New Zealand Budget Released

May 20, 2010 Taxation in New Zealand

BeehiveThe New Zealand Government has released its 2010 Budget. The announcement outlines various changes to the taxation system, putting to rest months of media speculations surrounding New Zealand’s tax future.

On May 20th the New Zealand Government revealed its national budget for the year 2010. The latest budget aims to reduce the impact of last year’s recession while introducing a range of fiscal stimulus measures and providing a solid base with which the Government can maintain control of the nation’s economy.

The Budget announcement revealed a number of significant alterations to New Zealand’s tax system. As expected by most economists, the Government has confirmed that the Goods and Service Tax (GST) rate will be raised to 15 percent from the current rate of 12.5 percent.

The increase in GST is offset by decreases to personal income tax rates at all income levels. Taxpayers earning below NZD 14 000 (approx. USD 9 507) will face a tax rate of 10.5 percent, compared to the current rate of 12.5 percent. The tax rates levied on the NZD 14 001 to NZD 48 000 income bracket will be reduced by 2.5 percent to 17.5 percent. Marginal incomes between NZD 48 001 and NZD 70 000 will be taxed at 30 percent, 3 percent below the current rate. The top marginal rate, currently applied to incomes above NZD 70 000 (approx. USD 47 538), will experience the biggest reduction, falling from 38 percent to 33 percent. The drops in personal tax and rises in GST are intended to encourage taxpayers to lessen personal consumption and increase the national saving propensity. Both changes are scheduled to take effect on October 1st 2010. Government income support, student allowance payments and numerous other payouts are scheduled to increase by 2.02 percent to compensate for the increased GST.

To further encourage savings amongst New Zealanders, the Budget includes a 2 percent decreases to the tax rates levied on corporate incomes, top-marginal Portfolio Investment Entity (PIE) earnings, and tax rates on life insurance policy holders and widely-held savings vehicles. Effectively, the change will result in tax levies of only 28 percent for the three types of income. The reduced rates will be introduced in the 2011-2012 financial year for corporate rates and insurance rates, and on October 1st 2010 for PIEs.

In line with Government promises, changes have been outlined which aim to remove the currently existing tax bias towards misbalanced investment in rental properties. Applying from the start of the 2011 financial year, depreciation deductions will no longer be allowed for buildings with an estimated useful life exceeding 50 years. Additionally, the current Working for Families scheme will be altered to exclude investment losses (including rental property losses) from taxpayers’ entitlement calculations.

According to the Government, the costs of the tax reform package are fiscally neutral in the medium term. Although, the cumulative monetary cost over the first four years, including the Government’s estimated macro-economic benefit assumption, will be NZD 415 million (approx. USD 282 million).

Photo by Ewan-M