Stewart & Co Blog

25 May 2017 marked the first budget from Steven Joyce.  This was expected to be a "steady as she goes" budget and did not disappoint.  The main winners in this budget are low to middle income New Zealanders with the centre piece of the Budget being the Family Income Package which includes an increase in the tax rate thresholds and Working for Families Tax Credits. 

Tax Rate Threshold Changes

As expected, the tax rate thresholds have increased from 1 April 2018, meaning more money in the hand for most New Zealanders.  The tax rate thresholds from 1 April 2018 will be as follows:

 

 

So what does this actually mean for you:

• Individuals are taxed on a sliding scale in New Zealand.  The first portion of your income is taxed at 10.5%, the next portion at 17.5% and so on.

• If you earn over $14,000 p.a. you will be paying less tax from 1 April 2018. 

For a person earning say $50,000 p.a. these threshold increases would result in the following annual tax saving:

 

Tax Rate	Annual tax prior to increase	Annual tax after increase	Saving
10.5%	1470	2310
17.5%	5950	4900
33%	660	0
Total Tax Paid	$8,080	$7,210	$870

 

Working For Families Tax Credits

Those on low incomes who receive the Family Tax Credit under Working for Families, as well as the Accommodation Supplement will more than likely see an increase in the credits they receive each week.   

Working for Families Family Tax Credits will rise by $9.25 a week for a first child under 16, and between $17.75 and $26.81 for other children.  It means families get the same rate for younger children as for those aged 16-18. 

An average boost of $35 a week for the Accommodation Supplement will help some 136,000 households.  Some households will receive more with areas in South and West Auckland and Christchurch being moved into categories which get higher payments to reflect the higher rents payable in these areas.  

Unfortunately, some households on middle incomes will get less with the income threshold at which Working for Families Tax Credits start to abate reducing from $36,350 to $35,000 and an increase in the abatement from 22.5 cents in the dollar to 25 cents in the dollar.  

Independent Earner Tax Credit

The Independent Earner Tax Credit of $10 per week for those earning between $24,000 and $48,000 has been removed.  The Government has said this was often not claimed by those entitled to it and the above changes should more than make up for the tax credit removal. 

 

What Else

• Further tax cuts have been signalled once the Government has the money to do so. 
• Couples on superannuation will receive an extra $13 a week. 
• Mental Health & Disability Support are set to get a boost in funding.  An extra $224 million will be spent over the next four years on mental health support and an extra $205.4 million over the next four years for disability support. 
• Auckland's City Rail is to get its first funding injection of $436m.
• $392 million is to go on new schools and classrooms.
• The school funding freeze is over, with funds being injected to keep up with the increase in demand due to growing school populations. 
• Almost $47 million to be spent on new initiatives to cut burglary and youth offending.
• Science and Innovation will receive an increase of $373 million funding.
• Insurance premiums are set to rise by up to $69 a year with the increase in the earthquake levy to help top up the Natural Disaster fund.  

The IRD have released their mileage rates for the 2017 year.  For both petrol and diesel vehicles this has been set at 73 cents per kilometer.  

New rates have also been introduced for Hybrid and Electric vehicles as follows:

• Hybrid - 73 cents per kilometer
• Electric - 81 cents per kilometer 

The above rates are effective from 1 April 2016.  If you have been using the prior year rates to reimburse employees or for preparing your tax return the IRD do not expect you to go back an amend these.  Please use the new rates going forward.  

Schedular Payments

Schedular payments apply to contractors across a broad spectrum of industries; from cleaners, farm workers and gardeners, to entertainers, sports people, labour only builders and fishing boat employers.  The withholding tax rate applicable depends on the industry type.
 
However, with the new rules, from 1 April 2017 contractors can choose to elect a lower withholding tax rate, down to a minimum of 10%.  This is done by the contractor electing a rate on their Tax Rate Notification for Contractors form (IR 330C) which they will provide to businesses that they invoice.
 
Withholding tax has always been required to be deducted from industries that fall within the Schedular Payment industries, so the only real change affecting these type of contractors, in regard to this area is the ability to elect the rate at which withholding tax is being deducted. 
 
Special Tax Rate

In the past, contractors that were subject to the withholding tax rules were able to apply for a certificate of exemption to not have withholding tax deducted.  Under the new rules, you can no longer apply for a certificate of exemption however, you can elect to have a zero percent withholding tax rate.  This does mean that contractors will pay their income tax through the provisional tax system.
 
The election of a zero percent withholding tax rate is done by completing an IRD Special Tax Code application form (IR23BS) and submitting this to the IRD.
 
Labour Hire Firms

The withholding tax rules have been also been extended to apply for contractors that work for "labour hire firms".  A labour hire firm has a wide definition but essentially includes "a person which has as one of its main activities, the business of arranging for a person to perform work or services directly for clients of the entity".
 
If you are a labour hire business and pay contractors to do work for your client, under a labour hire arrangement, these payments now come under the schedular payment rules and tax must be deducted.
 
For more information on the new schedular payments rules and how these might apply to you, please contact us at Stewart & Co.