On Thursday 20^th May 2010, the Minister of Finance, announced the long awaited Budget and below are some of the major highlights affecting our clients.

Personal Tax Rates

All personal income tax rates will be cut from 1 October 2010.

0 – 14,000                                                            12.5%                                                     10.5%

14,001 – 48,000                                                  21.0%                                                     17.5%

48,001 – 70,000                                                  33.0%                                                     30.0%

Over 70,000                                                          38.0%                                                     33%

Government estimates that someone earning $44,000 will be better off by $593 ($11 a week in the pocket) when the GST and income tax changes are combined.

The reduction in tax rates will also provide near alignment with the trust and company tax rates. The reduction in the top personal tax rate to 33% on 1 October 2010 will remove much of the incentive to harbour income in trusts.

In one of the big surprises of Budget 2010, New Zealand has taken the lead on Australia by reducing our company tax rate to 28% from 1 April 2011, ahead of Australia’s plans to reduce to this level in three years time. It means the gap between the new company tax rate and the top personal tax rate has reduced down to 5% from the 8%.

There will be a two year transition period to allow tax paid at 30% to be imputed to dividends at a 30% rate.

As a result of the reduction in the company tax rate to 28%, the top PIE tax rate will reduce to 28%. These changes will take effect on 1 October 2010.

In summary it is calculated that after-tax earned income over all levels of taxable income will rise by more than the increase in GST.

GST Rises to 15%

As anticipated GST is set to increase to 15% from 1 October 2010. Therefore businesses have only 4 months to prepare for this increase and ensure that their accounting systems and procedures are able to deal with a GST rate of 15%.

Some of the issues that need to be addressed:

Depreciation Changes and the impact on Property Investors

The 2010 Budget was not all good news for some our clients.
 

The ability to claim depreciation on residential and commercial buildings with an estimated useful life of 50 years or more will be removed from the commencement of the 2011/2012 income year.

In simple terms it is anticipated that rates of return will reduce, there has been some comment that as a result rents will rise but with the present trading conditions this would seem unlikely.

In turn dividend payouts will reduce and it is anticipated that the Directors of each entity will give an indication of their dividend policy late in the 2010 year.

The classification of fit out costs will be an important factor and if included within the building structure will have a major negative result. At present fit out costs have a short economic life and upon demolition are written off as a deductible tax item, if part of the building structure then such tax deductions will cease and for our largest syndication client such write offs run into millions of dollars. As stated, once matters are clarified, the respective Directors will communicate to you their final decisions.

We still believe that our clients will continue to find commercial property investment attractive, in simple terms the removal of a depreciation claim is a timing issue as in most cases such depreciation is recovered on sale and taxed accordingly. The ultimate treatment of the fit out costs is the important note of contention.

Trusts

Trusts have not specifically been affected by the Budget announcements, however, the major reduction of personal marginal levels of tax are now equal to Trustees tax at 33%.   Does this make it more or less desireable to make a distribution to a beneficiary?  Remember, family trusts are not formed with the purpose of minimizing personal income tax, but form part of a family or business persons overall strategy of asset protection and wealth maximization.  There are still many good reasons from making distributions to beneficiaries and taxation is one of them.

What is important is that anyone with a family trust must  maintain very good records, keep your Trustees informed with everything you do (remember most Trust Deeds call for unanimous trustee resolutions) and if
you have any doubts at all, please contact us for the appropriate advice.

If you have any questions regarding the 2010 budget announcements, please contact your HFK adviser at any time.