New Zealand's 2010 Budget
Corporate income tax
The corporate tax rate will drop to 28% next financial year – generally as from 1 April 2011. There will be a two-year transitional period for imputing dividends at the existing 30% rate.
As offsetting measures, the safe harbor threshold (debt-to-asset percentage) for inbound thin capitalization purposes will decrease from 75% to 60% from the 2011/12 income year. As from the start of the 2011/12 income year, depreciation deductions will not be available for buildings with an estimated useful life of 50 years or more (this will include residential rental property and most commercial buildings). Building owners will be able to apply to the New Zealand tax authorities (Inland Revenue) for a provisional depreciation rate if they consider a class of buildings has an estimated useful life of less than 50 years. Businesses also will not be able to claim the 20% accelerated depreciation on new plant and equipment (for assets purchased or binding contracts entered into on or after 21 May 2010).
While there are no announcements specifically aimed at the small and medium-sized enterprise sector, small and medium-sized enterprises will be impacted by the broader tax changes on the company and personal income tax rates and the hike in the Goods and Services Tax rate.
Goods and Services Tax (GST)
The much anticipated increase in the Goods and Services Tax rate – from 12.5% to 15% – will take effect as from 1 October 2010. There are no other material changes proposed to the GST regime, for example, to introduce exemptions for necessities (e.g. food); as such, New Zealand's Goods and Services Tax regime remains one of the simplest in the world.
The new rate will have far-reaching consequences for business systems: ERP, billing, purchasing, expenses and accounting systems all will be affected by the change. The real challenge for taxpayers will be updating their systems in time for the effective date of 1 October 2010. For many businesses, particularly large corporations, updating Goods and Services Tax systems will be complex – it is not simply a matter of substituting one rate for the other. There will be a period of some months during which businesses will have to deal with both the old and the new rate.
Another practical consequence of the Goods and Services Tax rate increase will be that GST-exempt entities will need to factor in a 20% rise in GST cost, as they cannot recover all input tax credits. This will largely impact financial institutions, the most immediate example being financial intermediaries, such as banks and life insurance companies. The Budget is silent on any measures to compensate these entities for this additional cost.
Additionally, the rate change and heightened importance of Goods and Services Tax is likely to result in an increased audit focus from Inland Revenue on Goods and Services Tax.
Budget 2010 also includes base maintenance measures to address Goods and Services Tax fraud. Goods and Services Tax rules will be changed to prevent the use of "phoenix" arrangements, by zero-rating transactions involving the transfer of land between registered persons. Such phoenix arrangements involve companies that enter into high value transactions with a mismatch between the claiming of input tax and the returning of output tax.
Personal income tax
The cut in the personal income tax rates (the third cut since October 2008) will have the consequential effect of ensuring that adequate compensation is provided for the increase in the Goods and Services Tax rate (note that government benefits are also being increased as from 1 October 2010 to compensate for the increase in GST).
The new tax rates will take effect on1 October 2010, at the same time as the increase in Goods and Services Tax. The top personal income tax rate will decrease from 38% to 33%. Significantly, the top personal tax rate will now be aligned with the top tax rate for trustee income (also 33%), meaning the tax incentives to structure affairs are reduced.
Reductions in Personal income tax rates (amounts in NZD)
Current tax thresholds income range / New tax thresholds from 1 October 2010
0 – 14,000 12.5% 0 – 14,000 10.5%
14,001 – 48,000 21% 14,000 – 48,000 17.5%
48,001 – 70,000 33% 48,001 – 70,000 30%
70,001+ 38% 70,000+ 33%
Superannuation/savings vehicles
As from 1 October 2010, the top tax rate for most portfolio investment entities (PIEs), including KiwiSaver accounts, will be reduced from 30% to 28%, while other PIE rates drop to align with the new personal tax rates. The tax rate for savings vehicles such as unit trusts and widely held superannuation funds will also be reduced from 30% to 28% from the 2011/2012 income year.
The surprise drop in the highest PIE rate should be welcomed by the savings industry as savings vehicles will still enjoy a significant tax reduction for high income earners. After the personal tax reductions, high income earners would ordinarily pay tax at 33% on investment income, however if they invest through PIEs, they will only pay tax at 28%.
Tax working group recommendations
A Tax Working Group was established in 2009 to advise the government on reform of the tax system. In its report issued in January 2010, the group made 13 recommendations to the New Zealand government. While the government immediately ruled out some of the more controversial recommendations, decisions on the majority were left for the Budget.
TAX NEWS - may 2010
Recommendation/comment
1. The company, top personal and trust tax rates should be aligned.
2. The company tax rate needs to be competitive.
3. The imputation regime should be retained.
4. Personal tax rates should be reduced.
5. The tax base should be broadened.
6. A comprehensive capital gains tax would broaden the tax base.
7. Consideration should be given to a
"risk free return method" model for residential rentals.
8. A low-rate land tax should be introduced.
9a. Depreciation "loading" should be removed on new plant and equipment.
9b. Depreciation should be removed for buildings that do not depreciate.
9c. The thin capitalization safe harbor should be reduced to 60%.
10. Goods and Services Tax should continue to apply broadly with no exceptions.
11. Increasing Goods and Services Tax to 15% would have merit on efficiency grounds.
12. There should be a review of welfare policy and how it interacts with the tax system.
13. Institutional arrangements should
be introduced for when changes to the tax system are considered.
Government response
Announced in Budget 2010 that the top personal rate and trust rate will be aligned at 33%. The company rate will be reduced to 28%.
Announced in Budget 2010 that the company tax rate will be reduced to 28% for the 2011/12 income year.
Announced in February that imputation would be retained.
Personal tax cuts announced in Budget 2010.
Budget 2010 does not tax any new sectors, although changes are being made to the depreciation rules.
Ruled out in the Prime Minister's statement to Parliament on 9 February.
Ruled out in the Prime Minister's statement to Parliament on 9 February.
Ruled out in the Prime Minister's statement to Parliament on 9 February.
Announced in Budget 2010 that depreciation loading will be removed.
Announced in Budget 2010 that depreciation will be removed for buildings that have an estimated useful life of 50 years or more; this applies to all buildings including residential rental homes and commercial buildings.
Announced in Budget 2010 that the thin capitalization threshold will be reduced to 60% as from the 2011/2012 income year.
The government does not support moves to exempt GST on food.
Announced in Budget 2010 that Goods and Services Tax will be increased to 15%.
No comment in the Budget.
No comment in the Budget.
Comment
The alignment of the top personal and trust rate will improve the integrity of the tax system by removing the current bias of using trusts to avoid the top marginal tax rate. The gap between these rates and the corporate tax rate will be 5%.
The reduction in the corporate tax rate is welcome. The government has effectively trumped the recent Australian announcement of moving their rate to 29% in 2013-14 and 28% in 2014-15.
Imputation has many benefits, primarily to prevent double taxation when New Zealand profits are distributed to New Zealand shareholders. Consideration needs to be given to how imputation can be improved where corporations have significant foreign investments and foreign shareholders.
The move towards lower personal income tax rates is positive; where high marginal tax rates exist, there is disincentive to increase income, productivity and efficiency. International evidence suggests that taxing income is harmful to economic growth.
Removing the tax bias for residential rental investment and the reduction in avoidance opportunities around Working for Families is a step in the right direction.
There are many issues with a comprehensive capital gains tax, the political dimension probably the most daunting. For the time being, New Zealand will have pockets of taxing capital gains through the application of specific tax regimes but no general capital gains tax.
We support the minority view of the Tax Working Group, and the government was right to rule this out. Taxing deemed notional returns has practical issues, which would seem to make it unworkable.
The government was right to rule this out as it would not only be politically difficult without exemptions, but would also have b een largely incurred by current property owners through an immediate drop in value, which would have been inequitable.
The decision to remove the 20% depreciation loading is understandable given the standard depreciation rates are meant to reflect economic usage of an asset. With the additional loading to be removed, it is important that all business taxpayers review the depreciation rates applicable to their business to ensure the standard depreciation rates do actually reflect the useful life of assets. If not, consideration should be given to applying for special determination rates for material assets.
It is a significant step for depreciation deductions to be removed for most buildings. The Tax Working Group identified that depreciation of residential rental homes is questionable as this asset class generally appreciates in value. Therefore, tax depreciation provides a tax subsidy to this sector that other forms of investment do not obtain – it was expected that depreciation changes would target this sector rather than applying to all buildings.
New Zealand's existing thin capitalization debt-to-asset percentage of 75% is not out of alignment with other countries given the expansive manner in which New Zealand measures "debt," and as such did not warrant any immediate change. This change will cause some foreign investors real concern.
We agree with the Tax Working Group and the government. New Zealand has a very stable GST system; exempting certain items would only lead to complexity.
The government has been careful to compensate taxpayers via personal tax cuts and selected changes to benefits. We agree that there should be a shift away from taxing personal exertion income and savings towards taxing consumption. Evidence suggests that taxing consumption is less harmful to economic growth than other taxes.
This has been identified for a longer term project with the government rightly tackling the current avoidance areas to improve the integrity of these regimes. The issue of effective marginal tax rates largely as a consequence of the Working for Families initiatives remains a fundamental unresolved tax issue.
This is a technical issue around consultation and more consideration of the macro settings. This is something that was not expected to be covered in the Budget.
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