Changes to personal income tax, introduction of an independent earner tax credit and R&D tax credit
The Taxation (Urgent Measures and Annual Rates) Act introduces changes to KiwiSaver and personal income tax, repeals the research and development tax credit and introduces an independent earner tax credit.
These changes take effect from 1 April 2009.
- Personal income tax
- Independent earner tax credit
- Tax on interest and investment income
- KiwiSaver
- Employers
- Research and development tax credit.
Personal income tax rate and threshold changes
Reductions to personal tax rates and thresholds will be phased in over the next three years, starting on 1 April 2009.
The new rates will apply to all individuals including:
- employees who make PAYE payments directly to Inland Revenue (IR 56 customers), and
- individuals who file IR3 tax returns.
Current PAYE rates and thresholds:
| Income thresholds | Rates |
|---|---|
| Income to $14,000 | 12.5% |
| $14,001 - $40,000 | 21% |
| $40,001 - $70,000 | 33% |
| $70,001 and over | 39% |
New rates and thresholds from 1 April 2009:
| Income thresholds | Rates |
|---|---|
| Income to $14,000 | 12.5% |
| $14,001 - $48,000 | 21% |
| $48,001 - $70,000 | 33% |
| $70,001 and over | 38% |
Salary or wage earner
If you're a salary or wage earner you won't need to do anything. Your employer will use the new PAYE rates to calculate how much PAYE to deduct from your salary or wage starting from your first pay period that ends on or after 1 April 2009.
Benefits, student allowances and superannuation
The amount of benefit, student allowance or superannuation you are receiving after tax will not change on 1 April 2009 because these are already being taxed at the correct rate.
Secondary tax codes
The secondary tax code thresholds are also changing from 1 April 2009.
Current rates and thresholds:
| Income thresholds | Rates | Tax code (no SLS) | Tax code (with SLS) |
|---|---|---|---|
| Total income to $40,000 | 21% | S | S SL |
| $40,001 - $70,000 | 33% | SH | SH SL |
| $70,001 and over | 39% | ST | ST SL |
New rates and thresholds from 1 April 2009:
| Income thresholds | Rates | Tax code (no SLS) | Tax code (with SLS) |
|---|---|---|---|
| Total income to $48,000 | 21% | S | S SL |
| $48,001 - $70,000 | 33% | SH | SH SL |
| $70,001 and over | 38% | ST | ST SL |
Special tax code
If you are applying for a new special tax code or renewing an existing code we will automatically take the new rates into account. We will issue you with a new certificate in March which you'll need to give to your employer(s).
Provisional tax payer
Changes to provisional tax were not included in the Taxation (Urgent Measures and Annual Rates) Act.
However if you use the standard method to calculate your provisional tax payments, the Taxation (Business Tax Measures) Act has introduced changes to the way provisional tax is calculated for the 2008-09 and 2009-10 income years - from 1 April 2009 you'll pay less provisional tax. Find out more about these provisional tax changes.
Independent earner tax credit (IETC)
The independent earner tax credit (IETC) is a tax credit for individuals who are New Zealand tax residents, and whose annual income is between $24,000 and $48,000. In order to receive the IETC the following must apply:
- you or your partner are not entitled to working for families tax credits
- you or your partner do not receive an overseas equivalent of working for families tax credits
- you are not receiving an income tested benefit, NZ super, veterans pension or an overseas equivalent.
Your entitlement to IETC is determined monthly so, if you don't meet the criteria for any part of a month then you won't qualify to receive the IETC for that entire month.
From 1 April 2009 if your annual income is between $24,000 and $44,000 inclusive you’ll receive a tax credit of $520 - or $10 per week. If you’re eligible, but earn over $44,000, your annual entitlement to the IETC decreases by 13 cents for every additional dollar earned.
Receiving the tax credit
If you're eligible you can choose to receive the IETC through your pay or as a lump sum at the end of the year. If you work for a salary or wage, you will receive the IETC through your pay. If you are self employed, or work as a contractor, you can claim the IETC as a lump sum after the end of the year.
If you will receive the tax credit through your pay after 1 April 2009 you'll need to choose a new tax code: either ME or ME SL (if you have a student loan).You'll need to let your employer know by completing a new Tax code declaration (IR330) form. You can only use this new tax code for your main job or source of income. Updated IR330 forms will be available from the start of March 2009.
If you will receive the tax credit at the end of the year you don't need to do anything yet.
If you're a salary or wage earner you'll need to request a personal tax summary (if you don't usually receive one). We will calculate your tax credit for the first time and include it in your personal tax summary calculation. You would receive your personal tax summary from July 2010.
If you are self employed or a contractor you can claim the tax credit for the first time on your IR3 return for the year ending 31 March 2010.
Eligible for part of the year?
If you receive the above forms of government assistance for part of the year and would otherwise qualify for the tax credit, you will be eligible for the months of the year you don't receive the above forms of government assistance.
Example
Jonah received the unemployment benefit from 1 April 2009 to 10 September 2009. He then got a job working at Shelley's fish market. His total income for the year (including his unemployment benefit) was $24,000. Jonah will be eligible for the IETC from October onwards.
If you become a New Zealand resident during the year and you meet the other eligibility criteria you will be eligible for the tax credit for the full months of the year that they are resident.
Working for families tax credit
If you, or your partner or spouse are entitled working for families tax credits (or are receiving a foreign entitlement) you won't be eligible for the IETC.
Student allowance, ACC, paid parental leave, accommodation supplement
If you receive a student allowance, ACC payments, paid parental leave or the accommodation supplement you will still be eligible for the independent earner tax credit if you meet the other eligibility criteria.
Find out more about the independent earner tax credit.
Tax on interest and investment income
There will be no immediate changes to the tax rate structure that applies to portfolio investment entities (PIEs) to reflect the new personal tax rate structure. The associated changes to the PIE tax rates will be considered after further consultation with the managed funds industry, and it is likely that any changes would apply from 1 April 2010.
A reduced optional top rate of 38% for resident withholding tax (RWT) on interest will apply from 1 April 2009. This change means interest payers (for example financial institutions, banks) have the option of offering a 38% RWT top rate on interest to their customers for the 2010 tax year.
If an interest payer does not offer the 38% rate, a customer can recover any overpaid RWT by showing the interest and RWT on their Individual tax return (IR3) or by requesting a Personal tax summary at the end of the year.
Further consequential changes to the resident withholding tax (RWT) rates on interest will not be fully implemented until there has been further consultation with banks and other financial institutions
KiwiSaver changes
There will be several changes to KiwiSaver on 1 April 2009, which will affect members and employers. Further information can be found on our KiwiSaver News and updates item.
Employers
The changes to personal income tax rates and thresholds, and the introduction of the independent earner tax credit (IETC) will affect all employers. To help you prepare for these changes we will:
- be issuing new PAYE tables (IR340 and IR341), updating the PAYE online calculator (found under 'Work it out').
- work with payroll developers so they can update payroll software.
- updating the Tax code declaration (IR330) form
- provide further detail in future editions of Payroll News.
The following questions and answers may also be helpful.
What do I have to do?
We'll be issuing new PAYE tables (IR340 and IR341) and updated Tax code declaration (IR330) forms, updating the PAYE online calculator and providing an online tax code declaration form equivalent in early March 2009. We're also issuing a new payroll specification to developers before the end of 2008 so they can update their payroll software.
We’re updating the IR330 so employees who want to receive the IETC through their pay can do this via a new tax code. The new tax codes are ME and MESL for employees with a student loan.
The new PAYE rates and IETC come into effect from 1 April 2009. This means you need to start using the new rates and tax codes (if applicable) to calculate the correct amount of PAYE to deduct from employees' salary and wages for pay periods ending on or after 1 April 2009.
New employees starting work during March, who will be eligible for the IETC and are planning to use one of the new tax codes, will initially need to use one of the existing main income source tax codes. They will then need to complete another IR330 to start using ME or MESL from their first pay on or after 1 April.
If your employees’ circumstances change during the year this may mean their eligibility for IETC also changes. As a result, your employees may need to change their tax code several times during the year.
What impact do the new rates have on fringe benefit tax?
Currently you have the option of applying the multi-rate tax rate or using a flat rate of 64%.
From 1 April 2009 the flat rate changes from 64% to 61%.
The multi-rate fringe benefit rates for the year ending 31 March 2010 have changed. The following rates will apply:
| Income range | Tax rate |
|---|---|
| $0 - $12,250 | 0.1429 |
| $12,251 - $39,110 | 0.2658 |
| $39,111 - $53,850 | 0.4925 |
| $53,851 and above | 0.6129 |
I have an employee who has a secondary tax code - what do I need to do?
Ensure you are deducting the correct rate as per the secondary tax code table.
I have an employee who has a special tax code / repayment rate - what do I need to do?
Your employee will give you a new Special Tax code for the year 1 April 2009 as they do at the start of each tax year. The new certificate will include the new tax rates and thresholds.
How do I handle extra pays?
Lump sum payments made to employees are known as extra pays. Tax on extra pays is currently withheld at 21%, 33% and 39% depending on your employee's annualised income. These rates and thresholds are changing. This applies from the first pay period that ends on or after 1 April 2009.
Current rates and thresholds:
| Income thresholds | Rates |
|---|---|
| Total income to $40,000 | 21% |
| $40,001 - $70,000 | 33% |
| $70,001 and over | 39% |
New rates and thresholds from 1 April 2009:
| Income thresholds | Rates |
|---|---|
| Total income to $48,000 | 21% |
| $48,001 - $70,000 | 33% |
| $70,001 and over | 38% |
How do the new rates affect the employer superannuation contribution tax (ESCT) that I calculate?
From 1 April 2009 the rates and thresholds for employer superannuation contribution tax (ESCT) will change. You will need to use the new rates and threshold amounts to determine how much tax to withhold on employer superannuation contributions. These will apply from the first pay period that ends on or after 1 April 2009.
From 1 April 2009 to 31 March 2010 the rates and thresholds for employer superannuation contribution tax are:
| Income range | Tax rate |
|---|---|
| $0 - $16,800 | 0.125 |
| $16,801 - $57,600 | 0.210 |
| $57,601 upwards | 0.330 |
Research and development tax credit
The R&D tax credit has been repealed with effect from the 2009-10 income year.
Businesses will still be able to claim the credit for the 2008-09 income year, but if a business's eligible R&D spans more than the first year, it can only claim the credit for expenditure on R&D carried out in the 2008-09 year.
The timeframes for filing and for notices of proposed adjustment to claims relating to the 2008-09 year are unchanged.
More information is available on the research and development section of our website.
Date published: 17 Jun 2009
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