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Issue 3, May 2010

A William Buck Publication

Be Advised
STRATEGIC THINKING I TAILORED ADVICE I INTEGRATED SOLUTIONS
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01 – Introduction
02 – Immediate Effect
03 – Effective from 1 October 2010
04 – Effective from 2011/12 income year
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May 2010 Tax Budget


New Zealand

williambuck.com CHARTERED ACCOUNTANTS & ADVISORS


May 2010 Tax Budget – New Zealand
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01 – 03 –
Introduction Effective from 1 October
In the May 2010 Budget, as announced today
2010
(20 May 2010), the Government introduced a
number of significant tax measures to reform our GST rate lift and compensation measures
tax system. This was driven by the following
GST to increase to 15% from 1 October 2010.
four key objectives:
The increase in GST will be accompanied by tax
cuts on NZ Super and a 2.02% increase in
— creating incentives for people to work hard,
payments to recipients of NZ Super, main
improve their skills and get ahead in New
working-age benefits and Working for Families –
Zealand
reflecting Statistics New Zealand’s calculation of
the effect on prices of the rise in GST – worth
— encouraging saving and boosting
$2.2 billion over four years.
productivity of investments
Personal tax cuts
— helping drive economic performance and
create jobs Reduction in income tax rates, secondary tax
and resident withholding tax rates were
— easy to comply with and administer, announced in today’s Budget. They will take
regarded as fair, and limits opportunities to effect from 1 October 2010. The cost of the
divert income and reduce tax liabilities personal tax cuts is $2.46 billion in 2010/11
rising to $4.26 billion in 2013/14. These tax cuts
The tax measures announced in today’s budget will be largely funded by increasing GST and
can be classified into the following categories: reducing tax breaks that encourage property
speculation. The aim is to remove some of the
— Those with immediate effect distortions in the tax system by aligning the top
rate with the trust rate. The present diversity of
— Those effective from 1 October 2010 rates encourages people to shelter income in
trusts, companies and portfolio investment
— Those effective from 2011/12 income year entities to cut their tax liability or reduce income
for the purposes of receiving Working for
Families payments, calculating child support and
02 – making student loan repayments.
Immediate Effect
Depreciation loading

Businesses will no longer be able to claim 20%


accelerated depreciation on new plant and
equipment. This change will apply to assets
purchased after Budget day. The old rules will
continue to apply for assets purchased before
this date.

williambuck.com CHARTERED ACCOUNTANTS & ADVISORS


May 2010 Tax Budget – New Zealand
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The following table compares the new personal in the hope the investment would be directed
tax rates with the existing ones and outlines the elsewhere and therefore the depreciation claims
savings that will be made by the individuals. in relation to buildings with an estimated useful
life of 50 years or more (either commercial or
Income Existing New Savings residential) will be disallowed. This will take
Level Personal Personal Per effect from the 2011–12 income year. Note that
Tax Tax Annum the depreciation on chattels will continue to be
Rates Rates an allowable deduction.
$0 - 12.50% 10.50% Up to The Government was concerned with taxpayers
$14,000 $280
gaining deductions for depreciation when the
$14,001 - 21.00% 17.50% $280 + capital value of properties continues to increase.
$48,000 Up to Generally properties do depreciate over time;
$1,190 however recently it has been noted that the
capital increase of the value of properties has
$48,001 - 33.00% 30.00% $1,470 +
more than offset the depreciation of the
$70,000 Up to
$660
buildings.

> $70,000 38.00% 33.00% $2,130 + LAQC and QC changes


5c in
every Qualifying companies (QCs) and loss attributing
dollar qualifying companies (LAQCs) will become flow-
earned through entities for tax purposes - similar to
above limited partnerships. The reason for these
$70,000 changes is that shareholders cannot deduct
losses at their marginal tax rate and pay tax on
Lower savings tax profits at the lower company rate. Inland
Revenue and Treasury are releasing an issues
The top tax rate for most portfolio investment paper today on the implementation of the new
entities (PIEs), including KiwiSaver accounts will rules. Changes will take effect from income
be reduced from 30% to 28% from 1 October years starting on or after 1 April 2011.
2010. The other PIE rates will also fall to align Legislation implementing these changes will be
with the new personal tax rates. enacted later this year.

04 – Thin capitalisation rules

Effective from 2011/12 The safe harbour in the inbound thin


capitalisation rules – or so-called "thin
income year cap" - will be reduced from 75% to 60% . This
means foreign owned companies will be able to
Company tax cut claim only tax deductions for interest
payments on debt up to 60% of their local asset
The company tax rate will fall from 30% to 28% value. The only exception is if the total multi-
from the 2011–12 income year. For most national group's debt ratio is higher than this.
companies, this will apply from 1 April 2011. This change will take place from the 2011/12
The Government will allow dividends issued income year – for many businesses this will be
after the new company rate takes effect to be from 1 April 2011. Changing the thin cap rule
imputed at the existing 30% rate for two years if limits the extent to which foreign multinationals
company tax has been paid at the 30% rate. can allocate debt to their New Zealand
subsidiaries, claim tax deductions for
Depreciation on buildings the interest they pay on this debt, and therefore
reduce the amount of tax they have to pay here.
The Government wanted to remove New
Zealanders' bias towards investment in property

williambuck.com CHARTERED ACCOUNTANTS & ADVISORS


May 2010 Tax Budget – New Zealand
___________________________________________________________________________________________________________________________________

Some initial thoughts on the Government’s on them. For example, groceries worth $100
Response now cost $112.50 including GST. GST at 15%
makes that $115.00 - a 2.2 per cent increase.
Budget 2010 delivers a principled tax reform Statistics New Zealand estimates the net effect
package that includes across the board cuts in on average of a 2.5% increase in GST will be
personal tax rates and an increase in the GST about 2% on the consumer price index (CPI)1.
Sydney rate to 15%.
T 61 2 8263 4000 Having said this, the exact effect will depend on
E info@williambucknsw.com.au The big surprise is a reduction in the company whether businesses feel they can maintain
tax rate from 30% to 28% from 1 April 2011, two profits if they pass through the full increase, or
Melbourne years ahead of a similar move in Australia. whether they take the opportunity to increase
T 61 3 9824 8555 prices further. A recent survey suggested that
E info@williambuckvic.com.au The disallowance of the depreciation on nearly half the firms sampled would increase
residential property coupled with personal tax prices by more to claw back margins eroded
Brisbane cuts is not bad news to all the residential over the past two years1. Bank economists
T 61 7 3229 5100 property investors. It is important to note that in forecast total CPI to rise to 4.8% or 5% in the
E info@williambuckqld.com.au a number of cases claiming depreciation on last quarter of this year1.
residential property is only a temporary benefit,
Perth as at the time of its disposal the depreciation The businesses need to plan now for the
T 61 8 6436 2888 claimed in prior years are clawed back (often increase in GST rate to 15% in order to ensure
E info@williambuckwa.com.au resulting in less nil effect). that they do not incur unnecessary costs or
risks. Some of the matters that need to be
Adelaide In our view the personal tax cuts in most cases considered are as follows:
T 61 8 8409 4333 are likely to outweigh the present benefit of
E info@williambucksa.com.au claiming depreciation on residential property. — Ability to increase the price charged to
The following table outlines the extent to which customers to cover a rate increase
Auckland the personal tax cuts outweigh the present
T + 64 9 366 5000 benefit of claiming depreciation on residential — The changes that need to be made to the
E info@williambuck.co.nz property (at the various income levels). The accounting and reporting systems
comparison table uses an average three
bedroom residential rental property with a cost — Review of the contract terms and periodic
of $355,000 of which 44% represents the contracts
building cost resulting in depreciation of $4,686
using diminishing value method ($355,000 x — Impact on the funding position or cost base
44% x 3%).
Finally we note that the Inland Revenue will
receive more funding to increase its audit and
Income Annual Tax Shelter Tax
Level Tax on Savings
compliance activity around debt collection, the
Savings Depreciation Less hidden economy and property transactions.
Tax Hence we expect an increase in the number of
Shelter audits, which the Inland Revenue will be
undertaking in near future.
Disclaimer 75,000 2,380 1,781 599
The material in this newsletter is for the 100,000 3,630 1,781 1,849
benefit and information of clients. The
items are in the nature of general Contact Us
comments only, and re not to be used, 125,000 4,880 1,781 3,099
relied or acted upon without seeking If you have any questions about the issues
further professional advice. William Buck 150,000 6,130 1,781 4,349
accepts no liability for any errors or
contained in this newsletter, please contact your
omissions, or for any loss or damage William Buck advisor.
suffered as a result of any person acting The increase in GST does not mean the cost of
without such advice. Liability limited by a
scheme approved under Professional
living will go up by 2.5%. Note that the 2.5%
Standards Legislation other than for acts increase is on goods already priced at 12.5%
or omissions of financial services above their GST-exclusive price and furthermore 1 NZ Herald 14 May 2010
licensees.
some goods do not have GST charged directly

williambuck.com CHARTERED ACCOUNTANTS & ADVISORS

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