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Published September 2011

We are right into the Rugby World Cup fever here at Lock & Partners, go the All Blacks!  But alas, we still need to face reality and remind you of some important tax updates.

Please find below a few key changes, updates and reminders that you may need to be aware of. 

 
KiwiSaver changes

Following the KiwiSaver changes announced by the Government in the 2011 Budget, legislation was enacted on 24 May 2011 to implement the amendments, which are being phased in over the next two years. The changes are intended to reduce the Government’s costs to fund the scheme. Employers need to be aware of the changes to correctly administer their employees’ contributions and meet their own obligations under the scheme.

The changes are to come into effect as follows:

  • From 1 July 2011 the member tax credit will reduce by half to 50 cents per $1 dollar contributed, up to a maximum of $521 per annum. The maximum was previously $20 per week ($1,040 per annum). The $1,000 kick-start payment available to members when they sign up to KiwiSaver remains unchanged.
  • Prior to the introduction of KiwiSaver, contributions made by an employer to an employee’s superannuation scheme were subject to withholding tax in the form of Employer’s Superannuation Contribution Tax (ESCT). With the introduction of KiwiSaver, an exemption from ESCT applied to the employer’s minimum required contribution. From 1 April 2012 that exemption will be removed and the total employer contribution will be subject to ESCT.
  • This change represents an increase in Government tax revenue and a decrease in the amount a member receives from their employer.
  • The method for calculating ESCT has also changed. Before 1 April 2012 an employer could calculate ESCT at a flat rate of 33 cents in the dollar. After this date ESCT must be calculated at a progressive rate based on either:
    • Where the employee has been employed for the whole of the previous year – the employee’s annual salary or wages plus the gross employer contributions paid in the previous tax year, or
    • Where the employee was not employed for the total previous tax year - an estimate of the employee’s gross salary or wages plus an estimate of employer’s gross contributions for the current year.

Although not legislated at this stage, the Government has also signalled its intention to change the minimum contribution rate for employers and employees from 1 April 2013. These are currently set at a minimum of 2% for both employee and employer contributions. Both are expected to increase to a minimum of 3%. Members will still have the option to select a higher rate of 4% or 8% if they wish. This change is expected to apply to both existing and new members.

Employers will need to update their wages processes, as the changes come into effect, to ensure that KiwiSaver obligations are accounted for correctly.

 
 
 
The abolition of Gift Duty

Legislation has now passed to abolish gift duty from 1 October 2011.  Government officials and Inland Revenue officers have made it clear that current NZ legislation will be used in future to prevent individuals from divesting themselves of assets overnight to defeat creditors, relationship partners and Government agencies providing social assistance (rest home fee subsidies, student loans etc).

Gifts defined as ‘extraordinary’, i.e. they exceed $27,000, may be subject to claw back at any time and legislation such as the Insolvency Act, the Property Law Act and Social Security regulations will be used in future to police this area.

The message is clear - with the abolition of gift duty, current legislation will increasingly be used along with organisational changes to police this area by the likes of WINZ, IRD, the Official Assignee and other agencies.  Long story short - substantial gifts should not be undertaken without seeking professional advice.

 
 
 
Rental homes for the Rugby World Cup - IRD focus

It has been widely publicised that those who make their homes available for rent during the Rugby World Cup may face targeted scrutiny from the Inland Revenue.

The Inland Revenue itself has commented that it will be scanning sources, such as property rental web-sites and TradeMe, to identify potential rental earners and then checking their income tax returns to make sure the income has been reported.

The amount of taxable income will depend on how much rent is received and what expenses can be deducted. If rental earners are identified by the Inland Revenue as non-compliant, penalties and interest can apply.

For more information about how this is calculated, a suitable starting point is to refer to the Inland Revenue’s statement on the income tax treatment of holiday homes that are rented out.  While the statement relates to the use of holiday homes to derive income, it can also be applied in this context. It should be noted that depreciation on residential buildings was removed after the statement was released.

 
 

GST private use adjustments

On 1 April this year, rules for calculating GST private use adjustments were simplified. Sounds great!  Problem is that the new rules aren’t very simple.  Private use adjustments are calculated at the time of purchase, each year if usage changes, and when sold. 

If you complete your own GST returns and need assistance working out how much GST you can claim or have to pay when you have an asset with private use such as a car, give us a call or drop us an email along with the facts.  We’ll do the calculations and send you a work sheet with the calculations explained.  That way if you ever have to explain your calculations to IRD, you’re covered.

‘Government's view of the economy could be summed up in a few short phrases: If it moves, tax it.  If it keeps moving, regulate it.  And if it stops moving, subsidise it.’ Ronald Reagan
 
 
Tax facts that may interest you

In 2009/2010 the Government’s total tax revenue derived from taxpayers was split as follows:
  • Individuals - $21.9 billion (43%)
  • GST - $11.7 billion (23%)
  • Corporate tax - $7.3 billion (14%)
  • Other tax - $9.8 billion (19%)

Following the Budget, the split for the 2011/2012 year is forecast to be:

  • Individuals - $24.3 billion (44%)
  • GST - $15 billion (27%)
  • Corporate tax - $8.1 billion (15%)
  • Other tax - $7.3 billion (13%)

Income support vs income tax
  • Currently, households earning less than $50,000 (43% of households) receive more in income support than they pay in income tax (on a net basis). Income tax paid by households earning between $50,000 –$110,000 effectively pays for this net refund.
    Prior to the introduction of the 39% tax rate in 2000 there were about 20,000 trusts in New Zealand. By 2010 that number had increased to about 55,000.

  • As at 30 June 2011 student loan debt is estimated to be $12 billion.



 Who pays the most tax?
  • Before the individual tax cuts in October 2010, 12% of individual taxpayers contributed 49% of all personal income tax, while the remaining 88% of individual taxpayers contributed 51%.

  • Households earning over $120,000
    pay 97% of net individual income taxes, while the top 10% of households (those over $150,000) pay 71% of the net individual income tax revenue.



 


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+ Set ups & structuring

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+ Want asset protection?

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