Tax cuts for individuals
2008 legislation enacts tax cuts for individuals by reducing the bottom personal tax rate from 15% to 12.5% and raising the thresholds at which tax rates apply.
Sections CS 1(7)(b), LC 3(3)(a) and (4), LC 9(1)(b), LC 10(3)(a), LC 11(1)(a), LC 12(1)(a) and (3)(c), ME 3(3)(c)(i), RC 5(4), RC 8(9), RC 10(3)(a)(i) and (ii), RC 11(4), RD 10(2)(a), RD 17(2) and (3), RD 51(3)(b)(i) and RD 51(4)(b)(i), RZ 5B, RZ 5C, YA 1 and YA 3(2)(i), schedule 1, parts A, C and D, and schedule 4, part I of the Income Tax Act 2007
Sections 24B(3)(c) to (e), 33A(1)(b)(iv)(AA), 33A(1)(b)(iv)(A), 33A(1)(b)(iv)(BA), 33A(1)(b)(iv)(B), 33A(1)(b)(v)(AA), 33A(1)(b)(v)(A), 33A(1)(b)(v)(BA), 33A(1)(b)(v)(B), 33A(1)(b)(vi)(AA), 33A(1)(b)(vi)(A), 33A(1)(b)(vi)(BA), 33A(1)(b)(vi)(B), 33A(1)(b)(via), 33A(1)(b)(vib), and 33C(b) and (c) of the Tax Administration Act 1994
In Budget 2008, the government announced a series of personal tax reductions to be phased in over three and a half years. The new legislation gives effect to those announcements by reducing the bottom personal tax rate from 15% to 12.5% and raising the thresholds at which tax rates apply.
Key features
The Income Tax Act 2007 and the Tax Administration Act 1994 have been amended to provide for tax cuts for individuals from 1 October 2008. The main features of the changes are:
- The tax cut package will be rolled out progressively in three stages.
- The new tax rates and thresholds apply to income earned by individuals.
- Some Stage 1 changes apply from 1 October 2008, and others apply for the 2008-09 income year.
- Stage 2 changes apply for the 2010-11 income year (meaning they generally apply from 1 April 2010).
- Stage 3 changes apply from the 2011-12 income year (meaning they generally apply from 1 April 2011).
- The bottom tax rate has been lowered from 15% to 12.5%.
- The thresholds will be raised for each of the three stages, as shown in the table below.
| Rate | Thresholds | ||
|---|---|---|---|
| Stage 1 (beginning 1 October 2008) ($) | Stage 2 (1 April 2010) ($) | Stage 3 (1 April 2011) ($) | |
| 12.5% 21% 33% 39% | 0 - 14,000 14,001 - 40,000 40,001 - 70,000 70,001 and above | 0 - 17,500 17,501 - 40,000 40,001 - 75,000 75,001 and above | 0 - 20,000 20,001 - 42,500 42,501 - 80,000 80,001 and above |
- Consequential changes to other aspects of tax legislation - such as PAYE tax and provisional tax, fringe benefit tax and employer superannuation contribution tax - have been made to coincide with the three stages.
- The existing resident withholding tax rates for interest income and the portfolio investment entity (PIE) tax rates have not been changed, although the government has announced that they will be reviewed.
- The low income rebate 1 has been removed from the 2008-09 income year, to be replaced by the new 12.5% tax rate.
Application dates
The personal income tax cuts will be phased in over three and a half years, starting on 1October 2008, followed by further cuts starting on 1 April 2010, with the final phase of tax cuts starting on 1 April 2011.
Detailed analysis
Personal tax rate reductions
New composite tax rates for the 2008-09 income year (schedule 1, part A, table 1)
Income tax is calculated annually and is based on a person';s annual income. Because the tax rates and thresholds are changing part-way through the 2008-09 income year, the statutory tax rates that apply for the whole of the 2008-09 income year are "composite tax rates"; that reflect an average of the two income tax rates that are used during the year. The table below shows the income tax rates that will be used during the 2008-09 income year, as well as the composite tax rates for the year. The new composite tax rates are contained in schedule 1, part A, table 1 of the Income Tax Act 2007.
| Taxable income ($) | Old tax rates applying to PAYE for the period 1 April 2008 - 30 Sept 2008 | New tax rates applying to PAYE for the period 1 Oct 2008 - 31 March 2009 | Composite tax rates for 2008-09 income year |
|---|---|---|---|
| 0 - 9,500 9,501 - 14,000 14,001 - 38,000 38,001 - 40,000 40,001 - 60,000 60,001 - 70,000 70,001 and higher | 15%* 21%* 21%* 33% 33% 39% 39% | 12.5% 12.5% 21% 21% 33% 33% 39% | 13.75% 16.75% 21.00% 27.00% 33.00% 36.00% 39.00% |
| *Includes the low income rebate | |||
New tax rates for 2009-10 income year, 2010-11 income year, and 2011-12 income year (schedule 1, part A, table 1)
Schedule 1, part A, table 1 of the Income Tax Act 2007 provides for new tax rates for the 2009-10 income year, the 2010-11 income year, and the 2011-12 income year. The provision is amended each year. The new rates are shown in the table below:
2009-10
| Taxable income ($) | Tax rate |
|---|---|
| 0 - 14,000 14,001 - 40,000 40,001 - 70,000 70,001 upwards | 12.5% 21% 33% 39% |
2010-11
| Taxable income ($) | Tax rate |
|---|---|
| 0 - 17,500 17,501 - 40,000 40,001 - 75,000 75,001 upwards | 12.5% 21% 33% 39% |
2011-12 and subsequent years
| Taxable income ($) | Tax rate |
|---|---|
| 0 - 20,000 20,001 - 42,500 42,501 - 80,000 80,001 upwards | 12.5% 21% 33% 39% |
New PAYE rates from 1 October 2008 - M and ML tax codes
The new tax rates and thresholds apply for the first pay period that ends on or after 1October 2008. For pay periods that span the 1 October date and are a month or shorter, PAYE should be deducted at the new rates. If the pay period spanning 1October is longer than a month, PAYE needs to be deducted at the old rate for the part of the pay period before 1 October and at the new rate for the part of the pay period after 1 October.
Tax rates on which PAYE will be based from 1 October 2008 to 31 March 2010
| Taxable income ($) | Tax rate |
|---|---|
| 0 - 14,000 14,001 - 40,000 40,001 - 70,000 70,001 upwards | 12.5% 21% 33% 39% |
The new thresholds will be progressively raised from 1 April 2010 and 1 April 2011. Inland Revenue's PAYE deduction tables will be updated to reflect the new rates and thresholds, so that the M and ML tax codes reflect the new rates and thresholds.
New PAYE rates from 1 October 2008 - secondary tax codes (section 24B(3)(c) to (e) of the Tax Administration Act 1994)
Section 24B(3) of the Tax Administration Act 1994 raises the thresholds for secondary tax codes to reflect the new thresholds. The changes apply from the first pay period that ends on or after 1 October 2008.
Employees can elect a new secondary tax code if they believe that their annual income will be below the new threshold.
The new secondary tax thresholds will be progressively increased from 1 April 2010 and 1 April 2011.
From 1 October 2008 to 31 March 2010
| Taxable income ($) | Tax code | Tax rate |
|---|---|---|
| 0 - 40,000 40,001 - 70,000 70,001 upwards | S SH ST | 21% 33% 39% |
From 1 April 2010 to 31 March 2011
| Taxable income ($) | Tax code | Tax rate |
|---|---|---|
| 0 -40,000 40,001 -75,000 75,001 upwards | S SH ST | 21% 33% 39% |
From 1 April 2011
| Taxable income ($) | Tax code | Tax rate |
|---|---|---|
| 0 - 42,500 42,501 - 80,000 80,001 upwards | S SH ST | 21% 33% 39% |
New rates for extra pay from 1 October 2008 (sections RD 10(2)(a), RD 17(2) and (3))
Sections RD 10(2)(a) and RD 17(2) and (3) of the Income Tax Act 2007 raise the thresholds at which tax rates on extra pay apply to reflect the new thresholds. The changes apply from the first pay period that ends on or after 1 October 2008.
The new thresholds will be progressively raised from 1 April 2010 and 1 April 2011.
Rates from 1 October 2008 to 31 March 2010
| Taxable income ($) | Tax rate |
|---|---|
| 0 - 40,000 40,001 - 70,000 70,001 upwards | 21% 33% 39% |
Rates from 1 April 2010 to 31 March 2011
| Taxable income ($) | Tax rate |
|---|---|
| 0 - 40,000 40,001 - 75,000 75,001 upwards | 33% 39% |
Rates from 1 April 2011
| Taxable income ($) | Tax rate |
|---|---|
| 0 - 42,500 42,501 - 80,000 80,001 upwards | 21% 33% 39% |
New FBT rates (schedule 1, part C, table 1)
Schedule 1, part C, table 1 of the Income Tax Act 2007 provides for new fringe benefit tax (FBT) rates and thresholds that employers use when calculating FBT under the multi-rate system. These reflect the new bottom rate of 12.5% and the raised thresholds. The changes apply to the 2008-09 income year, the 2009-10 income year, the 2010-11 income year and the 2011-12 income year. For the 2008-09 year, composite rates apply to reflect the two sets of rates being used for that year.
2008-09
| All-inclusive pay ($) | Tax rate |
|---|---|
| 0 - 8,194 8,195 - 11,940 11,941 - 30,900 30,901 - 32,360 32,361 - 45,760 45,761 - 52,160 52,161 upwards | 0.1594 0.2012 0.2658 0.3699 0.4925 0.5625 0.6393 |
2009-10
| All-inclusive pay ($) | Tax rate |
|---|---|
| 0 - 12,250 12,251 - 32,790 32,791 - 52,890 53,891 upwards | 0.1429 0.2658 0.4925 0.6393 |
2010-11
| All-inclusive pay ($) | Tax rate |
|---|---|
| 0 - 15,312 15,313 - 33,087 33,088 - 56,537 56,538 upwards | 0.1429 0.2658 0.4925 0.6393 |
2011-12
| All-inclusive pay ($) | Tax rate |
|---|---|
| 0 - 17,500 17,501 - 35,275 32,276 - 60,400 60,401 upwards | 0.1429 0.2658 0.4925 0.6393 |
New employer superannuation contribution tax rates (schedule 1, part D, table 1)
Schedule 1, part D, table 1 of the Income Tax Act 2007 provides for new employer superannuation contribution tax (ESCT) rates and thresholds. These reflect the new bottom rate of 12.5% and the raised thresholds. The changes apply from the first pay period that ends on or after 1 October 2008.
The new thresholds will be progressively raised from 1 April 2010 and 1 April 2011.
From 1 October 2008
| ESCT rate threshold amount ($) | Tax rate |
|---|---|
| 0 - 16,800 16,801 - 48,000 48,001 upwards | 0.125 0.210 0.330 |
From 1 April 2010
| ESCT rate threshold amount ($) | Tax rate |
|---|---|
| 0 - 21,000 21,001 - 48,000 48,001 upwards | 0.125 0.210 0.330 |
From 1 April 2011
| ESCT rate threshold amount ($) | Tax rate |
|---|---|
| 0 - 24,000 24,001 - 51,000 51,001 upwards | 0.125 0.210 0.330 |
Provisional tax (sections RC 5(4), RC 8(9), RC 10(3)(a)(i) and (ii), RC 11(4), RZ 5B, RZ 5C, YA 1)
Taxpayers using the standard or GST ratio methods of calculating provisional tax payments
New sections RZ 5B and RZ 5C amend provisional tax calculations to allow individuals who pay provisional tax using the standard or GST ratio methods to reduce their provisional tax payments from 1October 2008 to the end of the 2012-13 income year. These sections do not apply to non-individuals such as companies or trustees calculating tax on trustee or beneficiary income.
To calculate the new provisional tax payments, a taxpayer's previous year's residual income tax (RIT) liability is reduced by the dollar amount of the maximum tax cut that a person earning $70,000 would receive for the income year (for example, $730 in 2008-09) before applying the standard uplift. This applies to provisional tax payments that are made on or after 1 October 2008 - the changes to the provisional tax rules in the Income Tax Act 2007 come into force on 1 October 2008. These changes are illustrated in the following example.
Example showing provisional tax payments for the 2008-09 year using standard uplift method
Martin has a standard 31 March balance date, uses the standard 5% uplift approach to calculating provisional tax, and his RIT from the previous year is $15,000. He makes three provisional tax payments: on 28 August, 15 January and 7 May.
Step 1
His provisional income tax liability for the 2008-09 income year before the 1 October 2008 changes is:
$15,000 x 1.05 = $15,750
His provisional income tax liability for the 2008-09 income year after the 1 October 2008 changes is:
($15,000 - $730) x 1.05 = $14,983.50
Step 2
| P1 | Martin's P1 instalment is due before 1 October 2008, on 28 August 2008, so is calculated as follows: $15,000 x 1.05 x ⅓ = $5,250 |
| P2 | P2 occurs after 1 October 2008, on 15 January 2008 so is calculated as follows: ($15,000 - $730) x 1.05 x ⅔ - payment on P1 = $4,739 |
| P3 | His P3 occurs after 1 October 2008, on 7 May 2008 so is calculated as follows: ($15,000 - $730) x 1.05 x 3/3 - payments at P1 and P2 = $4,994.50 |
In a future income year, the RIT for that year is calculated by taking the previous year's RIT and reducing it by the dollar amount of the previous year's tax cut (columnB). This figure is multiplied by the uplift of 105%. If the previous year's return has not been filed, the RIT is calculated by taking the RIT for the year before the previous year and reducing it by the dollar amount of the tax cut that applied to that year (columnC). This figure is multiplied by an uplift of 110%.
| A. Future year | B. Dollar amount of tax cut: previous year ($) | C. Dollar amount of tax cut: year before previous year ($) |
|---|---|---|
| 1 October 2008 - end of 2008-09 income year 2009-10 2010-11 2011-12 2012-13 | 730.00 730.00 597.50 812.50 - | 730.00 1,460.00 1327.50 1,410.00 812.50 |
Similarly, the RIT is reduced by the same amounts when calculating the GST ratio for a provisional taxpayer using the GST ratio method.
Taxpayers using the estimation method of calculating provisional tax payments
Individual taxpayers using this method should use the composite rates when calculating provisional tax instalments for their 2008-09 income year. For their provisional tax instalments for the 2009-10 and later income years, they should use the relevant tax rates specified for that year.
ACC attendant carers (schedule 4, part I, clause 1)
Payments to ACC attendant carers are currently subject to a withholding tax rate of 15%, which reflects the bottom tax rate. Schedule 4, part I, clause 1 reduces the withholding tax rate to 12.5% from 1 October 2008.
Section 33C of the Tax Administration Act 1994 ensures that a taxpayer who has received ACC attendant care payments that have had tax withheld at 15% does not have to file a tax return in certain circumstances. These circumstances are when he or she has earned income of $9,500 or under and is not otherwise required to file a tax return under section 33A(1). Section 33C has been amended to apply to ACC attendant care payments that have had tax withheld at 12.5% from the 2008-09 and subsequent income years. The threshold for this has also been raised to $14,000 in 2008-09 and 2009-10, $17,500 in 2010-11, and $20,000 in
2011-12.
1 This is called "tax credits for persons on low incomes" in the Income Tax Act 2007, but is better known by its previous name, the low income rebate.