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The “Back to the Past” Budget

The “Back to the Past” Budget

“This is the most radical tax budget we have seen for some time. It signals a positive direction for business and the economy, and is a return to the past of lower rates and a simpler tax system,” said Craig Macalister, New Zealand Institute of Chartered Accountants (NZICA) tax director.

“This is a ‘back to the past’ budget - 33% was the highest marginal personal tax rate in 2001, and 28% was the company rate in 1989. The move from 33% to 39% in 2001 (for those earning over $60,000) caused considerable restructuring by taxpayers to avoid this rate. Ever since then the tax system has fallen into disarray, as governments have tried to apply a band-aid to arrangements to avoid the 39 % rate.

“This is a welcome return to a simpler tax system, and it removes some of the incentives to structure for tax purposes rather than for commercial purposes. Hopefully, these rate changes will also flow through to fringe benefit tax, and possibly allow room for simplifying the calculation of FBT.

“However, some anomalies remain. The differential of 5% between the new company rate and the top personal tax rate of 33% leaves a strong incentive for people to form companies in order to avoid the top personal tax rate. Incentives also still remain for people to earn investment income through PIEs and pay only 28%.

“Property owners will not welcome the change to deny depreciation on properties that have an expected economic life of 50 years or more. However, this is a more principled approach than ring-fencing rental property losses and introducing bright-line tests to tax property purchased and sold within a specified time.”

Mr Macalister said the under-taxation of capital assets in New Zealand remains and will continue to create distortions.

“Businesses will not welcome the removal of the 20% uplift factor on new depreciable plant and equipment, as that will lift their effective tax rate, but that will be offset to an extent by the reduction in the corporate tax rate.”

“The changes to Working for Families, to remove the ability to deduct investment losses from income for WFF purposes, come as no surprise and will make the system fairer. In addition, the proposals around the LAQC and QC rules to shore up the integrity of the tax system are questionable,” he said.


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