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Sunday, 23 May 2010 23:10

Budget 2010 - Major Tax Changes Announced

As widely speculated, the 2010 Budget introduces wide ranging tax cuts, raises GST to 15 percent and makes life more difficulty for property investors.

The Government expects the measures in the 2010 Budget to lift economic growth and productivity by providing incentives to work, save and invest.

Company Tax Cuts

The company tax rate will be cut from 30 percent to 28 percent from the 2011 / 2012 tax year.

The cut to the company tax rate ensures that New Zealand remains competative across global markets as a place to do business. The top rate applying to certain investment vehicles, including portfolio investment entities (PIE), will be cut to 28 percent from the 2011 / 2012 tax year to match the company tax rate and encouraging saving.

Personal Tax Cuts

Personal tax rates will be cut sharply, with effect from 1 October 2010.

The top tax rate has been reduced from 38 percent to 33 percent. The new rates are:

Income	Current Rates	New Rates
$0 - $14,000	12.5%	10.5%
$14,000 to $48,000	21%	17.5%
$48,000 to $70,000	33%	30%
$70,000 +	38%	33%

The 33 percent tax rate applying to trusts will not change. This will align the trustee tax rate with the top personal tax rate and will limit but not remove the ability to reduce taxable income by using a family trust for income splitting.

GST Increase

Goods and services tax (GST) will increase from 12.5 percent to 15 percent, in a move that is controversial but widely expected.

The rate increase will apply from 1 October 2010, giving business very little time to change their administrative systems.
Welfare benefits, including New Zealand superannuation payments and Working for Families tax credits will increase by 2.02 percent to compensate for the increase in GST.

Changes to Property Investment Taxation

Residential property is the preferred investment option for most New Zealanders.

Earlier this year, the Tax Working Group reported that NZ$200 billion is invested in rental properties in New Zealand, producing a net return of negative $500 million. By contrast, the total market capitalisation of the New Zealand stock exchange is $55 billion. Recent economic commentary has focused on how to change New Zealanders' appetite for residential property investment and channel investment funds into more productive investment options.

The Budget ends the ability of investors to claim depreciation on buildings that are expected to increase in value.

A property investor who purchases a rental property is entitled to offset expenses, most notably interest on funds borrowed to finance the purchase and depreciation, against rental income derived. If the result is a net loss that loss can be offset against the investor's other income, including salary and wages, to reduce the investor's overall tax bill. This has been particularly advantageous in the case of depreciation, which results in a lower tax impost but no actual cash costs to the investor.

The rules are being tightened to limit the use of LAQCs

The ability to offset rental property losses against personal income can be achieved by direct investment by an individual or investment through a special corporate entity called a loss attributing qualifying company (LAQC).

The reforms proposed in the Budget will require investment losses to be included in income for the purposes of determining eligibility for Working for Families tax credits from 1 April 2011.

The reduced personal income resulting from a negatively geared rental property investment can in some cases qualify the investor for additional support payments, such as Working for Families tax credits. This will no longer be possible.

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