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Dunne: April 1 Tax Changes Promote Fairness, Boost Business

Contributor:
Fuseworks Media
Fuseworks Media
Peter Dunne
Peter Dunne

Tax changes taking effect tomorrow are in line with the Government's vision to make the tax system fairer and encourage productivity through saving and enterprise, Revenue Minister Peter Dunne said today.

"From 1 April, tax on interest earned from savings will match lower income tax rates introduced in 2009. This means savers who have confirmed their correct tax rate with their bank won't be paying more resident withholding tax on their interest earnings than they need to," he said.

The new RWT rates will be 12.5%, 21%, 33% and 38%, depending on people's personal tax rates.

People who are currently on the 19.5% RWT rate will automatically be moved to the new 21% rate.

Mr Dunne said it was important that when people open a bank account, they give their bank their correct tax rate so they receive the benefit of the changes.

"It is in taxpayers own interests to make sure they do not end up with a tax bill at the end of the year because they have had RWT withheld at the wrong rate," he said.

The default rate for those who open a new account from 1 April and do not specify their tax rate will rise from 19.5% to 38%.

"Savers with investments in portfolio investment entities will also be taxed on their interest earnings at the new income tax rates, up to the maximum rate of 30% that applies for PIEs, so they receive the same benefits as people who invest directly," Mr Dunne said.

"There will also be a new 30% RWT rate on interest for companies. Banks and other interest payers will have the option of applying this new 30% rate for one year from 1 April 2010 and it will be compulsory after that."

A new 12.5% secondary tax code for employees who receive secondary income and a new 12.5% withholding tax rate for extra pays also brings the withholding rates on employment income into line with the new personal tax rates introduced in 2008.

A number of other important changes to the tax rules will also come into effect from 1 April.

"Among these is a major change to our international tax rules, which will enable New Zealand-based businesses to compete more effectively in foreign markets.

"This change was part of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act passed in December last year, and brings New Zealand's tax rules into line with other countries by giving a tax exemption for income earned offshore from "active" business such as manufacturing or sales.

"This is a very significant step forward in our ongoing reform of the international tax rules to make New Zealand businesses more competitive internationally," said Mr Dunne.

The exemption applies from 1 April 2010 for taxpayers with a standard balance date.

Changes to strengthen the definition of "associated persons" in income tax law to prevent people in non-arm's length situations circumventing our tax laws also come into force on 1 April for standard balance date taxpayers.

Tax Rates Alignment Q and A - 1 April 2010

What are RWT and PIR?

RWT, Resident Withholding Tax is the tax deducted from gross interest earned on savings and investment accounts. It is deducted directly from your account at the same time the interest is paid to you.

The PIR, or Prescribed Investor Rate, is the tax rate paid on income earned from investing in a PIE, or Portfolio investment entity.

What is happening to them from 1 April 2010?

They are being changed so they are more closely aligned with personal income tax rates and income thresholds that changed last year.

What are the new rates?

New resident withholding tax (RWT) rates will be 12.5%, 21%, 33% and 38%, depending upon the personal tax rates of individual recipients. The default rate for individuals who do not specify their tax rate or provide their IRD number to their bank will rise from 19.5% to 38%. This will apply from 1 April 2010 for new bank accounts.

There will be a new 30% RWT rate on interest for companies that invest in financial institutions. Its use will be optional for financial institutions for a year from 1 April 2010, and compulsory after that.

Tax rates on portfolio investment entities (PIEs) will also reflect the new personal tax rates, with rates ranging from 12.5% to 30% for income over $70,000. The changes will ensure that people who invest in PIEs are not disadvantaged relative to direct investors. The new PIE rates will apply from 1 April 2010.

Who do the changes affect?

The changes affect individuals earning $14,000 or less, people who are currently using the 19.5% rate and companies. However this is a good time for all individuals to check that they are using the right RWT rate or PIR.

How many people would that be?

There are 1.5 million entities with money invested in a PIE/s.

There were 1,112,115 people who earned $14,000 or less in the year ending 31 March 2008.

Some 1,648,510 taxpayers had RWT taxed at 19.5% in the year ending 31 March 2008.Some of these tax payers should be using a higher RWT rate.

Note: this data doesn't account for joint accounts and we have data integrity issues, for example, 23% of interest information we receive from banks has no valid IRD number so we can't link it to the appropriate taxpayer.

What do they need to do?

People on the 19.5% rate will be moved to the 21% rate automatically by their bank/s. People who are eligible for the 12.5% rate will need to contact their bank to have this rate applied.

People should check what rate they need to be on, or if they are not unsure about it then visit our website or talk their tax advisor. If they need to change the rate, they must contact their bank after 1 April.

When do they need to do it?

People can change their rate at any time during the year. For the 1 April RWT changes people will need to check with their banks when they will be able change their rate/s.

What happens if they stay on an incorrect rate?

They will either pay too much or too little RWT or PIE tax. If they pay too little tax and earn over $200 worth of interest they need to declare this on their tax return or personal tax summary. If people pay too much RWT they can claim this excess back on their tax return or personal tax summary.

For PIE customers:

If PIE investors over pay their tax it won't be refunded because it is treated as a final tax. If they under pay their tax obligation and do not correct their rate they will need to file a return and pay any additional tax.

From October this year we will be check taxpayers income against the RWT they rate they have elected and where there is a mismatch we may ask the financial institution to change their customers rate,

What can you do about people who stay on a lower rate than they should be using and are not paying enough tax?

People will need to make sure they are on the correct tax rate for interest earned on their savings and investments, to avoid paying too much tax.

From October this year we will be check taxpayers income against the RWT they rate they have elected and where there is a mismatch we may ask the financial institution to change their customers rate,

How many people are likely to be paying more tax as a result of the changes?

There has been no change to the requirement for a person to make a return where they receive more than $200 resident passive income from which tax has been withheld at less than their marginal tax rate. For this group RWT remains an interim tax.

For those outside this group the likelihood is that a significant proportion will see a reduction in tax as a result of the 12.5% rate becoming available for those with a reasonable expectation their income for the year will be $14,000 or less.

The remainder of people receiving resident passive income will transition from the current 19.5% to 21%. Using the figures above, someone with resident passive interest of $199 will see the amount of RWT increase by $2.98 over a full year.

Is anyone likely to be paying less tax?

Yes. People who qualify to use the 12.5% will be paying less tax on any interest income they earn after 1 April.

What about couples with joint accounts, or accounts with multiple holders,eg a flat account?

We recommend you use the RWT rate for the higher income earner to avoid the possibility of an end of year tax bill.

Where can people get more information about it?

On our website: www.ird.govt.nz/rwt. Individual customers can also confirm which rate they should be using by calling 0800 870 700.

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