“The 15% R&D tax credit has been introduced to encourage New Zealand businesses to invest more in research and development, which will generate wider benefits for all businesses, ” Cullen and Dunne explained.

The R&D credit is part of the NZ$3.4 billion investment and innovation package announced in Budget 2007, which also included the recently enacted reduction in the company tax rate from 33% to 30% from the 2008-09 income year. The legislation introduces a number of transitional and consequential amendments resulting from the new company tax rate, most of which concern imputation credit handling in the two-year transitional period.

Another major focus of the new legislation is to strengthen incentives to save for retirement via a KiwiSaver or a complying superannuation scheme. It requires employers to match their employees’ contributions up to 4% of their gross salary or wages, phased in over four years. That measure is accompanied by a new employer tax credit of up to NZ$20 a week to help offset the costs to employers.

“These changes complement KiwiSaver incentives enacted in May in the form of a new tax credit to match member contributions of up to $20 a week, which means that members who save $20 a week will receive an extra $1,040 in their accounts," the ministers explained.

They continued:

“The new legislation relaxes a whole range of tax penalties, such as the penalty for taking an unacceptable tax position, to promote voluntary compliance. The aim of the changes is for penalties to better reflect the seriousness of the offence to which they pertain – so they distinguish between people who try to do the right thing and fail, and those who have no intention of doing the right thing."

They continued: “The new legislation also increases tax incentives for making donations to charitable organisations, as announced in Budget 2007. The changes include removing the rebate threshold on donations made by individuals, and removing the deduction limit on charitable donations made by companies and Maori authorities."

The ministers concluded:

“These are the main changes in the wide-ranging legislation that results from the three bills that passed through their final stages in Parliament today (December 12). We welcome the passage of this very important legislation."

Other reforms in the new legislation include:

Child support information matching

The new legislation introduces information matching between Inland Revenue and the New Zealand Customs Service. That will enable Inland Revenue to identify when people with outstanding child support debt enter and leave New Zealand, so that it can take steps to recover that debt before they leave the country.

Redundancy payments

A new redundancy payment rebate will make the taxation of redundancy payments fairer to people who find themselves in a higher tax bracket as a result of receiving a lump sum redundancy payout. Calculation of the rebate will be based on the flat rate of six cents per dollar of redundancy payment, up to a maximum payout of $60,000 per redundancy.

Finance lease amendments

Changes to the finance lease tax rules are intended to prevent people entering tax schemes involving depreciation deductions for leases on overseas assets that result in a loss to the New Zealand Revenue.

Further savings measures

Several technical improvements have been made to the new portfolio investment entity (PIE) rules, which alleviate a number of long-standing problems associated with the taxation of managed funds. Other changes allow policyholders in unit-linked life insurance products to access some of the benefits of the new PIE rules. Certain contributions to retirement schemes will be subject to withholding tax rather than income tax, meaning that contributions will not be taken into account for social assistance measures.

Adoption of IFRS

Changes have been made to the financial arrangement tax rules so that the timing of income and expenditure from financial arrangements follows their accounting treatment under IFRS. Consequential changes have been made to incorporate the adoption of IFRS into the trading stock and R&D expenditure tax rules.

Annual income tax rates

The annual income tax rates for the 2007-08 year have been set.