Cullen Announces Moderate Tax Relief For Business And Individuals

by Mary Swire, Tax-News.com, Hong Kong

20 May 2005

Budget 2005 reinforces the government’s commitment to economic growth, delivering a multi-million dollar suite of pro-business tax changes, Finance Minister Michael Cullen said yesterday.

According to Dr Cullen, the package more than delivered on the government’s promise to recycle back to business any revenue received from the carbon charge.

"Estimates are that the carbon tax will generate around NZ$720 million over the forecast period ending 30 June 2009. The business tax proposals the government is putting in place are expected to cost almost twice that amount at NZ$1.42 billion," he stated.

"This is equivalent to a cut of around 2 per cent in the corporate tax rate. It will deliver a better growth dividend, because the government measures are designed to raise productivity and support the transition to a knowledge-based economy."

Specific themes of the budget business tax pack are to encourage savings, ensure a more productive use of capital, improve New Zealand’s access to worldwide capital, skills and labour, and reduce compliance costs.

To encourage savings and support work-based savings:

• Ensuring portfolio investment by financial intermediaries, such as collective funds, is not overtaxed relative to direct investments.
• Ensuring that income from these funds is taxed at the individual’s correct tax rate, thereby preventing the over-taxation of members earning less than NZ$38,000 a year.

To ensure a more productive use of capital:

• Changing the depreciation rules so that rates better reflect how assets decline in value and to reduce the compliance costs to business.
• Removing barriers to R&D investment.

To improve New Zealand’s access to worldwide capital, skills and labour:

• Assisting the recruitment of top talent by providing a temporary tax exemption on the foreign income of new migrants and of New Zealanders who have been non-resident for tax purposes for at least ten years and who come here to work.
• Making New Zealand more attractive to international investment by aligning our tax rules on securities lending more closely with those of other countries.

To reduce compliance costs:

• Changes to Fringe Benefit Tax to reduce the fringe benefit valuation rate applying to motor vehicles, raise the minimum value thresholds for unclassified fringe benefits and exempt the private use by employees of work tools where the tool in question costs less than NZ$5000 each.
• Aligning GST and provisional tax payments to reduce the number of tax payment dates and allowing businesses to base their provisional tax payments on a percentage of their GST turnover.

Tax changes to create a fairer savings regime for low income and small investors are also outlined in Budget 2005.

Finance Minister Michael Cullen said the proposals, which developed out of the Craig Stobo report Toward Consensus on the Taxation of Investment Income, would remove current inconsistencies in the treatment of different taxpayers and investments and would create a more transparent and coherent tax environment.

They will:

• eliminate a tax disadvantage applying to collective funds and;
• ensure that income from these funds is taxed at the recipient’s correct tax rate.

Dr Cullen explained:

"The new rules, to come into effect on 1 April 2007, will apply to registered superannuation schemes, group investment funds, widely held unit trusts and other entities which have savings as their primary function.

"Currently gains from the sales of New Zealand shares tend to be taxed if the shares were bought through a collective fund but not if they were bought directly. This anomaly disadvantages collective funds and will be removed.

"The second rule change will allow the income from investments through managed funds to 'flow through' to the saver’s normal income tax rate, whether that be 19.5 per cent, 33 per cent or 39 per cent. Now many are taxed at a flat 33 per cent, which delivers a modest incentive to people on the 39 per cent rate but penalises lower income earners on 19.5 per cent.

"The two changes are inter-linked and voluntary. Not all funds are equipped to make the transition immediately. Those that are will have to decide what offers the best deal to their members."

However, Cullen added that the issue of offshore investment was proving more difficult. The government had considered using a version of the risk free rate of return method but had rejected this as administratively complex and also because of "perception problems" surrounding the requirement that tax be applied even when the investor had incurred losses.

"Officials are now focusing instead on an income calculation system based on actual shifts in value," he noted.

The 2005 Budget also seeks to raise personal tax thresholds by 6.12 per cent on 1 April 2008 under a Budget 2005 commitment to inflation proof incomes.

The decision will cost the government an estimated NZ$68 million in 2007-08 and NZ$360 million in 2008-09.

"This means that in future taxpayers will pay more tax only if their incomes rise in real terms," Dr Cullen said. "The adjustments will take place every three years beginning on 1 April, 2008."

"To provide greater certainty and administrative ease, we have decided to raise the thresholds by a uniform 2 per cent each year – the mid-point of the Reserve Bank’s price stability target range. Compounded over three years, this produces an increase of 6.12 per cent," Dr Cullen stated.

As a result of the changes, taxpayers who earn more than NZ$10,081 will pay NZ$35 less tax each year. Those earning more than NZ$40,324 will pay NZ$314 less and those earning more than NZ$63,672 will pay NZ$534 less.

Legislation to implement the indexation regime will be introduced next year.

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