News

The Budget – It is your Business

Date: 28/05/2010

It is not often that an annual Government Budget holds so much interest.  But this Budget affected every New Zealander. 

There were probably two aspects of the budget that commentators did not expect – the decrease in the company tax rate and the extent of the personal tax cuts. 

We have reviewed the budget and all the commentary around it and have summarised the key announcements that we think affect most people.  We have kept the detail to a minimum to ensure the important changes and facts are not lost.  Feel free to contact us if you require additional information.

GST rate lift and compensation measures

• GST will be increased from 12.5% to 15% from 1 October 2010.  This was well publicised prior to the Budget and should come as no surprise to anyone. 

• Businesses will need to start considering the impacts of an increase in GST.  We have previously written an article that looks into that issue. 
  
  http://www.bhwl.co.nz/news_would-you-like-some-gst-with-that_6_1

• Income support and other payments will be increased by 2.02% from 1 October 2010, to compensate for this increase. These payments include:
  
  • All main benefits, Student Allowances and a number of supplementary benefits.
  • NZ Superannuation, Veterans Pension and CPI-adjusted Government Superannuation Fund and National Provident Fund payments.
  • Working for Families (Family Tax Credit and Minimum Family Tax Credit).

• There is provision in place that for existing agreements/contracts GST can be altered to the new 15% rate, unless there is a contract prohibiting this.  There is a 3 month window from 1 October 2010 to do this.

Company Tax Cut

• The company tax rate will fall from 30% to 28% from 1 April 2011.  This is great news for those Companies wanting to reinvest their profits back into their business.

• The 5% differential between the company rate (28%) and the personal and trust tax rate (33%) is now only a timing difference that will get clawed back when a Company’s profits are paid out as dividends.

• Dividends paid from Companies will still need to have associated tax credits of 33%, which will mean that care will need to be taken when paying dividends. 

Depreciation on Buildings

• No depreciation deductions will be allowed for buildings with an estimated useful life of 50 years or more (such as rental housing and office buildings) from 1 April 2011.  This includes buildings that were being depreciated prior to the change. 

• This change will affect all residential property and long life commercial and industrial buildings.  It will exclude special purpose buildings e.g. barns, dairy sheds and glass houses.

• Depreciation on fit outs not considered part of the building will still be claimable, however we are waiting for some further guidelines from the Government on this.  It appears that the Government will review the treatment of commercial fit out.

Depreciation Loading

• The current 20 per cent depreciation loading on new plant and equipment will be removed, for new assets purchased after Budget day, 20th May 2010.

LAQC & QC Changes

• LAQC and QC rules will be tightened from income years starting on or after 1 April 2011 to prevent people choosing to have losses deducted at their marginal personal tax rate but profits taxed at the lower company tax rate.

• From 1 April 2011 all QC’s (which include LAQC’s) will become “flow through vehicles.”  This means that they will be treated as a partnership for tax purposes.  A partnership tax return will be required to be filed rather than the normal company return.  This will mean:

• Income and losses flow through to the “partners” personal returns based on their shareholding in the QC;
• The dividend and imputation rules will no longer apply;
• Loss limitation rules will apply.  This essentially limits losses to the amount of funds invested in the QC;
• Salaries paid from the QC will be subject to normal partnership rules – PAYE must be deducted and paid to the IRD;
• There are issues around the disposal/sale of shares.

• The loss limitation rules could have a significant impact for some investors.  From comments we have seen in regard to the issues paper released, it appears that a tax loss will be permitted up to the level of paid up share capital plus the amount of debt guaranteed by the shareholder. Where any LAQC borrowings are subject to personal guarantees, the impact of the loss limitation rules may not be significant.

• There is more information yet to be provided on exactly how this will work.  We will provide updates as this information becomes available.

R & D Assistance

• There is a new technology development grant.  It will apply to research intensive medium to large New Zealand businesses.  These businesses must invest at least 5% of their revenue in R & D and have revenue of at least $3 million. 

• The technology development grant will be equal to 20% of the businesses R & D budget for 3 years.  The grants are not project based.

• New technology transfer vouchers will allow those businesses who do not have much R & D capability to work with publicly funded research organisations.

Thin Capitalisation Rules

• The thin capitalisation rules are designed to prevent non-residents loading debt against their New Zealand operations, and thereby reducing tax paid in New Zealand.

• The tax rules will change from 1 April 2011 to reduce the interest deductions foreign multinationals can take by having high levels of debt allocated to their New Zealand subsidiaries.  

• Under the existing rules New Zealand companies controlled by non residents may be denied an interest deduction in New Zealand if their debt percentage (total group debt/total group assets) exceeds both:
  
  • 75%; and
  • 110% of the worldwide group’s debt percentage.
  Under the change announced in the Budget the 75% safe harbour will decrease to 60%.

More Funding for IRD & Other Issues

• IRD will get a significant funding boost to increase its audit and compliance activity around debt collection, the hidden economy and property transactions.

• GST rules will be changed to stop the use of “phoenix” GST fraud schemes.  These schemes typically involve companies claiming a GST input credit on land purchases and then selling the land without paying the GST on the sale.  The company is then wound up.

• It is proposed that transactions between GST-registered persons involving the transfer of land will be zero-rated for GST. This change will take effect from 1 April 2011.