The personal income tax changes that will apply from 1 October 2010 are:
$0 - $14,000 12.5% 10.5%
$14,001 - $48,000 21 % 17.5%
$48,000 - $70,000 33% 30%
Over $70,000 38% 33%
Secondary tax and resident withholding tax rates will also be reduced from 1 October 2010, to align with the new personal tax rates.
The company tax rate drops from 30% to 28%, from the start of the 2011/12 income year. There will be a transitional period of two years during which companies can attach imputation credits arising from tax paid at 30% at an imputation ratio of 30/70.
Changes in both the personal and company tax rates mean that provisional tax "uplift" calculations will need to be amended, just as happened following the last round of tax cuts. For the 2011/12 income year, instead of using 105% of the previous year’s residual income tax (RIT), the amount of provisional tax payable is calculated using 95% of their RIT for an individual and 100% of the RIT for a company.
The rate of Goods and Services Tax (“GST”) will be increased from 12.5% to 15% from 1 October 2010. Immediate compensation for the increase in the GST rate will be provided from 1 October 2010 by increasing by 2.02 percent payments to persons receiving the main working-age benefits, student allowances, New Zealand Superannuation and Veterans Pension. Annual indexation of these benefits will resume on 1 April 2011.
Also Working for Families, along with most of the important forms of supplementary assistance, and the Government Superannuation Fund and National Provident Fund annuities that are subject to CPI adjustments will be increased by 2.02 percent from 1 October 2010
From 1 October 2010 the top rate for most portfolio investment entities (“PIEs”), including Kiwisaver accounts, will be reduced from 30 percent to 28 percent. The other PIE tax rates will drop to align with the new personal tax rates. With the top personal tax rate reducing to 33%, and with the trustee rate remaining at 33%, there will still be an incentive to invest via a PIE to cap the tax rate on investment income at 28%.
The tax rate for other savings vehicles,(such as unit trusts and widely-held superannuation funds) will also be reduced from 30 percent to 28 percent from the 2011/12 year.
Resident withholding tax (“RWT”) rates applying to interest earned through a bank account will be reduced so they align with the new personal tax rates from 1 October 2010.
From the start of the 2011/12 income year taxpayers will no longer be able to claim depreciation on the cost of a building which has an estimated useful life of 50 years or more. This measure is not restricted to residential rental properties. It applies to all buildings.
However, if a taxpayer can demonstrate that a building has an estimated useful life of less than 50 years, the taxpayer can apply for a provisional depreciation rate from the IRD.
Building owners will need to ensure
that the “fit-out” within the building is separately costed and depreciated as fit out rather than as the fabric of the building.
The 20% depreciation loading will be removed from assets purchased after 20 May 2010. Previously, a purchase of a new asset (other than buildings) entitled the taxpayer to an uplift in the standard depreciation rates by 20%.
The Loss Attributing Qualifying Company (LAQC) tax regime will change from the current position where losses are attributed but profi ts are retained in the company. This produced a marginal tax rate discrepancy where the losses were offset at the top marginal rate but profits were taxed at the lower company tax rate.
From 1 April 2011 it is proposed all LAQCs will be taxed as limited partnerships. The main impact of this change will be to ensure both profits and losses are assessed at the marginal tax rate of the investor.Where the LAQC has a loss, the loss will still be able to be deducted from the shareholders’ other income.
However the loss will be limited to the shareholders cumulative historical interest in the investment. This loss limitation can be avoided by having rental properties held in individual ownership. Where the LAQC makes a profit, the profit will be taxed at the shareholder’s marginal tax rate.
Rental property investors using an LAQC will still be able to access the rental loss, but the loss itself will be lower because of the lack of a depreciation claim on the cost of the building.
As from 1 April 2011, investment losses will be added back to taxable income for the purpose of determining a family’s eligibility for WFF assistance. The IRD are continuing to review the WFF regime, so further changes are likely.
The balance sheets of overseas owned companies will need to be reviewed and, in some cases, recapitalised, to ensure the level of interest bearing debt in proportion to the total value of assets does not exceed 60%, from the 2011/12 income year. The previous level was 75%.
Where the level of debt is higher than 60% the interest expense attributable to portion of the debt in excess of the threshold is non-deductible
An additional $119.3 million will be provided to the IRD over four years, to fund compliance and enforcement (especially in relation to property transactions).
The budget has introduced a number of tax changes, which will have varying impact on you, our client. In particular, there will be a requirement to review how GST is charged and invoiced within your accounting system. We intend to contact you regarding this specific issue, in the near future.
Commercial and residential property owners need to be mindful of the impact the tax changes will have, and should contact us.
Disclaimer: All information contained in this newsletter is, to Kendons knowledge, true and accurate. No liability is assumed by Kendons for any loss suffered by any person or entity relying directly or indirectly on the information contained in this newsletter. It is recommended that clients should consult a senior representative of Kendons before acting on any of this information.