BUDGET 2010

The recent budget introduced the biggest restructure of the taxation system in 25 years and heralded a number of other changes yet to be introduced.

It began with an independent group set up through Victoria University. This tax working group wanted to identify the problems with the current system and provide recommendations
for change.

The initial acknowledgement was that the tax system was broken and specifically that;

• NZ relies too heavily on taxes that are the most detrimental to growth (specifically income tax)
• The abatement of Working for Families creates high effective marginal tax rates
• There was a lack of coherence, integrity and fairness
• The tax burden fell disproportionately on PAYE earners (those unable to avoid the highest marginal tax rate)

The specific recommendations were that;

• Company, top personal and trust tax rates should be aligned to improve the system’s integrity
• NZ’s company tax rate needed to be competitive with other countries tax rates (specifically Australia)
• The top personal tax rate should be reduced to assist growth
• There needed to be across the board reduction of tax rates to incentivise labour and compensate for an increase in GST
• Depreciation on buildings should be removed if evidence shows they do not depreciate in value
• Increase GST to 15% and not include any additional exemptions

Among other issues considered was the need for a comprehensive review of the welfare policy which appears to now be underway.

Some changes considered but not implemented were;

• Capital gains tax
• Land tax
• Assessing a deemed rate of return on rental properties
• Loss “ring fencing”
• Aligned personal, trust and company rates

It is interesting to note that the tax working group assessed cost of the election promises in 2006 to wipe interest on student loans and the expansion of the Family Assistance to In Work tax credits was such that without them the personal, trust and company tax rates could have been aligned at 25% rather than what they are now set at. The cost of a few dodgy credit card purchases are nothing in comparison to that political expediency.

Also being considered still are substantial changes to Qualifying and Loss Attributing Qualifying Companies (QC/LAQC). The Tax Working Group and the various Government bodies – IRD and Treasury – are apparently at loggerheads over QC’s and LAQC’s so we will have to wait and see what, if any changes are implemented.

How will the budget affect your business?

Other than the rise of GST to 15%, the other main points for business are:

Company tax lowered to 28 per cent

• Company tax will be lowered from 30 per cent to 28 per cent with effect from 1 April 2011 for the start of the 2011.2012 tax year.
• This change also applies to unit trusts which are taxed as companies.
• The resident withholding tax rules for interest paid to companies will also change accordingly.
• The Government will allow dividends issued after the new company rate takes effect to be imputed at the existing 30 per cent rate for two years if company tax has been paid at the 30 per cent rate.
• This move has been well received and means that New Zealand’s company tax rate, from April next year, will be more competitive than Australia’s.

Across-the-board cuts in personal tax rates
The new PAYE rates come into effect from 1 October 2010. This means you need to start using the new rates to calculate the correct amount of PAYE to deduct from employees' salary and wages for pay periods ending on or after 1 October 2010. You will need to ensure your payroll software is updated to calculate PAYE correctly.

Rates and thresholds from 1 October 2010 to 31 March 2011

The new tax rates are expected to compensate for the increase in GST and to leave people in most income brackets marginally better off.

The cuts have been criticised for being of more benefit to high income earners than low income earners, but are in line with government strategy to encourage productivity and provide incentives for skilled Kiwis to work in New Zealand rather than across the Tasman.

Impact of the new rates have on fringe benefit tax
Currently you have the option of applying the alternate rate or using a flat rate of 61%.

From 1 October 2010 the flat rate changes from 61% to 49.25%
The alternate fringe benefit rates for the year ending 31 March 2011 have changed in line with the composite tax rates. We will be happy to assist you with completing your FBT returns as this could be a bit messy given the changes in rates.