With Budget 2025 being released yesterday, we would expect some tax changes to be introduced to help the government pay for their proposed spending. However, the budget this year was light on tax changes. The government has preferred to look to fund the budget through cutting spending in some areas rather than through increased taxes.
The tax centre piece of the budget and main tax change is what the government is calling the investment boost. This is a tax incentive via allowing an immediate 20% deduction on the cost of a new asset that was purchased.
This change applies to depreciable property that is new in New Zealand on or after 22 May 2025. Because this applies to depreciable property new commercial buildings are in the scope of the incentive despite only just returning depreciation to 0%. Investors in commercial buildings can expect large deductions where they look to invest in new buildings or potentially on certain capital improvements to existing buildings.
Improvements to farmland, forestry land and planting listed horticultural plants along with certain other land improvements which ordinarily have had very low amortisation rates are also within the scope of the incentive. This will apply to improvements such as farm tracks which are normally amortised at 5% per year. An upfront 20% deduction on the cost of the track will be allowed under these rules. A welcome change to farmers.
This deduction is allowed on top of your normal depreciation claim. The cost of the asset is reduced the by 20% deduction and depreciation of the asset begins at this reduced cost. For example, if you purchase a new machine costing $10,000 you will have a $2,000 deduction in line with the 20% incentive. The tax book value becomes $8,000 (cost – 20%). If this machine is deprecated at 10% you will have an $800 depreciation deduction in year 1 and a total deduction on the machine of $2,800 in the first year you own the asset. Without the change, your first-year deduction would be $1,000, 10% of the purchase price.
Something to watch out for is the apportionment rules. The 20% deduction is only allowed for the business use of the asset. If the use of the asset changes from business to private, you will have to pay back the deduction to the extent the asset is now being used privately. This will sound familiar to anyone who has been exposed to the change of use rules for GST.
This change was introduced in line with the Invest New Zealand initiative which was introduced in January 2025. The hope is that this change will encourage investment in New Zealand and drive economic growth in New Zealand. Ultimately, the hope is this will contribute to a 1.5% increase in both wages and GDP over the next 20 years.
While not directly included in the budget bill, some changes from earlier in the year remain on the cards and were mentioned through the Invest New Zealand. These were changes to FBT, FIF rules, and employee share scheme rules. We expect these changes to continue to progress through the year.