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Budget 2010 – The Tax Changes Presented by: Michael Turner and Stephen Higgs Dunedin – May 2010 Budget 2010 – The Tax Changes C Polson Higgs, 2005C Contents Economic Predictions Government Finances Tax Rates GST Increase Property Issues Planning/Avoidance Other Business Issues Budget 2010 – The Tax Changes C Budget 2010 - Key Platforms Economic Performance Tax Reform Public Services Government Finances Budget 2010 – The Tax Changes C Economic Predictions 2010 2011 2012 2013 2014 -0.3 3.2 3.1 2.9 3.0 Inflation (annual % change March quarter) 2.2 5.9 2.4 2.4 2.4 90-day interest rate (March quarter) 2.7 4.3 5.2 5.4 5.7 Unemployment rate (March quarter) 7.1 6.2 5.5 5.1 4.6 Core Crown expenses ($b) 64.8 70.7 71.5 74.2 77.0 Core Crown revenue ($b) 56.4 60.3 64.5 68.5 72.9 Operating balance ($b) -6.9 -8.6 -5.4 -4.4 -3.0 Operating balance (% of GDP) -3.7 -4.2 -2.5 -1.9 -1.3 Net debt ($b) 26.6 40.0 49.6 57.1 63.0 Net debt (% of GDP) 14.1 19.6 23.0 25.3 26.5 Real GDP growth (annual average % change) Budget 2010 – The Tax Changes C Government Finances Govt surplus 2016 Net Debt peak 27.4% GDP 2015 2009 Budget had peak 35% GDP Total NZ debt as % GDP high (90%) Low Govt debt crucial – Credit rating – Interest rates Budget 2010 – The Tax Changes C Income Tax Rates Personal 0-14,000 14,001-48,000 48,001-70,000 70,001 + Current 12.50% 21.00% 33.00% 38.00% 2010/11 11.50% 19.25% 31.50% 35.50% 2011/12 10.50% 17.50% 30.00% 33.00% Trust Rate 33% 33% 33% Company Rate 30% 30% 28% PIE 30% 28% 28% (from 1/10) Budget 2010 – The Tax Changes C Income Tax Rates Personal Current $ Proposed $ 0-14,000 12.5% 1,750 10.5% 1,470 -280 14,001-48,000 21.0% 7,140 17.5% 5,950 -1,190 48,001-70,000 33.0% 7,260 30.0% 6,600 -660 70,001+ 38.0% _____ 14,020 ===== _____ -2,130 ===== 33.0% _____ 16,150 ===== Budget 2010 – The Tax Changes C Income Tax Rates Income Tax Current Tax Proposed Difference 70,000 16,150 14,020 - 2,130 100,000 27,550 23,920 - 3,630 150,000 46,550 40,420 - 6,130 200,000 65,550 56,920 - 8,630 Budget 2010 – The Tax Changes C Income Tax Rates Other changes RWT on interest RWT on dividends Provisional tax Use of imputation credits FBT Secondary tax Budget 2010 – The Tax Changes C Income Tax Rates Other changes Removal of redundancy & fund withdrawal tax New superannuation contribution rates Working for Families Benefits Budget 2010 – The Tax Changes C GST Rate Increase Rate increase 12.5% 20% increase in GST 1 October 2010 2% increase in CPI 1.59 billion revenue 2010/2011 15.0% 2.46 billion revenue by 2013/2014 History: – 1 October 1986 10.0% – 1 July 1989 12.5% – 1 October 2010 15.0% Budget 2010 – The Tax Changes C Calculation of GST content GST inclusive 12.5% = ÷ 9 15% = ÷ 23 x 3 GST exclusive 12.5% = ÷ 9 x 8 or 8/9 15.0% = ÷ 23 x 20 or 20/23 Budget 2010 – The Tax Changes C Issues to Consider Pricing and demand Spike / dip in demand for goods Prepay costs Only for consumer – not registered businesses Updating prices overnight Deemed supplies (change of use) Adjustments (12.5% vs 15%) Price points $9.95 – increase price to $10.17 (or more!) Signage, brochures, websites and price tags Budget 2010 – The Tax Changes C Issues to Consider Contractual issues Ordinary timing rules Hire purchase “lock in rate” New contracts Ongoing contracts Budget 2010 – The Tax Changes C Issues to Consider Unless agreement expressly contemplates it Section 78 Agreement deemed modified – supplier recover Contract three months after change Recover from recipient “Plus GST”, “Inclusive of GST” or Silent Budget 2010 – The Tax Changes C Issues to consider Recurring invoices Increase in funding cost (e.g. exports) Higher costs for those who can’t recover – consumer or unregistered Compliance more significant as GST $ gets larger (20% increase) Issuing correct tax invoices / credit/debit notes Budget 2010 – The Tax Changes C Issues to Consider Accounting systems Accounts payable – two rates Accounting system – Will it handle a change? – Change part way through a year? – Rates assigned to individual customers Updating prices overnight Budget 2010 – The Tax Changes C Transitional rules Anti-avoidance If GST return spans 1 October – two parts Will need a list of Debtors/Creditors on 1 October Payments basis will need to complete adjustment Budget 2010 – The Tax Changes C Sectors Property developers (settlement) Ongoing contracts (e.g. gym) Residential landlords Periodic costs (e.g. insurance) Budget 2010 – The Tax Changes C Property Issues Currently 2% SL / 3% DV Negative return of $500m Depreciation deductible Recoverable on sale Budget 2010 – The Tax Changes C Property Issues Proposed Depreciation for buildings estimated life <50yrs No depreciation ≥50yrs Begins 2012 income year R&M still deductible Commercial property fit-outs depreciable, but under review Budget 2010 – The Tax Changes C Property Issues <50 years generally specialist buildings – E.g. portable buildings, dairy sheds, concrete bunkers, chemical works, hot/shade houses, tanneries Can apply for estimated useful life ruling No deductible loss on sale Potential recovery of “old” depreciation Budget 2010 – The Tax Changes C Planning/Avoidance Funding of IRD – + $119.3m over 4 years – Increased audit/compliance activity Debt collection Hidden economy Property transactions Tax rate / income splitting? – “Phoenix” / Land – zero rating Budget 2010 – The Tax Changes C Planning/Avoidance Tax Rate – Was 38% vs 33% = 5% – Proposed 33% vs 28% = 5% – Company vs Trust – Attribution rules – Planning? Budget 2010 – The Tax Changes C Planning/Avoidance Working for Families – From 1 April 2011 – Investment (rental) loss not available – Issues Paper – Trust distributions, WFF, student allowances, community services card Budget 2010 – The Tax Changes C Planning/Avoidance LAQC – 1 April 2011 – Taxed like Limited Partnerships – Partnership tax return – Losses limited to investment – Profits taxed at S/H rate Thin Capitalisation – Debt to equity – 75% reducing to 60% Budget 2010 – The Tax Changes C Other Business Friendly Measures – $321m over 4 years R&D Aquaculture – Legislation to support growth – Lift regulatory barriers Mining – Gain in economic performance – Funded in budget Water – Improve regulatory regime – Storage/irrigation – Sustainable mngt programme Budget 2010 – The Tax Changes C Other Business Friendly Measures – Improve via free trade agreements E.g. HK, Malaysia & others – Transpacific partnership Exporters Productivity Commission – April 2011 – Independent body – Productivity related matters – Yeah right! Budget 2010 – The Tax Changes C Budget 2010 – The Tax Changes C