Corporate tax cut to 28%

BY TIM HUNTER
Last updated 14:50 20/05/2010

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Budget 2010

Turned off by the great tax switch Rent rises on the cards after Budget Landlords plan rent hikes Fears tax changes will hit trusts' profits Sovereign debt 'the hot issue' October timeframe adds to workload for larger firms Government considering state asset sales - English Rents could rise by up to 6.5pc Tax changes could lead to rate hikes Tax cuts: Old-fashioned vote-winner

After all the telegraphed changes Finance Minister Bill English still pulled off some big Budget surprises.

Among the biggest was the cut in the corporate tax rate from 30 percent to 28 percent from the 2011/12 tax year, well ahead of the cautious cut announced in Australia.

Alongside the corporate tax cut, the top tax rate on savings vehicles such as portfolio investment entities and KiwiSaver will also fall to 28 percent.

English described his tax reform package as "a centrepiece of the Budget", with company tax reducing to encourage corporate investment and boost New Zealand's international competitiveness.

"The government believes that in a world of mobile capital, business income is particularly sensitive to tax rates," he said.

A 33 percent rate may have been competitive 20 years ago, he said, but "since then company tax rates show stong downward momentum around the globe."

Prime minister John Key said the package gave an opportunity to come out of the downturn in better shape than other countries. "We are well palcedd to stand out from the crowd and deliver a rebalanced economy that focuses on investment in the right places."

At the current 30 percent rate, New Zealand's company tax matches Australia's but is still high compared to similar sized countries in the OECD, which average 25percent.

Changes announced by Australia this month will cut the corporate rate gradually to 28 percent, but not until 2012 at the earliest.

Challenged to match the bid, English saw it and raised it.

It comes at a cost, however. Budget projections indicate a cost of $340m in the 2011/12 year and $305m the next.

Last year company tax contributed $9.3b to government revenue - about 25 percent of total income tax. In 2011 the figure is expected to be about $8.5b and roughly the same percentage.

While the lower tax encourages companies to retain profits, for New Zealand shareholders it represents little change because the imputation regime means they are ultimately taxed at their personal rates.

There is a valuable transition regime, however, in which dividends issued after the new rate comes in can be imputed at the existing 30 percent rate for two years in some circumstances.

While the company tax cut looks generous, it was accompanied by a crackdown on tax avoidance, particularly by multinationals.

"Thin capitalisation" rules allow overseas-owned companies to gear up their New Zealand subsidiaries with related company loans, with interest payments used to reduce tax.

From April 2011 those companies can claim interest deductions on debt up to 60 percent of the local asset value, down from the current 75 percent.

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The change brings New Zealand's "thin cap" rules into line with the United States and will generate $200m a year in extra revenue.

THE THIN CAP RULES

Foreign Corp Ltd has gross profits of $8m and interest costs of $5.6m.

It reports pre tax profit of $400,000

Foreign Corp has debt of 75 percent of assets, within the current "safe harbour"

After the threshold is cut to 60 percent, the company's taxable profit rises to $1.52m

At a 28 percent tax rate, Foreign Corp has to pay extra tax of $313,600.

- BusinessDay.co.nz

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