Tax cuts for individuals
2008 legislation enacts tax cuts for individuals with changes to personal income tax rates and thresholds and the introduction of an independent earner tax credit.
Sections LC 13, RD 17(2), RD 58(1), RD 59(3), RD 60(3)(a), RD 61(3)(a), RE12(3)(a), RE 12(4), RZ 5B, RZ 5C, YA 1, schedule 1, parts A, C and D, and schedule 2, parts A and B of the Income Tax Act 2007
Sections 3(1), 24B(3)(a), (ab), (c) and (d), 33A(1)(b)(iv)(A), 33A(1)(b)(iv)(AA), 33A(1)(b)(iv)(BA), 33A(1)(b)(v)(A), 33A(1)(b)(v)(AA), 33A(1)(b)(v)(BA), 33A(1)(b)(vi)(A), 33A(1)(b)(vi)(AA), 33A(1)(b)(vi)(BA), 33A(1)(b)(vib), 33A(2)(db), 43A(2)(d)(iib), 108(1B)(b) and 177C(1B) of the Tax Administration Act 1994
Sections 7(2) to (4), 8(2) to (4), 10(2) to (4), 11(3) and (4), 13(2) and (3), 14(2) and (3), 15(2) and (3), 16(2) and (3), 18(2) and (3) of the Taxation (Personal Tax Cuts, Annual Rates, and Remedial Matters) Act 2008
Reductions to personal income tax rates are to be phased in over three years, beginning 1 April 2009. These changes are in addition to the tax cuts that came into effect on 1 October 2008. The package has two key elements:
- changes to personal income tax rates and thresholds, and
- the introduction of an independent earner tax credit (IETC).
Key features
The Income Tax Act 2007 and the Tax Administration Act 1994 have been amended to provide tax cuts for individuals. The main features are:
- The changes will be rolled out progressively in three stages from 1 April 2009.
- As well as changes to thresholds at which personal tax rates apply, the 21% rate will drop to 20% from 1 April 2011, and the 39% rate will drop to 38% from 1 April 2009, and again to 37% from 1 April 2010.
- The introduction of the independent earner tax credit (IETC). This will be available to individuals who earn $24,000 and over, at a maximum yearly amount of $520 from 1 April 2009, and $780 from 1 April 2010. It is abated at 13 cents for every dollar of income earned over $44,000.
- Banks and other financial institutions will be able to apply a new optional 38% resident withholding tax (RWT) rate from 1 April 2009.
- A number of consequential changes have been made to parts of the tax system affected by the changes to personal tax rates. These include fringe benefit tax rates, the employer superannuation contribution tax and thresholds for extra pay and secondary tax codes.
Application dates
The personal income tax cuts will be phased in over three years, starting on 1 April 2009, with further cuts starting on 1 April 2010. The final cuts will begin on 1 April 2011.
Detailed analysis
Personal tax rate reductions
Under the previous legislation, the following tax rates applied to personal income:
| From 1 October 2008 | |
|---|---|
| $0 - $14,000 | 12.5% |
| $14,001 - $40,000 | 21% |
| $40,001 - $70,000 | 33% |
| $70,001 and over | 39% |
Following enactment of the Taxation (Urgent Measures and Annual Rates) Act 2008, the following personal tax rates will apply (changes bolded for emphasis):
| From 1 April 2009 | |
|---|---|
| $0 - $14,000 | 12.5% |
| $14,001 - $48,000 | 21% |
| $48,001 - $70,000 | 33% |
| $70,001 and over | 38% |
| From 1 April 2010 | |
|---|---|
| $0 - $14,000 | 12.5% |
| $14,001 - $50,000 | 21% |
| $50,001 - $70,000 | 33% |
| $70,001 and over | 37% |
| From 1 April 2011 | |
|---|---|
| $0 - $14,000 | 12.5% |
| $14,001 - $50,000 | 20% |
| $50,001 - $70,000 | 33% |
| $70,001 and over | 37% |
Salary and wage earners will receive the tax cut through a reduction in the PAYE tax 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, a number of changes to other parts of the tax system have been made. These include fringe benefit tax rates, the employer superannuation contribution tax and thresholds for extra pay and secondary tax codes.
No immediate changes have been made to the tax rate structure that applies to portfolio investment entities (PIEs) to reflect the new personal tax rate structure. The government has indicated that the associated changes to the PIE tax rates will be considered after further consultation with the managed funds industry, with any changes likely to apply from 1 April 2010.
Similarly, the government has indicated that 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 2009. The government has indicated that it is likely that changes to the RWT rate structure to fully reflect the new personal tax rate structure will apply from 1 April 2010.
Independent earner tax credit (IETC)
The independent earner tax credit (IETC) is a credit for middle-income taxpayers who do not receive core assistance from the government.
To be eligible for the IETC, a person must earn $24,000 and over and must not receive a benefit, Working for Families tax credits or New Zealand superannuation. The IETC is available to New Zealand tax residents only.
The maximum yearly amount of the credit is $520 from 1 April 2009, and $780 from 1 April 2010. The IETC is abated at 13 cents for every dollar of income earned over $44,000.
Salary and wage earners can receive the IETC regularly in their pay packets by electing a new tax code with their employer. The new code is "ME".
Self-employed and other non-salary and wage earners can receive the IETC when they file their tax return or when requesting a personal tax summary at the end of the tax year.
People who already receive specified types of government assistance such as benefits, Working for Families tax credits, New Zealand superannuation, veterans' pension, or foreign pensions and benefits will not be eligible for the IETC.
Benefits
People who receive the following benefits are not eligible for the IETC:
- domestic purposes benefit
- emergency benefit
- independent youth benefit
- invalids' benefit
- sickness benefit
- unemployment benefit
- widows' benefit.
Working for Families tax credits
People who receive Working for Families tax credits are not eligible for the IETC.
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 the Working for Families scheme is a family-based entitlement.
New Zealand superannuation and veterans' pension
Individuals who receive New Zealand superannuation and the veterans' pension are not eligible for 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. Whether the foreign income is exempt under New Zealand or foreign law is not relevant to the question of whether it is of a similar nature to one of the income categories listed above.
This ensures that people who are receiving income assistance from the New Zealand government and those receiving assistance from overseas governments are treated equally.
Benefits that don't affect IETC eligibility
People who receive student allowances, ACC payments, paid parental leave or the accommodation supplement will be eligible for the IETC if they meet the other eligibility criteria.
Part-year entitlement to the IETC
The IETC will be pro-rated for people who receive a benefit, pension or Working for Families tax credits, or who were non-resident for tax purposes, for only part of an income year. The amount of IETC is based on the number of whole months that the person is resident in New Zealand and does not receive a disqualifying payment.
| Example 1: Receiving an unemployment benefit for part of the year Andrew receives the unemployment benefit, which is a disqualifying payment. On 15 May 2009, Andrew starts a new job as a carpenter. During the 2009-10 income year, Andrew earns $30,000 and receives no other disqualifying payments apart from the unemployment benefit that he received during April and May. Andrew is eligible for the IETC as he earns over $24,000. Because he earns under $44,000, the abatement of 13 cents in the dollar does not apply. However, his IETC is proportionally reduced for the two months - April and May - that he received the unemployment benefit. The amount of IETC that he is entitled to is calculated as follows: (IETC - abatement) x credit period months / 12 "Credit period months" is the number of whole months during which the person receives no disqualifying payments and was resident in New Zealand. Andrew received no disqualifying payments during the months from June 2009 to March 2010. The number of whole months during which Andrew receives no disqualifying payments is therefore 10. Andrew's IETC is calculated as follows: ($520 - $0) x 10 / 12 = $433.33 Example 2: Resident in New Zealand for part of the year During the 2009-10 income year, Amy earns $45,000 and does not receive any disqualifying payments. She is therefore eligible to receive the IETC. As she earns over $44,000, her IETC is abated at 13 cents in the dollar. She is resident in New Zealand for tax purposes between 1 April 2009 and 22 January 2010. On 22 January, she leaves New Zealand to move permanently to the United Kingdom. As she is not tax-resident in New Zealand from 23 January, she is not entitled to the IETC for the months of January, February and March. Amy's IETC is calculated as follows: ($520 - $130) x 9 / 12 = $292.50
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