Tax Changes To Lower Costs For New Zealand Business

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

26 May 2008

Legislation to be introduced into the New Zealand parliament next month will reduce tax-related compliance costs and remove tax impediments to the offshore expansion of New Zealand-resident businesses, Finance Minister Michael Cullen and Revenue Minister Peter Dunne have announced.

The ministers' announcement was made on the same day as Cullen delivered the 2008 budget, which has set out a three-year programme of personal income tax cuts worth NZD10.6bn (USD8.3bn).

The new business legislation will reduce the compliance costs for businesses, especially small and medium-sized enterprises, which represent a large portion of the economy and tend to bear a disproportionate tax compliance cost burden.

Commenting on the proposed changes, the ministers stated that:

“Compliance costs will be reduced by raising a number of tax thresholds. That may mean fewer tax returns for businesses to complete, a reduction in the amount of information or number of calculations required to complete returns, and a reduction in the number of tax payments that must be made."

“These changes represent the first phase of the government’s review of measures to reduce tax compliance costs for businesses. The second phase will consider initiatives that represent more significant departures from the normal tax rules that businesses have identified in consultation as being desirable."

The main threshold changes include:

• The PAYE once-a-month filing and payment threshold will be raised from NZD100,000 to NZD250,000. That will allow more SME employers to file and pay PAYE deductions once a month instead of twice a month.
• The fringe benefit tax annual return filing threshold will be raised from NZD100,000 to NZD250,000. Annual filing will also be available for closely held companies if their FBT liability arises solely from the provision of up to two vehicles to shareholder-employees. The changes will increase the number of employers that can file and pay the tax annually rather than quarterly.
• The GST registration threshold will be raised from NZD40,000 to NZD50,000, which will mean fewer taxpayers will have to register for GST.
• The GST six-monthly return filing threshold will be raised from NZD250,000 to NZD500,000, which will allow more taxpayers to file returns on a six-monthly basis rather than a two-monthly basis.

The bill will introduce other threshold changes in relation to provisional tax, low-value trading stock and accounting for tax in respect of financial arrangements.

“The proposed legislation will also give effect to the first phase of changes to emerge from the government’s continuing review of New Zealand’s international tax rules,” Cullen and Dunne explained.

They continued:

“The aim of the review is to improve the competitiveness of New Zealand’s international tax rules by bringing them into line with the relevant rules of our main competitors. These changes will enable New Zealand businesses to compete more effectively in foreign markets."

“The central feature of the reform, announced in Budget 2007, is the introduction of a tax exemption for active income from the offshore operations of New Zealand-resident businesses. Our current rules tax that income, with the exception of income from operations in the so-called ‘grey list’ of eight countries that our law singles out as having tax systems comparable to our own."

“Extensive consultation with businesses has helped to shape other aspects of the reform as proposed in the forthcoming bill. The active income exemption will be available to all controlled foreign companies in all jurisdictions, which means the grey list of eight is no longer required."

“There will, however, be a ‘grey list of one’, which will consist of Australia. That means New Zealand companies setting up operations in Australia, which is usually the first country of choice for our small and medium-sized businesses that want to expand overseas, will not have to face the compliance costs associated with meeting the active business test."

Meanwhile, under the tax cut programme announced in the budget, all workers will receive some form of tax relief from 1st October, 2008, mainly through the government's tinkering with the income tax thresholds.

The tax cut programme will deliver:

• A new low tax rate of 12.5%
• A lifting of the 21% threshold by NZD10,500 to NZD20,000
• A lifting of the 33% threshold by NZD4,500 to NZD42,500
• A lifting of the 39% threshold by NZD20,000 to NZD80,000
• A boost to the Family Tax Credit and an increase to the Working for Families Tax Credit income threshold from 1st October, worth NZD14 per week for a family with two young children on the average wage.
• A further expected increase to the Family Tax Credit and income threshold from 1st April 2011, worth an additional NZD16 per week for this same family.

According to Cullen, the programme will see a couple on the current average household income of NZD72,000 (split two thirds/one third) with two children aged 11 and 8 better off by NZD2,223 a year (NZD43 a week) from 1st October rising to NZD4,397 a year (NZD85 a week) from 1st April 2011. The greatest impact on average take home pay will be felt by workers on low incomes.

At full implementation, the programme will cut personal tax by roughly one quarter at the current level of the full-time minimum wage (NZD1,130 per year), one sixth at the current level of the full-time average wage (NZD1,670 per year) and one eighth at NZD80,000 a year (NZD2,870 per year).

“Since 2000, the New Zealand workforce has driven the longest period of economic expansion since World War II. Over that time, substantial tax relief has been delivered to families, to savers, and to businesses." Dr Cullen stated.

“This year we have seen households around the world come under considerable pressure, as all nations cope with rising food and petrol prices and higher mortgage repayments driven up by the credit crunch. The government’s strong fiscal management means we can deliver timely tax relief for workers who are struggling to make ends meet," he added.

“The tax cut programme has also been designed responsibly and meets the four design tests I put in place last year. It builds on the NZD4.6bn (excluding indexation) in tax cuts the government was already delivering to families, businesses, and savers from 2012," Cullen concluded.

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