The long-awaited tax tonic

Click on www.taxguide.govt.nz, type in your annual salary and the calculator will instantly tell you how much more your take-home pay will increase by and what the likely impact of the increase in GST will be.

Someone on an annual salary of $100,000 will receive $70 more in the hand week with the 2.5% increase in GST likely to swallow up $31 of that. Those in the more rarefied salary band of $500,000 year, for example, will receive pay rise of $454 week but, presumably based on the theory that spending rises exponentially to meet income, the Government has calculated it will be getting back $137 from the increase in GST.

Managing tax partner at Deloitte, Thomas Pippos, says many of the changes being introduced, particularly the personal tax cuts and lower tax rates for companies and savings vehicles, are huge step forward and provide foundation for economic growth.

“These changes are estimated to add an additional 1% to the size of the New Zealand economy by 2017,” Pippos says. “Ultimately, we needed something that would put more money in people’s pockets but also give them an incentive to save more and spend less.”

Pippos says potpourri of changes will impact on taxpayers in different ways. The most significant have:
• skewed the tax mix towards consumption by increasing GST; 
• encouraged increased labour participation by reducing personal tax rates and thresholds; 
• reduced the incentives to invest in property by removing building depreciation deductions; 
• incentivised the productive use of capital through lowering the corporate tax rate;
• increased the tax burden faced by certain non-residents (through changing the thin capitalisation rules).

Pippos says aligning the top personal tax rate with the trust rate will remove the incentive for high earners to restructure their affairs using trusts to avoid paying higher levels of tax.

The tax wedge between the 33% trust and top personal rate and the 28% corporate and savings rate is still material, but is inevitable given the global downward pressure on company tax rates.

“The pressure towards lower company tax rates makes the tax rate nirvana of full rate alignment between company and top personal rates unrealistic at this time,” he says.

The changes will result in very significant after-tax pay increases for those taxpayers currently paying the greatest levels of personal income tax. Deloitte’s tax division has analysed the difference it will make across pay levels above the average wage.

Annual income Weekly saving Annual saving
60,000 35.20 1830.40
80,000 50.58 2630.16
100,000 69.81 3630.12
120,000 89.04 4630.08
140,000 108.27 5630.04
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