ from the bright-line start date.

• Subdivided Land (QB 25/12): When selling a subdivided section, the bright-line period is measured from the date the undivided land was acquired. The main home exclusion can still apply, even if the sold lot does not contain a house, provided it was used for the benefit of the dwelling.

• Lifestyle Blocks (QB 25/13): Most lifestyle blocks do not qualify for the farmland exclusion as they are not part of a genuine farming business. However, the main home exclusion may still apply if more than 50% of the land was used for the owner's residence during most of the bright-line period.

• Business Premises (QB 25/14): Land used more than 50% for business operations can be excluded from the bright-line test, even if there is a residential component. The business use must also cover more than half the ownership period.

• Rollover Relief (QB 25/15): Transfers of residential land between associated persons may qualify for rollover relief. The transferee inherits the transferor’s bright-line start date and usage history, provided association existed for at least two years prior to transfer. Relief is limited to once every two years per property.

These revised QWBAs improve consistency and readability while incorporating recent legislative changes. They offer critical guidance for property owners, tax agents, and advisors navigating complex land sale scenarios.