Consequential changes to the Māori authority tax rate

Sections OZ 7B and RZ 5D and schedule 1 of the Income Tax Act 2007

As a consequence of the changes to personal tax rates arising from Budget 2010, the Māori authority tax rate has been lowered from 19.5% to 17.5%, to align it with the individual statutory rate of the majority of Māori authority members.

Background

Māori authorities are taxed as a proxy for their members. The 19.5% tax rate represented the statutory tax rate that applied to the majority of Māori authority members when the rules for Māori Authorities were introduced in 2004.

As part of Budget 2010, individual tax rates were lowered. Having a Māori authority tax rate that was not the statutory rate for individual members would have meant the Māori authority rate was no longer an effective proxy for these members. If left to continue, this situation would have increased compliance costs for these members because their taxable Māori authority distributions would not have been imputed to the correct ratio - making end-of-year corrections more common.

Key features

• The Māori authority tax rate has been reduced from 19.5% to 17.5%, as has the resident withholding tax rate for taxable Māori authority distributions. Both of these rates are contained in schedule 1.
• New section OZ 7B allows Māori authorities to continue to attach Māori authority credits at the previous 19.5/80.5 credit-to-distribution ratio until 31 March 2013.
• New section RZ 5D allows Māori authorities that pay provisional tax using the standard method or the GST ratio method to have immediate access to the tax cut.

Application date

The rate reduction applies for the 2011-12 and subsequent income years, which is the same effective date as the company tax rate decrease.

Detailed analysis

As part of the Budget 2010 package, which lowered the company tax rate, targeted provisions were introduced to assist the transition to the new company tax rate. As Māori authorities are taxed on a model based on the company imputation system, two of those transitional measures have also been introduced for the Māori authority tax rate transition.

"Grandparenting" imputation ratios - new section OZ 7B

The new maximum Māori authority credit ratio is 17.5/82.5. This ratio change can result in effective double taxation, as earnings taxed at the rate of 19.5% (prior to the rate change) may carry a maximum imputation ratio of 17.5% if distributed after the rate change. The result is that pre-rate change credits can be "trapped" in the Māori authority.

A "grandparenting" period of two years has been introduced to allow Māori authorities an opportunity to review their credit accounts and make distributions of pre-rate change profits if necessary. This two-year window is the same period afforded to companies as a consequence of their rate reduction. Therefore, the new section OZ 7B applies the company transitional measures in sections OZ 8 to OZ 11 and section OZ 13 to Māori authorities, with appropriate terminology changes and deletions to make them applicable to the Māori authority context.

Provisional tax adjustments - new section RZ 5D

An adjustment has been made to the provisional tax rules so that the rate decrease can be immediately reflected in the tax paid by provisional taxpayers. This change recognises the fact that, all other things being equal, the tax paid by a Māori authority is expected to be less in the year of the decrease.

This provision applies to taxpayers that base their provisional tax on an earlier year’s tax obligations, that is, taxpayers that use the standard or the GST ratio method of calculation. The reduction is achieved by amending the uplift factor used to calculate the current year liability.

The change to the uplift factor is slightly different from that enacted for companies, reflecting the fact that the 2% rate reduction for Māori authorities is larger in real terms than the corresponding 2% company rate reduction. As with the imputation ratio change mentioned above, new section RZ 5D implements these measures by deeming the relevant company transition provisions in sections RZ 3 to RZ 5 to apply to Māori authorities with appropriate terminology changes. Māori authorities that actually estimate their liability would be unaffected by these changes, as they would factor the lower rate into their estimates.