Tax Reform Summary

21 May 2010

The 2010 Budget announced on 20 May 2010 hails some of the most significant tax changes for New Zealand in the last 25 years. The Government has striven to make the budget fiscally neutral by raising GST and other tax reform to enable a $15 billion reduction in income tax. It is anticipated that the rise in GST will cause a corresponding rise in inflation by 2.2%.

One of the options originally considered by government was the ring fencing of rental losses. This has not been implemented, however the changes to the tax treatment of LAQCs and QCs will need to be carefully considered after those rules have been fully developed. Potentially losses in a LAQC or QC may be subject to some restriction of deductibility.

The main items in the budget are:

• GST increases from 12.5% to 15% effective from 1 October 2010.


• Personal Income Tax rate changes.


• The company tax rate and investment entity tax rates fall from 30% to 28%.


• Loss Attributing Qualifying Companies (LAQCs) and Qualifying Companies (QCs) to be treated like a Partnership with limited liability.


• Depreciation of 0% on all Buildings with an economic life of 50 years or more.


• Depreciation on new assets will no longer be entitled to the 20% loading on their base depreciation.


• Working for Families entitlements – no longer include investment losses to reduce family income when working out entitlements.


• Some overseas investors may pay more tax due to a limitation on their ability to claim interest expenditure.


• Tax integrity measures will be enhanced. $119.3 million more funding for tax audits of property transactions and the hidden economy.


• Where’s your tax money going?


• Redundancy Rebate repealed from 1 October 2010.


• The trustee rate of tax remains unchanged at 33% and will equal the new highest personal tax rate.

GST increases from 12.5% to 15% effective from 1 October 2010

Transitional rules apply so that where a supply is made under an existing agreement, the price may be changed to allow for the extra GST, unless prohibited in the contract. This transitional rule does not apply after 3 months have lapsed since the law change or where it is a public authority grant.

Normal time of supply rules will apply.

E.g. goods purchased through layby accounts will attract the higher 15% rate if the final payment is made on or after 1 October 2010. Reliance on the normal time of supply rules may allow businesses to bring forward invoicing so they can take advantage of the old lower GST rate. In excessive cases the general anti-avoidance provision in the GST Act may be applicable if it is clearly evident that businesses are restructuring their business practices to bring forward a material number of transactions.

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Personal Income Tax rate changes – highest marginal rate falls from 38% to 33%

The highest marginal rate falls from 38% to 35.5% for 2010-11 and then to 33% for future years. During the 2010-11 income year there is a blend of the old and the new rates of tax, resulting in a composite rate of tax.

We recommend visiting the Governments calculator www.taxguide.govt.nz to see how your family’s income is affected by the changes in tax.

Note that the calculator works out the net increase after allowing for tax cuts and the increase in GST.

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The company tax rate and investment entity tax rates fall from 30% to 28%

The company tax rate and the tax rates for investment entities such as PIEs, Unit Trusts, Superannuation Funds and Life Insurance all fall from 30% to 28%. Commencement date 1 April 2011, except for PIE’s which have an earlier commencement date of 1 October 2010.

• Dividends from companies will still be required to have associated tax credits to 33% by way of a combination of imputation credits and withholding tax deducted.
• A corporate tax rate of 28% will create an incentive to retain profits in the company.
  The reduction in the company tax rate from 1 April 2011 will be implemented a year earlier than Australia’s reduced company tax rate of 28% for small size companies and 2 years earlier than the Australian rate reduction for large companies.
• These company tax rate differences between NZ and Australia will result in a reverse in direction of some costs for transfer pricing. Going forward Trans-Tasman groups of companies might now start to be load costs on the Australian companies instead of the NZ company.

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Loss Attributing Qualifying Companies (LAQCs) and Qualifying Companies (QCs) to be treated like a Partnership with limited liability

Effective from 1 April 2011, LAQCs will convert into QCs.

Currently shareholders in LAQCs can deduct losses at their marginal tax rates, but any profits would be taxed at the company rate (currently 30% falling to 28%). This tax leakage has been addressed in the Budget.

• From 1 April 2011 the QC will be treated as a Partnership for tax purposes – requiring a partnership tax return to be filed instead of a company return.
• Therefore income and losses will flow through to the owners’ personal tax returns in proportion to their interest in the QC.
• Dividend and imputation rules will therefore no longer apply to the QC.
• The partnership special disposal rules will apply to any disposal of shares.
• Partnership loss limitation rules will apply – restricting the ability to attribute all the losses to the owners. The losses can only be distributed to the extent of the owner’s investment in the QC. “Capital at risk concept”
• A QC will only be able to have one class of shares to prevent the streaming of losses to persons who would have the greatest benefit.
• Any salary paid from a QC will be subject to the same tax rules that apply to partnerships, meaning PAYE must be deducted and paid to IRD on partner salaries.
• These changes to the QC regime which have not yet been fully developed, will have significant consequences for many of our clients. If you have a LAQC or QC, we strongly recommend you discuss the future of your company with your UHY Haines Norton Director or Jim Martin the Head of Tax at UHY Haines Norton.

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The trustee rate of tax remains unchanged at 33% and will equal the new highest personal rate of tax

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Depreciation of 0% on all Buildings with an economic life of 50 years or more

Effective from 1 April 2011.

This includes buildings that were owned prior to the law change. The taxpayer simply stops depreciating the building. Any depreciation already charged is held over until the building is sold. If the building is sold at above book value, any depreciation recovered will be taxable, however any loss on disposal will still not be deductible.

Some examples of buildings with economic lives of less than 50 years are: Barns, Car parks, Chemical works and Glass Houses. Therefore these buildings can continue to be depreciated for tax purposes.

The 0% rate of depreciation will not apply to fit out costs.

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Depreciation on new assets will no longer be entitled to the 20% loading on their base depreciation

Effective from 20 May 2010.

For example a new Motor Vehicle has a base diminishing value depreciation rate of 30%DV which was increased to 36%DV with the 20% loading (i.e. 30% x 1.2 = 36%). Now any new motor vehicle’s depreciation rate is limited to 30%DV.

Note that if an obligation to acquire a new asset existed prior to 20 May, that asset can still have the 20% loading on its depreciation rate.

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Redundancy Rebate repealed from 1 October 2010

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Working for Families entitlements – no longer include investment losses to reduce family income when working out entitlements

Effective from 1 April 2011.

Working for Families calculations of entitlements no longer include investment losses to measure family income when working out eligibility for Government assistance. For example Rental losses and other investment losses cannot be deducted from other family income for the purposes of these calculations. The government will also be looking at whether trust income and PIE income should be added to family incomes in these eligibility calculations.

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Some overseas investors may pay more tax due to a limitation on their ability to claim interest expenditure

This is due to a reduction in the safe harbour threshold for the Thin Capitalisation rules from 75% down to 60% of the local debt to local assets ratio.

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Tax integrity measures will be enhanced. $119.3 million more funding for tax audits of property transactions and the hidden economy

Government is also looking at changes to GST on land transactions to avoid loss of GST on Phoenix Schemes, where companies claim GST input tax credits on land purchases and then sell the land without returning GST on the sale – before folding the company up.

GST registered business-to-business land transactions will become zero rated so that IRD is not required to pay over GST input tax when the taxpayer buys the land.

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Where’s your tax money going?

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Should any of the matters raised be of concern to you please contact your UHY Haines Norton Director or Jim Martin – Head of Tax for UHY Haines Norton.

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