The Budget - Our Commentary

Budget Commentary

In what was widely anticipated as a aggressive budget announcement yesterday, the Right Hon Bill English has presented his second budget as the Minister of Finance and the purpose is now to summarise some of the key points that will affect you going forward.

GST Rise

As anticipated the GST has risen to 15% from the 1st October.  This would indicate according to the Government Actuaries, resulting in a $2.46 billion tax increase by the year ended June 2014.  The finer details of how the implementation of debit and credit notes will of course come in time, but at the moment many businesses will need to gear up for the rise in GST commencing 1st October.

Tax Rates

Tax rates will drop from 38% to 33% from 1st October for the top tax rate and also the Company tax rate has dropped from 30% to 28% from the 1st April 2011.  This of course makes New Zealand more competitive than Australia as Australia is looking to introduce the 28% tax rate for Companies in four years time.

We all knew that property was in the gun on the budget radar and as widely anticipated the use of Depreciation claimed against rental income will cease and there is a new rule being introduced that will affect LAQC's.

Under the current rules, shareholders and LAQC's have been able to rather than retaining them or having them taxed at the lower company rate, effectively creating what is known as a tax abitrage.  Instead of having the losses assessed by a LAQC the profits and losses are assessed at the marginal tax rate of the investor.  In effect this means that there will be a 28% tax on Company profit and losses as opposed to the tax back in the hand of the shareholder.

It is intended that the property investors who have more houses will be worse off comparatively speaking to what they were, and while it is most probably in the most desirable benefit of the investor, the reality is it could have been a hell of a lot worse.

The important thing at the moment is not to panic, but rather to digest the examples that the IRD and Government will be issuing in due course finalising details that have come out in the budget and determining what the best course of action going forward is for rental properties.

We have until 1st April 2011 which means that there is ample opportunity to reconsider some restructuring that may take place to maximise the tax efficiencies of the rental companies and to see whether it is better to maintain properties in personal names, transfer through to trusts, or a host of other options that may be available.  We will be watching the development of the details closely and will report in due course when more is known.

Key Changes Announced

• Cuts to personal tax cuts at every threshold level, with the top personal tax rate falling from 38% to 33%; tax on income between $48,000 and $70,000 falling from 33% to 30%; a new 17.5% rate for income between $14,000 and $48,000, down from 21%; and 10.5% on income up to $14,000.  Two-thirds of the tax returned by the package goes to income below $48,000, English says.
• A rise in the rate of GST from 12.5% to 15%, with a 2.002% compensating increased for beneficiaries, pensioners and recipients of Working for Families tax credits to offset the rise on October 1;
• An end to depreciation allowances on buildings deemed to have more than a 50 year life, to net around $1 billion a year in additional tax;
• Abolition from yesterday of the 20% automatic depreciation loading available for newly purchased assets;
• A change to the tax treatment of loss attributing qualifying companies to become "flow through entities", similar to limited partnership, expected to raise around $65 million a year;
• A cut in the rate for portfolio investment entities (PIEs) to 28%, to align with the new company tax rate, kicking in from October 1 for PIEs taxed at investors' marginal tax rates, and 2001/12 for other savings vehicles;
• Abolition of tax benefits relating to capital contributions for the purchase of capital assets;
• GST base-broadening to prevent so-caled "phoenix" scheme frauds, where GST is reclaimed by an entity which liquidates before paying GST owed
• An end to the redundancy tax credit from October 1.

Further changes, covering areas such as distribution from trusts and income from cash PIEs will follow the Budget, for consultation and implementation by April 1.