New Zealand Cuts Tax

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

20 May 2010

New Zealand Finance Minister Bill English has announced that the company tax rate will fall from 30% to 28% from the 2011/12 income year as part of a package of tax cuts in the government's budget.

The new tax rate will apply from April 1, 2011 and the government will allow dividends issued after the new company rate takes effect to be imputed at the existing 30% rate for two years if company tax has been paid at the 30% rate.

The move comes in the wake of the Australian government's decision to also lower its company tax rate to 28%, phased in over three years from 2012/13. The average company tax rate in the Organization for Economic Cooperation and Development in 2009 was 26.3%.

In another measure affecting business, the safe harbour in the inbound thin capitalization rules will be reduced from 75% to 60%. This means foreign-owned companies will be able to claim only tax deductions for interest payments on debt up to 60% of their local asset value. The only exception is if the total multinational group's debt ratio is higher than this. This change will take place from the 2011/12 income year. For many businesses this will be from April 1, 2011.

Additionally, the budget will deny depreciation deductions for buildings with an estimated useful life of 50 years or more, such as rental houses and offices. These rules will change for all such buildings from the 2011/12 income year.

English also announced that all personal income tax rates will be cut from October 1, 2010, when the top rate of income tax, currently 38%, will fall to 33% on income over NZD70,000 per year. The lower rate of tax will be cut to 10.5% from 12.5%; the second rate will be reduced to 17.5% from 21%; and the third tax bracket will fall to 30% from 33%.

However, the goods and services tax will increase from 12.5% to 15% from October 1, 2010, to compensate for the personal income tax cuts. Compensation will be paid by the government to certain vulnerable sections of society, such as those on unemployment and disability benefits, and those in receipt of a veterans pension.

English announced that changes to the tax treatment of investment property will increase fairness and help re-balance the economy towards productive investment. In addition to the scrapping of the property depreciation deduction, these changes mainly entail loophole closures such as preventing property investors from using rental losses to inflate tax credit eligibility and payments, and altering the rules for for qualifying companies and loss attributing qualifying companies. These changes will take effect on April 1, 2011.

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