Budget 2010: Tax reductions in detail

Company tax will drop from next year alongside the much-hyped reduction to personal income tax and GST is on the rise, Finance Minister Bill English’s budget revealed today.

READ ALSO: Budget 2010: Tax specialists impressed

Billed as the biggest tax reform in 25 years, Budget 2010 contained few surprises confirming the top personal tax rate reduction from 38% to 33% and an increase in GST to 15% from October 1 this year.

However, company tax is also set to drop with a cut from 30% to 28% to apply in the 2011/12 income year. For most companies, this will take effect on April 1 next year.

And to encourage saving in New Zealand, the top tax rate for most portfolio investment entities (PIEs) will also drop 2% to 28%.

This change will also take in life insurance policy holders and widely-held savings vehicles such as unit trusts and superannuation funds.

Mr English said the budget delivered the biggest reform of the New Zealand tax system in decades.

“Across the board personal tax cuts and a package of other tax changes will help boost economic growth, make the tax rules fairer and help hard-working Kiwis get ahead under their own steam,” he said.

“For too long, New Zealand has relied on investment property speculation, rising debt and increases in government spending we could not afford.

“This budget takes action that will encourage investment in the productive parts of the economy such as exporting, and it gives the vast bulk of New Zealanders extra cash in their pockets so they have more choices.

The sting
While higher income earners will benefit from the government slashing the top tax rate, there is a sting in the tail of the budget that will hit wealthy in the hip pocket beyond just an increase in GST, which is widely considered to adversely affect the less wealthy the most.

Building depreciation tax deductions will no longer be allowed from next year, providing the building has a useful life of 50 years or more. This would include most rental houses and offices.

The reasoning behind this is because buildings do not drop in value over time and the current depreciation allowances provide a tax preference to owning property.

This will affect landlords, property investors, property investment companies and some business owners who can currently claim depreciation of up to 3% of the purchase price of the building each year.

It is expected this change will boost government coffers by $685 million in the 2011/12 year, rising to $690 million in 2013/14.

Coupled with that revelation is the inability to claim 20% accelerated depreciation on new plant and equipment – a change that will apply to assets bought after 20 May, 2010 – budget day.

Landlord fears not realised
Those using loss attributing qualifying companies (LAQCs) and qualifying companies (QCs) to minimise their tax responsibilities will need to take more notice of their company structures.

New legislation will be enacted later this year will allow LAQCs and QCs to become “flow-through” entities for tax purposes, similar to limited partnerships.

Changes will take effect from income years starting on April 1, 2011.

The current rules people can deduct losses at their marginal tax rate – up to 38% - but have their profits taxed at the lower company rate -30%.

New flow-through rules will mean any profits will also flow through to the shareholders of the company and be taxed at their marginal rate.

Savings encouragement
While someone with a personal income of $120,000 a year will save $4630 in reduced taxes, there will be more encouragement to save the windfall.

Successive governments have been criticised for doing little to encourage saving. 

With a GST increase discouraging unnecessary spending and tax cuts for PIEs, which also includes Kiwisaver accounts, it is thought more people will focus on saving.

Key tax changes
All personal income tax rates will be cut from October 1, 2010.
Income up to $14,000 will be taxed at 10.5%, down from 12.5%.
Income from $14,001 to $48,000 drops to 17.5% from 21%
Income from $48,001-$70,000 down to 30% from 33%
Income over $70,000 will be cut to 33% from 38%.

GST
GST will increase from 12.5% to 15%. Income support and other payments will rise by 2.02% to compensate for the increase. This includes student allowances and supplementary benefits, superannauation, veterans pension and the Working for Families tax credit.

Company tax
The company tax rate will fall from 30% to 28% from the 2011/12 income year.
In addition, the top tax rate for most portfolio investment entities (PIEs) will drop from 30% to 28% and other PIE rates will drop to align with the new personal tax rates.

Similarly, the tax rate for life insurance policy holders and widely-held savings vehicles like unit trusts and superannuation funds will fall to 28% from 30% from the 2011/12 income year.

Property depreciation
Depreciation deductions will be dumped for buildings with an estimated useful life of 50 years or more, such as rental housing and office buildings from the 2011/12 income year reflecting the fact that many people live and work in buildings more than 100 years old.

Alongside this, the current 20% depreciation loading on new plant and equipment will be removed for assets bought after 20 May, 2010 – Budget day.

Multinationals
The tax rules will change from the 2011/12 income year to reduce the interest deductions foreign-owned multinationals can take by having high levels of debt allocated to their New Zealand subsidiaries.

LAQCs
There will be changes to the functions of loss attributing qualifying company (LAQC) and qualifying company (QC) rules.

From 1 April, 2011, the LAQC rules and QC rules will be tightened to prevent people choosing to have losses deducted at their marginal personal tax rate, but profits taxed at the lower company tax rate.

Working for Families
People will not be able to sue investment losses, including from rental properties, to reduce their income and become eligible for Working for Families tax credits from April 1, 2011.

How much less you will pay
Annual income and decrease:
$50,000 = $1530 less
$60,000 = $1830 less
$70,000 = $2130 less
$80,000 = $2630 less
$90,000 = $3130 less
$100,000 = $3630 less
$110,000 = $4130 less
$120,000 = $4630 less

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