It began with a report of the Tax Working Group (TWG) established by the Centre for Accounting Governance and Taxation Research of Victoria University, in conjunction with the Treasury and Inland Revenue.
The Group examined a number of issues, including personal and company taxes and expressed concern over the efficiency, equity and integrity of the current taxation system.
The Report, released on January 20, 2010, recommended changes to the tax system. Among them were alignment of company, trust and top marginal tax rates financed by an increase in GST, possible land tax, removing tax depreciation on buildings, removing 20% depreciation loading on new plant and equipment, a risk free rate of return method for rental property and changes to thin capitalisation rules.
Budget 2010 represented an opportunity for the Government to forge a new strategic direction for the economy. It contained a raft of material changes to the tax system. The following table shows the changes.
1 October 2010 Changes
1 April 2011 changes
PAYE Rates reduced
Company tax rate down from 30% to 28%
GST rose from 12.5% to 15%
Taxpayers receiving Working for Families Tax Credits will not be able to use investment losses from rental properties to reduce their income.
Rate changes for working for families tax credit and Minimum family tax credits
No depreciation deductions allowed for buildings with a useful life of 50 years.
RWT rates align with new personal income tax rates
Changes to LAQC and QC rules and introduction of LTC regime
Top tax rate for most PIEs drop from 30% to 28% while the others aligned with personal income tax rates
ACC earners’ levy increases to 2.04% to reflect the increase in GST
20% depreciation loading on new plant and equipment removed for assets purchased after budget day
Changes for Employers
For businesses, the PAYE, FBT and Employer superannuation contribution rates have changed. In respect of individuals, the personal income tax rates have come down. As a result, banks have reduced the Residence Withholding Tax (RWT) rates on interest to align with the new personal income tax rates.
The company tax rate will reduce to 28% for the 2011/12 year. Businesses have already experienced the effect of tax rate reduction from 33% to 30% effected on April 1 2008 and its impact on the Imputation Credit Account. Just as there have been transitional rules covering the tax credits (imputation credits) attached to dividends from retained earnings taxed at 33%, there will be similar rules for profits earned in 2009 and 2010 taxed at 30%. There will be a window of two years through to 31/03/2013, to allow companies to pay dividends with imputation credits of 30%. Thereafter, the level of imputation credits will be limited to 28%.
The GST rate rose from 12.5% to 15% on October 1, 2010.
Depreciation rates for buildings with an estimated useful life of 50 years or more will drop to 0% from April 1, 2011. The 20% depreciation loading has been removed for assets purchased after May 20, 2010.
Changes have been made to Qualifying Companies (QCs) and Loss Attributing Qualifying Companies (LAQCs). LAQCs will no longer be able to attribute losses to shareholders. Taxpayers must learn the new rules about Look Through Companies (LTCs), which is intended to provide transparent tax treatment, with losses shared according to the owner’s effective interest in the LTC.
Rental and investment losses will be excluded from income for calculating social need allowances such as Working for Families, student allowances and rest home subsidies. Changes have also been made to the definition of Family Scheme Income for calculating social assistance benefits such as Working for Families Tax Credits.
Legislation has been introduced in the Parliament to abolish the Gift duty.
GST registered vendors will be required to charge GST at the rate of 0% from April 1, 2011, on supplies made to a registered person involving land or in which land is a component, if at the time of settlement the recipient intends to use the goods for making taxable supplies, and the supply is not a supply of land intended to be used as the principal place of residence of the recipient or a relative of the recipient.
Property investors should be happy since they will be relieved that these changes have not abolished all of the perceived property tax loopholes.
Vijay Talekar is Director, Tax Experts Limited (Chartered Accountants), based in Auckland.
He can be contacted at his new office (Level 1, 208 Great South Road) in Papatoetoe Phone (09) 2792987 or (09) 2713112.
The above article should be considered only as a guideline and not specific advice. Mr Talekar absolves himself along with the management and staff of Tax Experts Ltd and Indian Newslink of any responsibility or liability that may arise from the above article. Readers should seek professional advice before acting upon any information contained above.