Provisional tax

Section HL 20 and Schedule 1 of the Income Tax Act 2004

The tax rate for companies and certain savings vehicles has been reduced from 33% to 30%. The reduction is consistent with the government's economic transformation goals of increasing productivity and improving New Zealand's international competitiveness.

The top rate for portfolio investment entities has been capped at 30%, instead of the previous 33%, while the tax rate for certain widely held savings vehicles has also been lowered to 30%.

The new tax rates are intended to encourage savings and implement a more neutral tax treatment of different savings entities.

Background

The changes give effect to announcements made in Budget 2007, to lower the tax rate for companies and certain savings vehicles.

As a result of these changes, a number of transitional and consequential amendments are required to the Income Tax Act 2004 and the Tax Administration Act 1994 to reflect the reduced tax rates. These amendments (excluding provisional tax) are included in the Taxation (Annual Rates, Business Taxation, KiwiSaver, and Remedial Matters) Bill, which was introduced into Parliament on 17 May 2007 and was enacted on 17 December 2007.

Key features

Clause 5 of Schedule 1 has been amended to reduce the company tax rate from 33% to 30%. The definition of "company" includes a unit trust, so this new rate also applies to unit trusts (see Bonus Bonds Trust below).

Clause 1 has been amended to reduce the tax rate on life insurance policyholder income from 33% to 30%.

The definition of "portfolio investor rate" has been amended to reduce the maximum tax rate for portfolio investment entities that are portfolio tax rate entities from 33% to 30%. Consequential amendments have been made to the definition of "prescribed investor rate" and section HL 20(9).

Clause 7 has been amended to reduce the tax rate on group investment funds deriving category A income (which is taxed as if it were a company) from 33% to 30%.

A change has been made to clause 4 (trustee income) to exclude a number of widely held investment vehicles which are ordinarily subject to the 33% trustee tax rate. These vehicles are subject to a 30% tax rate under new clause 8B, which refers to:

• an approved unit trust to which the Income Tax (Exempt Unit Trusts) Order 1990 applies. The Bonus Bonds Trust is an approved unit trust. The 1990 Order considers the unit trust not to be a company. Income earned by the trust is taxed at the 30% rate under clause 8B;
• a widely held superannuation fund; and
• a widely held group investment fund (GIF). This applies to GIFs if they derive category B income or are designated GIFs.

To be a "widely held superannuation fund" or a "widely held GIF" a vehicle must satisfy either:

• the investor membership requirements that a portfolio investment entity must satisfy (which is generally that the vehicle must have more than 20 members when the vehicle is treated as having one portfolio investor class comprising all the investors); or
• certain criteria that a qualifying unit trust must satisfy. Generally, the vehicle must be a retail one with at least 100 members. However, the 100-member rule can be relaxed in certain circumstance if the vehicle is genuinely widely held.

Finally, as a result of the change to the company tax rate, the dividend withholding payment rate also reduces from 33% to 30% (section NH 2(1)).

Application dates

The new tax rates apply from the beginning of the 2008/09 income year, except for portfolio investment entities that do not pay provisional tax and that attribute income to members on a daily or quarterly basis. For these portfolio investment entities, the new maximum rate will apply from 1 April 2008.