Personal Tax Cuts Fact Sheet

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1 Personal Tax Cuts Fact Sheet The government is introducing a three-year programme of personal tax cuts starting from 1 April These changes are in addition to the tax cuts that came into effect on 1 October The package has two key elements: changes to personal income tax rates and thresholds; and the introduction of an independent earner tax credit (IETC). Changes to personal tax rates and thresholds Reductions to personal tax rates and changes to personal tax thresholds will be phased in over three years starting on 1 April These changes will result in the following personal tax structures (changes in bold): From 1 April 2009 $0 $14, % $14,001 $48,000 21% $48,001 $70,000 33% $70, % From 1 April 2010 $0 $14, % $14,001 $50,000 21% $50,001 $70,000 33% $70, % From 1 April 2011 $0 $14, % $14,001 $50,000 20% $50,001 $70,000 33% $70, % The current tax rates and thresholds effective from 1 October 2008 are as follow: Income to $14, %

2 $14,001-$40,000 21% $40,001-$70,000 33% $70,001 and over 39% Salary and wage earners will receive the tax cut through a reduction in the PAYE tax that their employers withhold on their regular pay. Self-employed and other non-salary and wage earners will receive the tax cut when they file a tax return or request a personal tax summary at the end of the tax year. Consequential changes to other parts of the tax system To ensure that the changes to the personal tax rates and thresholds flow through the tax system correctly, it is also necessary to make a number of changes to other parts of the tax system. These areas include fringe benefit tax rates, the employer superannuation contribution tax and extra pay thresholds. There will be no immediate changes to the tax rate structure that applies to portfolio investment entities (PIEs) to reflect the new personal tax rate structure. The associated changes to the PIE tax rates will be considered after further consultation with the managed funds industry, and it is likely that any changes would apply from 1 April Similarly, the necessary changes to the resident withholding tax (RWT) rates on interest will not be fully implemented until there has been further consultation with banks and other financial institutions. However, banks and other financial institutions will be able to apply a new optional 38% RWT rate from 1 April It is likely that changes to the RWT rate structure to fully implement the new personal tax rate structure will apply from 1 April Independent earner tax credit (IETC) The independent earner tax credit (IETC) will provide tax relief to middle-income New Zealanders who do not receive core assistance from the government. The IETC will, from 1 April 2009, deliver $10 per week to individuals who earn between $24,000 and $44,000 and who do not receive a benefit, Working for Families tax credits or New Zealand superannuation. The IETC will be abated at 13 cents for every dollar of income earned over $44,000. The amount of the IETC will increase to $15 per week from 1 April 2010.

3 It is estimated that around 630,000 people will qualify for the tax credit in its first year. Salary and wage earners can receive the IETC regularly in their pay packets by electing a new tax code with their employer. A separate tax code is required to distinguish those who are eligible for the IETC from those who are not. Inland Revenue will provide information on how to do this closer to the 1 April 2009 start date. Selfemployed and other non-salary and wage earners can receive the IETC when they file their tax return at the end of the tax year. The IETC will only be available for New Zealand residents and will be pro-rated for part-year residents. Receipt of benefits and other core government assistance People who receive core assistance from the government will not be eligible for the IETC as outlined below: Benefits Individuals who receive the following benefits will not be eligible to receive the IETC: domestic purposes benefit; emergency benefit; independent youth benefit; invalids benefit; sickness benefit; unemployment benefit; widows benefit. Working for Families tax credits Individuals who receive Working for Families tax credits will not be eligible to receive the IETC. In addition, if a person s spouse or partner receives Working for Families tax credits the person will not be eligible for the IETC. This is because Working for Families tax credits are a family-based entitlement. New Zealand superannuation and veterans pension Individuals who receive New Zealand superannuation and the veterans pension will not be eligible to receive the IETC. Foreign pensions and benefits Individuals who receive pensions and benefits paid by overseas governments that are similar in nature to New Zealand superannuation, the veterans pension, Working for Families tax credits or income-tested benefits will also not be eligible for the IETC. This ensures equity of treatment between people who are receiving income assistance

4 from the New Zealand government and those receiving assistance from overseas governments. Receipt of disqualifying amounts for part of a year People who receive a benefit, pension or WfF tax credits for part of a year who would otherwise qualify for the IETC will be eligible for a portion of the IETC for the part of the year they did not receive disqualifying amounts. This will be calculated on a monthly basis. For example, a person who received the unemployment benefit for half the tax year and then moved into paid employment for the other half of the year would, provided their total annual income (including the unemployment benefit) was between $24,000 and $50,000, receive half of the equivalent entitlement to the IETC for that full year. Benefits that don t disqualify Individuals who receive student allowances, ACC payments, paid parental leave or the accommodation supplement will still be eligible for the IETC if they meet the other eligibility criteria. Tax savings table Table 1 shows how much savings the tax cuts deliver over the three-year programme in addition to the 1 October 2008 tax cuts. Table 1 Annual Cumulative weekly savings taxable income 1-Apr-09 1-Apr-10 TOTAL ANNUAL SAVINGS FROM 1-Apr-11 1 APRIL 2011 Tax cut with IETC Tax cut with IETC Tax cut with IETC Tax cut with IETC $ 15, $ 20, $ 25, $ 30, $ 35, $ 40, $ 45, $ 50,

5 $ 55, $ 60, $ 65, $ 70, $ 75, $ 80, $ 85, $ 90, $ 95, $. 100,

6 Personal Tax Cuts Examples Shane Shane is single and receives no benefits or New Zealand superannuation throughout the year. He earns $42,000 per year in the tax year. Shane is therefore entitled to the independent earner tax credit (IETC) for the tax year. From 1 April 2009, Shane is $14.62 per week better off as a result of the tax cuts. This is made up of $10 IETC and $4.62 as a result of the changes to the tax rates and thresholds. Assuming Shane s situation does not change, he will be $19.62 (IETC of $15 & $4.62) better off per week from 1 April 2010 and $25 (IETC of $15 & $10) better off per week from 1 April Dave and Diane Dave and Diane are married with three children. Dave earns $30,000 per year and Diane earns $50,000 per year. They receive Working for Families tax credits. Because they qualify for Working for Families tax credits, neither Dave nor Diane is entitled to the independent earner tax credit. From 1 April 2009, Diane is $18.46 per week better off as a result of the changes to the personal tax rates and thresholds. Assuming Dave and Diane s situation does not change, Diane will be $23.08 better off per week from 1 April 2010 and $30 better off per week from 1 April 2011, while Dave will be $3.08 better off per week from 1 April 2011 as a result of the changes to the personal tax rates and thresholds. Jane

7 Jane is single. Although she does not receive a benefit or New Zealand Superannuation throughout the year, Jane is not entitled to the independent earner tax credit because she earns $90,000 per year. From 1 April 2009, Jane is $22.31 per week better off as a result of the changes to the personal tax rates and thresholds. Jane will be $30.77 better off per week from 1 April 2010 and $37.69 better off per week from 1 April 2011.

8 Personal Tax Changes Q&As What is the cost of the tax package? The changes to tax rates and thresholds and introduction of the independent earner tax credit will cost $4.4 billion over the five years to 30 June (These costs take into account the savings from replacing the 1 April 2009 and 1 April 2010 tax changes announced by the previous government in Budget 2008.) These costs are being funded by changes to KiwiSaver (saving $3.5 billion) and some of the savings from discontinuing the R&D tax credit (saving $1.3 billion). Do superannuitants benefit from the tax cuts? After-tax payments of New Zealand superannuation will increase from 1 April each year, in line with the annual adjustments made to reflect increases to living costs. As the new tax package is rolled out, there will be an additional increase to the rates of net New Zealand superannuation on 1 April 2010 as a result of the tax cuts. Do beneficiaries gain from the tax cuts? Benefit rates are set on an after-tax basis, so the tax cuts won t flow through to change benefit rates. Benefits will continue to be increased each year, to take account of increases in the cost of living, with the next increase timed for 1 April How will the tax package help the economy? New Zealand is currently in a recession, characterised by lower consumption spending and economic growth, and increasing unemployment. The tax cut package will help reduce the severity of the recession by encouraging people to continue spending, improve their skills and to increase employment opportunities. Why target individuals with the IETC and not families? Individuals are targeted because many families already benefit from Working for Families tax credits. The IETC may give incentives to those earning below the fulltime minimum wage to increase their participation in the labour force. What happens if my circumstances change throughout the year (for example, I receive Working for Families tax credits, the unemployment benefit or NZ superannuation?

9 The amount of IETC that a person receives will be reduced on a pro rata basis for months during a year that the person receives disqualifying types of income or benefits, or is not a New Zealand tax resident. If a person's spouse or partner receives Working for Families tax credits, then the person will also not be eligible for the IETC for a year or for part of a year. Can I still receive a student allowance while claiming the IETC? Yes. What do I need to do to get the IETC? Salary and wage earners will be able to receive the IETC through their pay packets by electing a new tax code with their employer. The IETC will start on 1 April Inland Revenue will provide information on how to do this closer to the start date. Self-employed and other non-salary and wage earners can receive the benefit of the IETC when they file their tax return at the end of the tax year.

10 Q & A for employers How will the tax changes (including the independent earner tax credit) affect employers? The income tax changes (including the independent earner tax credit) will have very little impact on employers. The tax changes take effect through changes to PAYE tables and software which will be implemented before 1 April A new PAYE tax declaration code will be available for employees who qualify for the independent earner tax credit. Inland Revenue will provide information for employers on what they need to do closer to 1 April How will the tax changes affect resident withholding tax and portfolio investment entity tax rates? Government officials have been consulting with managers of portfolio investment entities (PIEs) and other payers of interest on the practical implications of changing resident withholding tax (RWT) and PIE tax rates to reflect the new personal tax rate structure. This consultation will continue next year and it is hoped to have the changes enacted next year. We think it will be manageable, however, for most payers of interest to change the 39% RWT rate to 38% effective from 1 April 2009, so the legislation allows payers of interest to make that change. The 39% rate will still be available in case some payers have difficulty making system changes in time.

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