‘Paper Route Tax’ may lose track

I struggled to get started on this article on Budget 2012.

Such was the impact the Budget had on this writer.

Being a tax advisor, naturally the focus went to the tax changes, which were surprising. One must question how much revenue will be collected from the so- called ‘Paper Route Tax’ and the ‘Bach Tax.’

At least, booking a Bach for the holidays may become much easier.

Like most accountants, I thought I would look into the numbers released by the Government to better understand how New Zealand will reach surplus by 2014/2015.

This is where the Government’s moves start making more sense.

A country’s budget is no different to a household budget. You take a look at your income and subtract your expenditure. If the balance is a surplus, you can spend on things you want or need (For example, education, infrastructure and health).

Alternatively you can save, invest or pay down the mortgage.

If there is a deficit, expenses go on the overdraft, until one day the bank manager stops increasing the overdraft.

The US was in this predicament not so long ago.

The New Zealand Government wants to stop borrowing.

For 2012-2013, the Government has forecast $73.7 billion for expenses, of which $50.3 billion relates to social security ($23.2 billion), health ($14.7 billion) and education ($12.4 billion).

Revenue or income for 2012-2013 is forecast at $64.2 billion.

Interestingly, taxes account for $58.3 billion of income.

Individual tax and GST amount for $41.6 billion.

Simple mathematics indicates a deficit of $9.5 billion for the financial year.

Therefore, how will the Government plug the hole?

Simple, it will increase revenue and reduce expenses.

Have you tried doing this at home?

A tough choice

The Government expects that as the economy improves, expenses should fall and revenues (in the form of tax collection) should increase.

The economy would need to grow at a pace seen in the early 2000s to meet the objective.

Against this backdrop, the situation in Europe and a weakening Australian economy will not be helpful.

This leaves two choices; cut down Government spending or increase revenue.

If the economy does not grow at the rate predicted, the Government will be left with no choice but to introduce new taxes or get the most out of the system.

In this Budget, Inland Revenue has been given $78 million to increase compliance and audit activity, with a target to collect $340 million over four years. Given where the economy is and the need to bring the budget back to surplus, the focus will be on taxes and you can bet your bottom dollar that the taxman will be on a clear mission to collect.

Ravi Shailen Mehta is a Director at PricewaterhouseCoopers in Auckland.

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