Tax changes 1 April 2017- Part 1

The residual tax threshold

(income tax owing after applying PAYE, imputation credits and withholding tax)

CurrentPost 1 April 2017

Set at $50,000 before use of money interest applies to individuals and $2,500 for trusts and companies

Raises thresholds to $60,000 for all three types of taxpayers. Companies and trusts will then have the same level before interest applies as will individual taxpayers.

This will enable taxpayers, especially close companies and trusts they manage, to consider more widely whether to retain their income in those entities rather than passing that income through to individuals. Until now, since use of money interest applied from August of the financial year for amounts over $2,500, it often made economic sense to account for income individually so as not to incur the interest.

Retaining the income in the company or trust may be preferred to assist in future developments and growth, plan for timing issues when earnings are volatile, and, for companies when there is a benefit of tax at 28% rather than 33%. ACC premiums are also a factor.

Whether income from personal services can be retained in the company does not change and remains subject to the anti-avoidance rules that came about as a result of the Penny and Hooper court rulings.

As a result of this change, shareholder salaries may be less and company profit more.

Removal of use of money interest for provisional taxpayers using the standard uplift provisional tax method

CurrentPost 1 April 2017

Provisional taxpayers whose residual tax exceeded the threshold, use of money interest was calculated for tax owing pro rata back to the first and second instalments.

This meant that taxpayers were expected to provide for taxation which came about at the end of the year, way back in August and even January of the financial year.

This method is perceived as being very unfair and penalised growth and success.

Use of money interest will only apply on the third instalment, payable in May, after the financial year has ended. Similar measures apply for taxpayers with year ends other than March.

Shortfalls of payment on each instalment will still be subject to interest and penalties.

Contractors can elect their own withholding rate

CurrentPost 1 April 2017

Individuals receiving scheduler payments (withholding tax payments) using the tax code WT are limited in what rate can be applied.

Subject to certain conditions, including a minimum rate of 10%, contractors will be able to select any rate of withholding so as to reflect their individual tax situation. Changes in rate can be made twice in a year before requiring consent of the payer.

A special rate below 10% will require approval of the commissioner.

If an IRD number is not supplied, a withholding rate of 45% applies.

Removal of 1% late payment penalties on certain tax types

CurrentPost 1 April 2017

The penalty applies in the first week of the due date and for each month after the first month. The effect of this can lead taxpayers to become overwhelmed by their arrears taxation.

A 1% monthly incremental late payment penalty on unpaid tax from Goods and Services Tax (GST), income tax and Working for Families tax credits overpayments will no longer apply

The tax change results in the 1% penalty not being applied after the first month. Use of money interest will still apply.

Further changes, including changes to provisional tax payments, use of accounting software, fringe benefits tax on company vehicles, etc., will come into effect from 1 April 2018. As their effective date draws closer we will comment on these changes.

Please contact us if you would like to discuss these changes and how they may affect you.