Budget 2010 – A Short Overview

Bill English delivered his second budget on 20 May 2010 with an overall focus of reforming the tax system, continuing to get value for money from the public service, and further strengthening Government finances. The backdrop to the 2010 budget is more positive than 12 months ago, with the global financial crisis taking less of a toll than anticipated on the New Zealand economy and therefore the recovery coming sooner than was originally forecast.

The objective of transforming the tax system was addressed by movement in all levels of personal income tax rates:

With the tax rate changes for individuals effectively occurring on 1 October 2010, for the 20102011 year (1 April 2010 – 31 March 2011 for most), composite tax rates have been developed, such that the following will apply:

• 0-14,000 – 11.5%
• 14,001 – 48,000 – 19.25%
• 48,001 – 70,000 – 31.5%
• 70,001 + – 35.5%.

There is no change to the trust rate, while the company rate drops to 28% from 2011/2012.

In addition, the rate applying to certain savings vehicles such as PIEs drops to 28% from 1 October 2010.

For an individual earning $70,000, this will result in a tax savings of $2,130 pa once the full rate changes have been implemented. For an individual earning $200,000, this will result in a saving of $8,630 pa once fully implemented.

With the tax rate change, there are consequential changes to RWT on interest, provisional tax calculations, use of imputation credits, FBT, and PAYE rates etc.

The funding of the tax rate changes effectively comes from two sources, the first being an increase in GST rate, and secondly changes to the depreciation regime.

GST from 1 October 2010 will increase from 12.5% to 15%, and this will impact on all businesses, together with the final consumers. Businesses will need to work through issues such as pricing, contract terms, and changes to accounting systems.

The second area where the Government looked to raise additional revenue is through how the tax system treats property. From the 2012 year, buildings with an estimated useful life of ? 50 years will have a zero depreciation rate set. This will effectively remove the depreciation deduction property owners have previously claimed. Note: the IRD do not believe many buildings have a useful life of less than 50 years.

Repairs and maintenance will remain tax deductible with the contentious issue likely to be around fit-out and what constitutes part of the building.

Also in this area, the Government has removed the 20% depreciation loading that did apply to all new asset purchases from Budget. This will impact on businesses, particularly in relation to assets which depreciate quickly such as computers.

Continuing its attack on property, the Government has looked to modify the LAQC regime (used by many property investors) to tax these entities from 1 April 2011 more like a limited partnership than a company. This will have the effect of limiting losses available to the investors while taxing profits at the shareholders’ marginal rates.

In addition to the announcements contained in Mr English’s Budget Day speech, there are a lot of consequential changes and other changes which have not been well highlighted.

If you were unable to attend the Polson Higgs Budget Update breakfast, please feel free to download the slides. (1.17MB, Microsoft PowerPoint)

The above is only a brief summary of the budget, and your Polson Higgs advisor is well positioned to discuss with you the impact of the budget on your business, and issues you need to consider.

<< Back to May 2010 News Archive