Tax threshold changes – now the work really starts to deliver tax cuts

By Robyn Walker

It’s been so long since tax thresholds have been adjusted in New Zealand that many people have either forgotten about or don’t know about the ‘consequential’ impact on employers and software providers in having to adjust calculation methodologies to actually deliver the tax reductions promised by the Government into the back pockets of employees.

It was of no surprise that we saw an adjustment in tax thresholds as part of Budget 2024, but what was surprising was that they were the same as what the National Party had campaigned on, except for one element – the application date. 

The majority of changes announced in Budget 2024 will now apply from 31 July 2024. This application date was pushed back from 1 July 2024 to allow more time for payroll providers to update and test systems before the go-live date. However, the choice of 31 July, rather than 1 August leaves us mathematically considering the formulas of 121/365 and 244/365 (dates at old and new thresholds respectively) rather than the conceptually simpler 1/3 and 2/3.

The key issue to be aware of is that for payroll purposes, thresholds should adjust from 31 July, but the 2024/25 tax year will be considered a “composite” year, and that means that tax reductions will effectively be averaged across the year when it comes to working out end-of-year tax obligations. The consequence will be if someone earned proportionately more income in the last 244 days of the tax year, they may have been undertaxed and have a tax liability, and vice versa.

When factoring in the threshold changes and the application date, for the 2024/25 tax year there will be eight tax bands which need to be applied to work out total tax obligation:

If employers and payroll providers are unable to be ready for the 31 July start date, there is the option to put through a payroll correction to correct any errors.

Consequential changes

Tax threshold changes don’t impact only on payroll, tax code selection, and personal tax calculations, they also have flow-on implications for other tax types. Given the short lead time, the Government has taken a variety of approaches to when these different taxes will change:

Extra pays and tax codes

The decision was made to not disrupt the approach to extra pays and tax codes in the 2024/25 tax year, so instead thresholds for determining which extra pay rate to use and which tax code to apply will only change from 1 April 2025.

Fringe Benefit Tax (FBT)

For employers undertaking FBT attribution calculations, the tax thresholds for FBT will not change until 1 April 2025, however, in order to stop tax reductions effectively being clawed back through the formula for calculating FBT, the decision has been made to adjust how FBT is calculated with effect from 1 April 2024. We’ll cover this in more detail in a future edition of Tax Alert. The key message is that anyone still doing FBT calculations using complicated formulas in excel will need to do some rework when it comes to the 2025 and 2026 FBT attributions.

From 1 April 2025 the FBT thresholds will become:

Employer Superannuation Contribution Tax (ESCT)

ESCT rates are generally set by looking backwards to the amount of income earned in the previous year, and include a 20% “buffer” to prevent taxpayers jumping into the next tax band. To simplify matters it was decided that ESCT thresholds will only change from 1 April 2025. This may technically result in some workers having a higher level of ESCT applied than if the rates were adjusted immediately, however, it will save employers some compliance costs. The following thresholds will apply from 1 April 2025:

Retirement Superannuation Contribution Tax (RSCT)

Employers who opt to pay RSCT will need to apply new thresholds (which align with the personal tax thresholds) from 1 April 2025.

Prescribed Investor Rates (PIR)

Investors into KiwiSaver and other Portfolio Investment Entities (PIEs) will be used to confirming their correct Prescribed Investor Rate (PIR) each year. To simplify compliance, it has been determined that PIRs should only be adjusted with effect from 1 April 2025, with the thresholds for applying a 10.5% or 17.5% PIR aligning with the new personal tax thresholds from that date. The top PIE remains 28%.

Resident Withholding Tax (RWT)

Taxpayers who find themselves having moved down a threshold (from 17.5% to 10.5%, from 30% to 17.5% or from 33% to 30%) as a consequence of the band changes will have the option to elect a lower RWT rate by notifying their interest payer. 

Independent earner tax credit (IETC)

Despite tax codes not changing until 1 April 2025, from 31 July there is a change to eligibility for the IETC. The IETC currently provides up to $10 per week to individuals earning between $24,000 and $48,000 (with the benefit currently abating once someone earns $44,000). The upper threshold for this credit has been extended to $70,000 (with abatement beginning at $66,000) meaning an anticipated extra 420,000 taxpayers will be eligible. Given the part-year implementation, there are apportionment calculations to be made to ensure that the credit is only made available for 244/365 days for those who are only eligible due to the Budget changes. These changes should effectively be built within PAYE table calculations and therefore shouldn’t require further work from employers. 

FamilyBoost

Not technically a tax change, but administered by Inland Revenue, is “FamilyBoost”. FamilyBoost was announced in March and will allow parents to claim back up to 25% of weekly early childcare costs, but to a maximum of $75 per week. FamilyBoost will be available from 1 July 2024, with parents required to upload invoices to Inland Revenue on a quarterly basis. Only households with total income below $180,000 will be eligible (with abatement applying from $140,000), and this will be assessed by Inland Revenue using real-time pay data. Employers are not responsible for FamilyBoost, but may field questions if employees don’t understand how this “tax relief” will be delivered. 

In-Work Tax Credit (IWTC) and Minimum Family Tax Credit (MFTC)

The IWTC exists to support low- to middle-income family members to remain in work. The IWTC base rate is increasing from $3,770 to $5,070 per year (a $25 per week increase).

The MFTC is one of the Working for Families tax credits and “tops up” incomes for working families to ensure they are better off than receiving a benefit. The MFTC threshold is increasing from $35,204 to $35,316 per year after tax from 31 July 2024.

Conclusion

It is important that employers take steps now to familiarise themselves with the new requirements to ensure that employees can benefit from tax relief as soon as possible. We understand that payroll providers were made aware of the impending changes ahead of the Budget, and as such have had a head start to get software updated. We recommend that employers touch base with their payroll provider (if this is outsourced) to find out the timelines for software updates and testing. Employers who prepare their own payroll may wish to consider whether now is a good time to move to an outsource model… or otherwise should keep an eye on the Inland Revenue website for key updates to PAYE deduction tables.

If errors are made, then consideration can be given to making a correction in a subsequent pay period, or else, given amounts in question may be low (in comparison to the work required to make corrections), it may be left to be squared up as part of the end of year process for individuals. We expect Inland Revenue to release more practical details in this regard as 31 July 2024 approaches.

For more information please contact your usual Deloitte advisor.