Report overview

The Taxation (Consequential Rate Alignment and Remedial Matters) Bill introduces new resident withholding tax (RWT) rates on interest paid to individuals, to bring them into line with recent changes to personal tax rates. The new rates for individuals will be 12.5%, 21%, 33% and 38%, depending on their income.

The bill introduces a new default rate of 38% for people who do not elect an RWT rate with their bank. This default rate will apply to accounts opened from 1 April 2010. The bill proposes a transitional period for people who have an existing bank account at 1 April 2010 and who are on the current RWT default rate of 19.5%. They will be automatically shifted up to a 21% rate for a year from 1 April 2010. They will then have a year in which to either confirm with their bank that 21% is their correct rate or to select one of the other RWT rates. If they neither confirm the 21% rate nor elect another rate, their RWT rate will then go up to 38% from 1 April 2011. The changes to the default rate are being made to motivate people to use the RWT rate that aligns with their marginal tax rate for the interest they receive from their financial institution.

This has proved to be the most controversial matter in the bill.

The bill aligns the tax rates on portfolio investment entities (PIEs) with the new personal tax rates, so that PIE rates will be 12.5%, 21% and 30%, and makes a number of similar consequentials to other withholding tax rates.

Other amendments include removing the current requirement for Inland Revenue to issue personal tax summaries, clarifying the Commissioner’s discretion to allow taxpayers who have made minor errors in a return (involving $500 or less in tax) to correct them in a subsequent return, making the requirement to pay tax in dispute a non-disputable decision and clarifying the meaning of ‘dividend’ under the dividend stripping rules.

Thirteen submissions were received on the bill. Submitters were generally supportive of the main purpose of the bill, which is to align rates. However, several submitters had significant concerns regarding the proposal to change the default rate to 38% for all taxpayers using the 21% rate on 1 April 2011. During consultation with officials, submitters suggested an alternative proposal which targets taxpayers who use the incorrect rate. Officials support the alternative proposal.

Several submitters raised significant issues that were not directly related to the changes in the bill. These included issues relating to dividend RWT, PIEs and government superannuation allowances. Officials are sympathetic to several of the issues raised, but there has not been sufficient time to address these issues given the timeframe. In any case it is difficult to deal with extraneous policy matters in the context of the select committee bill process.