The 2010 Budget was always going to be a hard act to follow, with very little in significant change included in the 2011 Budget.
As widely tipped, changes have been made to KiwiSaver and we discuss these in more detail below. Working For Families (WFF) tax credits has been left largely unchanged, with some very small adjustments being made with respect to abatement thresholds, meaning that some people on higher incomes will no longer be entitled to WFF or will receive a smaller entitlement.
These changes are to take effect from 1 April 2012, with a four year transitional period until the changes are fully in force. People should be more concerned with the changes to the definition of “family scheme income” for WFF purposes that commence on 1 April 2011 and previously discussed in Sharp-As Tax than the very minor adjustments made to WFF moving forward.
A lot has been made of potential changes to the student loans scheme. The most significant change is the shortening of the repayment holiday for overseas based borrowers from 3 years to 1 year, incorporating an application process, and providing for a New Zealand based contact person for the borrower. The repayment thresholds for student loans will not be adjusted for inflation until 1 April 2015, effectively meaning that as wages rise in line with inflation, student loan repayments will increase instead of remaining static. Eligibility to receive students loans has been tightened for those with overdue repayment obligations in excess of $500, and restricts borrowing for those aged over 55 to tuition fees only.
Outside of the Budget announcements, the Government has announced a review of the livestock valuation rules, in particular the elections allowing the movement between the two common valuation methods where tax advantages can sometimes be achieved.
The Government also aims to review the tax treatment of mixed use assets where those assets are used for both private and business purposes. This is in line with recent changes to the GST Act in relation to mixed use assets.
How it affects you
After the across the board tax changes of 2010, the 2011 Budget does little more than tinker around the edges with respect to tax policy. With the majority of changes applying from 1 April 2012 and draft legislation to come, there is very little in the Budget for most taxpayers to be concerned, or excited, about.
KiwiSaver contribution rates to change
As widely tipped prior to the Budget announcements, KiwiSaver is one of the prime areas where Government savings have been made to allow for increased funding in the health and education sectors.
Key changes to KiwiSaver are a reduction in the member tax credit from $1 to 50c for every $1 contributed by members, with the maximum contribution falling to $521 per year. The minimum employee and employer contribution rates will increase from 2% to 3% from 1 April 2013.
Perhaps the most significant change to KiwiSaver is the removal of the existing exemption from Employer Superannuation Contribution Tax (ESCT) with respect to the compulsory 2% employer contribution. ESCT currently applies to employer contributions above 2%, but from 1 April 2012, will apply to all employer contributions. As such, all contributions made to KiwiSaver after 1 April 2012 will effectively be from tax paid income.
At present, ESCT is calculated at a flat rate of 33% on any contributions made over and above the 2% compulsory employer contribution. From 1 April 2012, ESCT will be calculated based on an employee’s prior year earnings, including the employers superannuation contribution, or an estimate of what that amount would be if the person was not employed for the entire previous income year.
The changes to the application of ESCT effectively mean that the employee, via the employer’s compulsory contribution, is funding some if not all of the member tax credit that the employee will receive.
The table below sets-out the impact of these changes for someone earning $50,000.
1 April 2013
The weekly contribution increases from $19.18 to $28.77 from 1 April 2013.
The $1,000 Government kick start remains unchanged.
How it affects you
Other than the change to the member tax credit, which comes into play almost immediately, all of the other changes are either 9 or 21 months away.
As such, the decision to join KiwiSaver remains largely unchanged following the Budget announcements as the advantages of joining largely remain.