Personal tax cuts
Under changes proposed in the Taxation (Budget Measures) Bill 2010, all personal income tax rates will be reduced from 1 October 2010.
To ensure that the effects of the tax cuts flow through the tax system appropriately, other consequential amendments to the tax Acts will be needed. The Taxation (Budget Measures) Bill 2010 therefore proposes to amend fringe benefit tax rates, secondary employment codes, withholding tax rates for casual agricultural employees and election day workers, extra pay rates, ESCT rates, PIE rates, RWT rates, RSCT rates, withholding rates for some Māori authority distributions, ACC attendant care withholding rates, child taxpayer tax credits and transitional circumstances tax credits. Transitional provisional tax rules for individual taxpayers are also proposed.
Redundancy payment tax credits are proposed to be removed from 1 October 2010, and fund withdrawal tax also phased out from that date.
Key features
- Under the changes proposed in the bill, the new tax rates will apply to income earned by individuals from 1 October 2010.
- The bottom tax rate will be lowered from 12.5% to 10.5%, the 21% rate to 17.5%, the 33% rate to 30%, and the highest rate lowered from 38% to 33%.
- Consequential changes to other aspects of the tax legislation – such as PAYE tax and provisional tax, resident withholding tax rates for interest income, portfolio investment entity tax rates, and fringe benefit tax – will be made to coincide with these changes.
- The bill does not amend some withholding tax rates (for example, the 19.5% tax rate for Māori authorities, and certain withholding tax rates such as payments to horticultural contractors). These rates will be reviewed as it is not clear what rates are appropriate for these payments.
Application date
Generally these changes apply from 1 October 2010.
Fund withdrawal tax will not apply to withdrawals that relate to contributions made on or after 1 October 2010.
Redundancy tax credits will not be available for redundancy payments derived after 1 October 2010.
Detailed analysis
Composite income tax rates for the 2010–11 income year (clause 71(1))
Income tax is calculated based on a person’s annual income. Because the proposed tax rates will be changing part-way through the 2010–11 income year, the new tax rates that will apply for the whole of the 2010–11 income year are “composite tax rates” that reflect an average of the two income tax rates that are used during the year. The table below shows the income tax rates that will be used during the 2010–11 income year as well as the composite tax rates for the year. The new composite rates will be contained in schedule 1, part A, table 1 of the Income Tax Act 2007 and are shown below:
| Old tax rates applying to PAYE for the period 1 April 2010 – 30 Sept 2010 | New tax rates applying to PAYE for the period 1 Oct 2010 – 31 March 2011 | Composite tax rates for 2010–11income year | |
|---|---|---|---|
| $0 – $14,000 | 12.5% | 10.5% | 11.5% |
| $14,001 – $48,000 | 21% | 17.5% | 19.25% |
| $48,001 – $70,000 | 33% | 30% | 31.5% |
| $70,001 and over | 38% | 33% | 35.5% |
Income tax rates for the 2011–12 and future income years (clause 71(2))
Proposed schedule 1, part A, table 1 of the Income Tax Act 2007 provides for new income tax rates for the 2011–12 and future income years. The new rates will be:
| Income range | Tax rate |
|---|---|
| $0 – $14,000 | 10.5% |
| $14,001 – $48,000 | 17.5% |
| $48,001 – $70,000 | 30% |
| $70,001 and over | 33% |
PAYE rates: M and ML tax codes
The new income tax rates will apply to PAYE for the first pay period that ends on or after 1 October 2010. For pay periods that span the 1 October date and are for a month or are shorter, PAYE will be deducted at the new rates. If the pay period spanning 1 October is longer than a month, then PAYE should be deducted at the old rate for the part of the pay period before 1 October and at the new rate for the part of the pay period after 1 October. The new rates will be:
| Income range | Tax rate |
|---|---|
| $0 – $14,000 | 10.5% |
| $14,001 – $48,000 | 17.5% |
| $48,001 – $70,000 | 30% |
| $70,001 and over | 33% |
Inland Revenue’s PAYE deduction tables will be updated to reflect the new rates, so the M and ML tax codes reflect the new rates.
PAYE rates: secondary employment income (clause 36)
Proposed schedule 2, part A of the Income Tax Act 2007 reduces withholding tax rates on secondary employment income to reflect the new tax rates. This will apply from the first pay period that ends on or after 1 October 2010. The new rates will be:
| Income range | Tax code | Tax rate |
|---|---|---|
| $0 – $14,000 | SB | 10.5% |
| $14,001 – $48,000 | S | 17.5% |
| $48,001 – $70,000 | SH | 30% |
| $70,001 and over | ST | 33% |
Extra pays (clauses 37)
Lump sums earned in the course of employment (“extra pays”) are generally taxed at the employee’s marginal rate. Proposed schedule 2, part B, table 1 of the Income Tax Act 2007 will reduce withholding tax rates on extra pays to reflect the new marginal tax rates. These will apply from the first pay period that ends on or after 1 October 2010. The new rates will be:
| Income range | Tax rate |
|---|---|
| $0 – $14,000 | 10.5% |
| $14,001 – $48,000 | 17.5% |
| $48,001 – $70,000 | 30% |
| $70,001 and over | 33% |
PAYE rates: casual agricultural employees and election day workers (clause 36)
Proposed schedule 2, part A of the Income Tax Act 2007 reduces withholding tax rates for casual agricultural employees and election day workers. The rate will drop from 21% to 17.5%, to reflect the second-to-lowest marginal tax rate and will apply from the first pay period that ends on or after 1 October 2010.
Resident withholding tax rates on interest income for individuals (clause 32)
Schedule 1, part D, table 2 of the Income Tax Act 2007 provides for new resident withholding tax (RWT) rates for individuals who receive interest income. These reflect the proposed new personal tax rates of 33%, 30%, 17.5% and 10.5%.
Non-declaration rate
Row 1 of schedule 1, part D, table 2 will replace the previous 38% RWT rate that applied if a person had not supplied their interest payer with their tax file number with a 33% rate, to align with the new highest marginal tax rate.
Default rates
Row 2 of schedule 1, part D, table 2 introduces a new 33% default rate from 1 October 2010 for people who have opened a new account with an interest payer after 31 March 2010 but do not elect a tax rate.
Row 5 of schedule 1, part D, table 2 provides for a 17.5% default rate from 1 October 2010 for people who have not opened a new account after 31 March 2010 and have not made a tax rate election.
Additionally, table 2 sets out transitional rules so that people who elected rates before 1 October 2010 shift automatically on that date to the relevant new RWT rates.
The new rates will apply from 1 October 2010.
Consequential change to resident withholding tax rates on interest income for companies (clause 33)
Schedule 1, part D, table 3, rows 3 and 4 are being amended to reflect changes to personal income tax rates. This will reduce the rate of resident withholding tax from 38% to 33% for interest paid to a company when the recipient of the interest has either elected for the top personal rate to apply or has not supplied their tax file number to the payer.
This will apply from 1 October 2010.
Portfolio investment entity (PIE) rates (clauses 5, 6, 7, 8, 9, 30 and 39)
Proposed schedule 6, table 1 is being amended to lower the tax rates that apply to investors in portfolio investment entities (PIEs). The new rates will be:
| Taxable income | Taxable + PIE income | PIE tax rate |
|---|---|---|
| $0 – $14,000 | $0 – $48,000 | 10.5% |
| $0 – $14,000 | $48,001 – $70,000 | 17.5% |
| $14,001 – $48,000 | $0 – $70,000 | 17.5% |
| $48,001 and over | Any | 28% |
| Any | $70,001 and over | 28% |
Section HM 58 ensures that people who invest in PIEs before 1 October 2010 will automatically shift to the new equivalent rate on 1 October 2010, so that they do not need to re-elect their rate with the PIE.
These changes will apply from 1 October 2010.
Provisional tax (clauses 25, 26, 27, 28, 29 and 30)
The bill introduces changes to sections RZ 3 to RZ 5 to amend the formulas used to calculate provisional tax and allow individuals who pay provisional tax based on the earlier year method to reduce their provisional tax payments from 1 October 2010.
To calculate provisional tax from 1 October 2010 that is paid on the basis of an earlier year’s residual income tax (RIT), transitional factors will apply.
The following table provides adjustments to the transitional factors for individuals on the standard and the GST ratio methods for calculating provisional tax for the 2010–11 or later income years.
| Years | ||||
|---|---|---|---|---|
| 2010–11 | 2011–12 | 2012–13 | 2013–14 | |
|
Standard method adjustment – 110% payment decreases to: – 105% payment decreases to: |
95% 95% |
95% 95% |
100% |
|
|
GST ratio method adjustment – Two years before preceding year RIT decreases to: – Year before preceding year RIT decreases to: – Preceding year’s RIT decreases to: |
80% 85% 90% |
80% 85% 90% |
85% 90% |
90% |
For the 2010–11 income year the adjustments apply to provisional tax payments made on or after 1 October 2010.
Consequently, the formulas referred to in sections RZ 5B and RZ 5C from the 2008 Budget measures are repealed.
New FBT rates (clauses 64 to 70 and 72)
Proposed changes to sections RD 50 to 53 and schedule 1, part C, table 1 of the Income Tax Act 2007 provide for new fringe benefit tax (FBT) rates and thresholds for attributed fringe benefits. These reflect the new personal tax rates. The changes will apply to the 2010–11 income year and subsequent income years. For the 2010–11 income year, composite rates apply to reflect the two sets of rates being used for that year.
The new FBT rates and thresholds for attribution purposes will be:
| Income range | Tax rate |
| $0 – $12,390 | 0.1299 |
| $12,391 – $39,845 | 0.2384 |
| $39,846 – $54,915 | 0.4599 |
| $54,916 and over | 0.5504 |
| Income range | Tax rate |
| $0 – $12,530 | 0.1171 |
| $12,531 – $40,580 | 0.2121 |
| $40,581 – $55,980 | 0.4286 |
| $55,981 and over | 0.4925 |
Employers will still have the option of paying FBT at a single rate if they prefer. Proposed changes to sections RD 58 to 61 reduce the single rate from 61% to 49.25%. For close companies and small businesses that are able to file FBT returns annually, the applicable rate will also be reduced to 49.25 from the 2011–12 income year – however, for the 2010–11 income year, a composite rate of 55.04% will apply.
New employer superannuation contribution tax rates (clause 31)
Contributions that an employer makes to an employee’s superannuation scheme are generally taxed at the employee’s marginal tax rate. Proposed schedule 1, part D, table 1 of the Income Tax Act 2007 provides for new employer superannuation contribution tax (ESCT) rates. Under the changes proposed in the bill, the 12.5% rate has been dropped to 10.5% and the 21% rate has been dropped to 17.5%. The rate has been reduced from 33% to 30% for people who earn between $57,601 and $84,000.
The changes will apply from the first pay period that ends on or after 1 October 2010. The new rates will be:
| Income range | Tax rate |
|---|---|
| $0 – $16,800 | 0.105 |
| $16,801 – $57,600 | 0.175 |
| $57,601 – $84,000 | 0.300 |
| $84,001 and over | 0.330 |
It should be noted that the income ranges at which the ESCT rates apply are higher than the income ranges that apply for personal tax rates. This is to reduce the risk that employer contributions made to employees whose income is close to a threshold are not overtaxed.
New retirement superannuation contribution tax rates (clauses 35, 40 and 42)
Contributions made by an approved entity to a member’s superannuation scheme are generally taxed at the member’s marginal rate under the retirement superannuation contribution tax (RSCT) rules. Proposed schedule 1, part D, table 5 and schedule 6, table 2 of the Income Tax Act 2007 provides for new RSCT rates that reflect the new personal tax rates.
A consequential change has also been made to section 28C of the Tax Administration Act 1994, which deals with notification of a person’s retirement scheme prescribed rate, to reflect the new top tax rate.
The changes will apply from 1 October 2010.
ACC attendant carers (clauses 38 and 73)
Payments to ACC attendant carers are currently subject to a withholding tax rate of 12.5%, which reflects the bottom tax rate. Proposed schedule 4, part I, clause 1 reduces the withholding tax rate to 10.5% from 1 October 2010. A consequential change is also being made to section 33C(c) of the Tax Administration Act 1994. This will ensure that these taxpayers do not need to file a tax return if they used 10.5% or the 12.5% rate in the 2010–11 income year.
Payments from Māori authorities to members who have not provided a tax file number (clause 34)
The current rate of tax for Māori authority distributions to members who have not provided a tax file number is 38% in schedule 1, part D, table 4. It is proposed that this rate be reduced to 33% to reflect the reduction in the top personal tax rate. The changes will apply from payments made on or after 1 October 2010.
Fund withdrawal tax (clause 4)
Fund withdrawal tax (FWT) is a 5% tax payable on some superannuation fund withdrawals for members whose income is above $70,000. FWT was introduced to ensure that taxpayers who are on the highest tax rate were not undertaxed under the employer contribution superannuation tax (ESCT) rules, as the top rate for ESCT was 33%.
As a consequence of the bill’s proposal to align the top ESCT rate and the top personal tax rate, fund withdrawal tax is being phased out. Section CS 1 will be amended to ensure that FWT will not apply to withdrawals that relate to contributions made on or after 1 October 2010 (which is the proposed date of the changes to personal rates).
However, FWT will continue to apply to withdrawals that relate to contributions made before 1 October 2010 (before the top ESCT rate was aligned with the top marginal tax rate).
In some cases the trustee of the superannuation fund may not be able to establish whether an employer’s superannuation contribution was made before or after 1 October 2010. In these cases, the income derived by the fund in section CS 1(2) can be reduced by 50% of the employer-sourced superannuation savings contributed during 2010–11 if:
- the withdrawal relates to an employer’s superannuation contribution made during 2010–11; and
- the trustee of the fund cannot identify whether an employer’s superannuation contribution was made in the last pay period ending on or after 1 October 2010.
Section CS 1 will provide that FWT will not apply to any withdrawals from income years beginning on or after 1 April 2015.
Child taxpayer credit (clause 59)
The child taxpayer credit provides children with a tax rebate on income that is not interest or dividends. This allows an eligible child to earn income (less interest and dividends) up to $2,340 a year tax-free.
As a result of the reduction in the lowest tax rate from 12.5% to 10.5%, section LC 3 of the Income Tax Act 2007 will be consequentially amended so that the current tax-free threshold stays at the same level.
The changes will apply to 2010–11 and later income years.
Transitional circumstances credit (clause 60)
The transitional circumstances credit effectively provides a tax-free threshold of $5,824. It is available for some people who earn under $9,880. As a result of the reduction in the lowest tax rate from 12.5% to 10.5%, section LC 4 of the Income Tax Act 2007 will be consequentially amended so that the current tax-free threshold stays at the same level.
The changes will apply to 2010–11 and later income years.
Redundancy tax credit (clauses 10 and 11)
Section ML 2(1) will be amended to remove the redundancy tax credit from 1 October 2010. The redundancy tax credit was originally introduced to ensure that the receipt of a redundancy payment did not cause a person to move up a tax threshold and be taxed at a significantly higher tax rate than they would ordinarily (the top personal tax rate at the time was 39%, which was 6% higher than the next highest personal tax rate at the time. The 39% rate has since been reduced to 38%.). Because the 38% rate will be reduced to 33% from 1 October, and because there will be a smaller gap between the new 33% top personal tax rates and the next lowest rate of 30%, it is proposed this credit be repealed from 1 October.