IRD sides with Act in fiscal hole battle, David Seymour magnanimous in victory

Act leader David Seymour says advice from IRD has disproved Labour’s claims of a $90 million mistake in the Government’s costings for reinstating interest deductions for residential property owners.

Seymour was magnanimous in victory, noting the fact that most political parties had made a similar error in their pre-election costings of the policy.

The issue comes from costings released by the Government to the Herald on Monday evening, which showed the cost of reinstating interest deductions would be $360m in the next fiscal year, rising to $915m by 2027/28.

But that data included a $0 cost for the current fiscal year, 2023/24, which began on July 1 last year and ends on 30 June this year. That is a problem, because the Government plans to begin phasing-in its policy from April 1 this year, meaning the policy covers three months of the current fiscal year. Interestingly, National used a different style when it published its fiscal plan before the election, in which it added a cost to the fiscal year 2023/24.

Seymour denied the cost needed to be booked against the 2023/24 fiscal year because tax returns would be filed later - and IRD agreed.

“We understood how Labour could make this mistake. We too assumed in our alternative budget that there would be costs in this fiscal year because the tax year starts in April and the fiscal year ends in June.

“However, Inland Revenue advises us that Government costings are done on the basis of when a person’s tax return is filed with Inland Revenue. The tax returns won’t be received until well into the Government’s fiscal year 2024/25.

“No tax returns will be received in the fiscal year 2023/24. There is therefore no cost in 2023/24,” Seymour said.

The verdict bodes ill for Labour, marking the first time in years one of its “fiscal hole” attacks seriously failed to hit the mark.

In the past, changes like the previous Government’s new 39 per cent top tax rate were credited against the end of that fiscal year, reflecting the fact they triggered on April 1. Other costings, like the current trust rate changes, have been credited against later years.

Act’s alternative Budget also charged the cost of that party’s plan to restore interest deductions against the 2023/24 year.

Labour Finance Spokeswoman Barbara Edmonds alleged that the Government had “forgotten to include $90m of the cost of changing interest deductions for landlords in the current financial year, a scheme costing almost $1 billion more than they bargained for.

“The changes to interest deductions start on 1 April this year. But according to data seen by NZ Herald, the government figures don’t show any impact on the government’s books until the 1st of July. That’s a mismatch of $90m,’ Edmonds said.

Labour revenue spokeswoman Deborah Russell alleged this showed “atrocious book-keeping”, but when advised IRD had sided with the Government, Russell said the imbroglio was caused by a “lack of transparency”.

“We haven’t seen the legislation and the only costings we’ve seen are those reported in the media,” she said.

Costings for the policy released to the Herald by the Government. Table / NZ Government

Edmonds repeated calls for the Government to walk back the change and spend the money on social services.

“We have almost $3b that could instead be 439 million lunches for children, it could keep our smokefree generation, it could mean Police are paid fairly for the work they do to keep our communities safe.”

During his post-Cabinet press conference on Monday, Prime Minister Christopher Luxon said he had not seen an updated cost for the policy but that his ministers had.

“I haven’t, but our ministers [have]” Luxon said.

The policy in question will allow landlords to reduce their tax bills by reinstating their ability to deduct interest costs, as has historically been the case.

In 2021, Labour began removing the ability for residential investment property owners to deduct interest costs from their tax bills, which has the effect of increasing the amount of tax investors pay. The three parties of Government campaigned on reversing the policy, which will have the opposite effect and reduce the tax paid by landlords.

The National-Act coalition agreement said landlords would get a 60 per cent deduction in 2023/24, rising to 80 per cent in 2024/25 and 100 per cent in 2025/26.

This was an accelerated version of what National campaigned on, which was to keep interest deductions at 50 per cent in the 2024/25 tax year and increase deductions to 75 per cent in 2025/26, with deductions fully restored in 2026/27.

In the end, talks between the partners saw the 60 per cent 2023/24 deduction dropped, with the policy phasing-in at 80 per cent in the 2024/25 tax year.

Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.