New Zealand Budget 2008
New Zealand Budget 2008
Our 2008 Budget Commentators give their thoughts on Dr Cullen's 2008 Budget below...
So... Do Budgets Win Elections?
The announcement of subsequent rounds of tax cuts on 1 April 2010 and 1 April 2011 shows the taxpayer what they can expect to pay in income tax over that period of time but will leave many wondering why they have to wait. The Budget also includes various changes to compliance thresholds which should help reduce at the margin the compliance burden for many businesses in the SME market.
Personal Tax Cuts
New Zealand has three personal marginal tax rates of 19.5%, 33% and 39%. However the low income rebate operates to provide four rates in practice. The personal tax cuts announced have been explained based on the four rates and with a corresponding increase in thresholds as set out below:
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Current rates
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From 1 October 2008
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From 1 April 2010
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From 1 April 2011
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15% to $9,500
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12.5% to $14,000
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12.5% to $17,500
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12.5% to $20,000
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21% to $38,000
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21% to $40,000
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21% to $40,000
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21% to $42,500
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33% to $60,000
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33% to $70,000
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33% to $75,000
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33% to $80,000
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39% over $60,000
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39% over $70,000
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39% over $75,000
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39% over $80,000
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This cautious approach of spreading the tax cuts over the three year period is consistent with the manner in which expenditure plans have been trumpeted over the nine years of Dr Cullen’s past budgets. It makes the budget sound a lot grander than it actually is and can be contrasted poorly with the more aggressive tax cut packages recently introduced in Australia.
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New Zealand (from 1 Oct '08)
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Australia (from 1 July '08)
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Tax Threshold (NZ$)
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Tax Rate
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Tax Threshold (AU$)
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Tax Rate
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0-14,000
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12.5%
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0-6,000
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0.0%
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14,001-40,000
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21.0%
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6,001-35,000
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15.0%
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40,001-70,000
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33.0%
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35,001-80,000
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30.0%
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70,000+
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39.0%
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80,001-180,000
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40.0%
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180,000+
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45.0%
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Tax Rate Differential
The four tier marginal tax rate structure, with no change to the company or trustee rate is a long way off the favoured rates desired by the Revenue Minister Peter Dunne of a company tax, trustee tax and top personal tax rate of 30%, 30% and 30%.
The difference in the top tax rate and the company tax rate is of concern as it will disadvantage many small businesses, such as tradesmen, who are not running their business as a company. Arguably it will continue to influence the choice of business entity for entrepreneurs and will continue to incentivise what the IRD regard as tax avoidance behaviour.
Such avoidance behavior creates a major drag on the economy as IRD have to increase their audit activities of taxpayers who are often innocent and would rather get on with running their business than have an argument with the IRD over the business structure they choose to use.
Lower Compliance Costs
Any effort to lower compliance costs for business is welcome! Many governments, both Labour and National, have attempted to reduce compliance costs over the years for business with mixed success.
The advantages of the following proposals are their simplicity in removing many SME’s from more regular filing requirements. These initiatives include:
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PAYE only filed once a month if deductions <$250,000 (up from $100,000)
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FBT return can be filed annually if PAYE deductions <$250,000 (up from $100,000)
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Annual FBT return for small closely held companies where the only fringe benefits are 2 vehicles provided to shareholder-employees
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GST registration increased to $50,000 (up from $40,000)
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GST 6-monthly filing available if taxable supplies are less than $500,000 p.a.
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The safe harbour on use of money interest for individuals is raised from a residual income tax of $35,000 to $50,000.
Active Income Exemption
The Budget also includes legislation to give effect to an active income exemption for income derived offshore by Controlled Foreign Companies (CFCs). The central feature of these reforms is the introduction of a tax exemption for active income of offshore operations of New Zealand resident businesses. The active income exemption for CFCs will be welcome to any active business undertaken overseas. This is a positively encouraging aspect of the tax reform process which finally brings New Zealand into line with many other jurisdictions.
It does come at a cost and that is the removal of the grey list of favorable countries such as the US, Canada and the UK. In a move that is similar to the fair dividend rate exemption on portfolio shares, the grey list exemption will continue for Australia.
US – NZ Double Tax Agreement
to be updated
Negotiations are to take place in June 2008 over the need to revise the DTA between the US and NZ. This follows on from the recent announcement of a review of the Australia and NZ DTA. It's h
oped that this review will include a reduction in withholding tax on royalties, interest and dividends which often results in a double tax impact arising from a deficit in available imputation credits in New Zealand.
Charitable Exemption
We remind charitable organisations that they have to register with the Charities Commission before 1 July 2008 if they wish to continue to have their charity related income exempt from tax and for gifts to them to be exempt from gift duty.
However, legislation introduced today as part of the Budget will mean that certain state funded tertiary education institutions, state integrated schools and non-resident charities not to register with the Charities Commission to retain their tax exempt status.
A non-resident charity is a non-resident entity that is registered as a charity in their own country and would not be normally allowed to register with the Charities Commission. Although this would result in them losing their tax exempt status in respect of New Zealand sourced income, this seems inappropriate.
Non-resident charities who would not be eligible to register with the Charities Commission because they are not established in New Zealand or have no strong connection with New Zealand will continue to have tax exempt status here on their New Zealand sourced charity related income if they seek Inland Revenue approval.
Pay-roll Giving
Details have also been released on the intention of Government to introduce a pay-roll giving system for collecting donations to charitable organizations. This will be a voluntary pay-roll giving system that will enable people to donate to charitable organisations through work based pay-roll deductions.
It
will be a voluntary scheme for employers to introduce pay-roll giving into their workplace and voluntary for employees to participate. It will be only be available to employers who file their employer monthly schedules with the Inland Revenue electronically. The schedules will provide payday information and employee’s salaries and wages, PAYE deductions and other social policy related deductions such as student loan deductions and child support.
The system will deliver payday tax relief on charitable donations by way of a PAYE credit. Each pay day employees will receive a PAYE credit on the amount of their donation rather than having to file the donation rebate form at the end of an income year.
This, along with the removal of the limit on charitable donated rebates, is a welcome introduction from the 2007 Budget and employers should be encouraged to take part in this arrangement.
H
owever, with many businesses suffering under the already tiresome burden of paperwork and compliance costs, another scheme to be administered by their HR department may take some time to gain momentum. The PAYE credit will be calculated on a set rate of 33 1/3%. The alternative current end of year rebate claim process will continue. It will not be removed.
In Conclusion
The 2008 Budget is clearly aimed at the individual (or is it the voter) with the personal tax cuts and Working for Families package - whether it is significant enough to win the next election - only time will tell.
Who are our commentators?
Iain Craig, Tax Partner and National Tax Technical Director, has wide ranging experience both in New Zealand and the UK. Iain will be issuing our BDO Spicers commentary on the Budget later today.
Alan Scott, Tax Partner, Wellington has experience in both New Zealand and London, with particular expertise in developing global tax strategies for his clients. Alan appeared on TV3's Sunrise this morning, calling the latest budget The Fondue Budget - nice to have but not enough! Download Alan's press release comment here.