Last week’s budget was uneventful, as expected. We saw a change to personal income tax thresholds, an extension of the Independent Earner Tax Credit, an increase to the In-Work and Minimum Family Tax Credits, an increase in the Student Loan interest rate, and the rollout of the FamilyBoost Scheme.
Read more about these here.
– Alex
Those of us in the tax world are currently working between the March tax changes which generally apply from 1 April 2024, such as changes to trustee tax rate, interest deductibility, commercial building depreciation, and the ‘app tax’; or from 1 July 2024, such as the change to the Bright-line test.
However, following the changes announced in last week’s budget we now have a third date of 31 July 2024, which is when the personal income tax thresholds are set to change.
New Zealand has a progressive tax system. The more you earn, the higher your tax rate. However, tax brackets have remained unchanged since 2010 and this has created an effect called ‘bracket creep’ where inflation moves the average earner into higher tax brackets, while their purchasing power remains unchanged.
To partially offset the effects of bracket creep, the tax brackets have been adjusted upwards by around 11.5% with application from 31 July 2024. The table below sets out these changes.
The mid-year application of the changes does create a few headaches, especially when it comes to payroll. However, to reduce the compliance burden, some of the changes to consequential tax types will not apply until 1 April 2025, such as for Fringe Benefit Tax (FBT), Employer Superannuation Contribution Tax (ESCT), Retirement Scheme Contributions Tax (RSCT), and the Prescribed Investor Rate (PIR).
Currently, individuals earning between $24,000 and $48,000 receive a tax credit of 13 cents per dollar (with a reduction to the credit starting at $44,000). This can add-up to a maximum benefit of $520 per year.
However, changes applying from 31 July 2024 will allow individuals earning up to $70,000 to receive the 13 cent per dollar credit (with a reduction to the credit starting at $66,000).
An individual’s entitlement under the IETC will be determined by using a split-year calculation.
The IWTC is a tax credit for families with dependent children who are normally in paid work. It is generally based on a family’s combined income and the number of children they have. As an indication of when it applies, a family with one child receive a weekly credit of up to $72.50 if they have a combined income of up to $69,500.
Changes under the budget will increase the IWTC base rate by $25 per week, meaning that the same family will receive a weekly credit of $97.50 from 31 July 2024.
The MFTC is designed to incentivise members of families with children to move off the benefit and into full-time work (defined as 20 hours for sole parents and 30 hours for couples). The MFTC tries to achieve this by “topping up” the incomes of working families to an amount that is more than what they could potentially receive on a benefit. However, for every dollar a family earns over the MFTC threshold (currently $35,204), their MFTC entitlement reduces by a dollar.
Changes under the budget will increase the MFTC threshold to $35,316.
The FamilyBoost scheme will be implemented from 1 July 2024. It is designed to aid with early childhood education (ECE) costs for working families and is a ‘rebate’ style tax credit paid each quarter of up to 25% of ECE costs and capped at $975 for a quarter. Entitlements will abate where the annual income of the household is between $140,000 to $180,000, with no remaining entitlement at $180,000.
Applications must register for the scheme through MyIR (the IRD portal), and each quarter submit ECE invoices and confirm their family circumstances.
From 1 April 2025, the interest rate charged to overseas-based borrowers will increase by 1%, as will the late payment interest rate.
As always, don’t hesitate to reach out if you’d like help to work through the implications of any of these changes.
Alex Cull, Tax Partner
[email protected]
If you’re reading this long after the published date, please get in touch to see if it’s still relevant.
