NZ Budget 2010
The drop in the corporate tax rate to 28c is a bit of a surprise and a highlight of the 2010 New Zealand Budget. This coupled with lower personal tax rates across the board, means small businesses will have more cash in their pockets. So more cash to invest in their business, pay off debt or take out of their business to meet personal financial commitments. Great too that this brings us inline with Australia.
The GST rise is clearly the big ‘cost’ for SMEs. You will need to be very careful about how you price your products and services, or you may find you are wearing the GST rise on your top line (revenue). If you do not get your pricing right here, all the other lower income tax benefits will be eroded.The difference in the top individual tax rate of 33c and the new company rate of 28c will provide tax advantages for small businesses, which are trading as a company. And for those that wish to re-invest after-tax profits back into their business, they will have more to invest. So if you have a growing business, set up as a company and you will save yourself 5c tax on your profits.
If you are carrying forward tax losses you will need to think about the effect on you and the timing – comes in from 1 April 2011 for those with a 31 march balance date. While slightly more technical, you will also need to consider your imputation credit account. There are some transition rules, but check with your accountant what is the best strategy for you. You will need to think about how much provisional tax you pay and I suggest you ask your accountant to complete a tax forecast for you, so you can assess your options.
The proposed changes to LAQCs (Loss Attributing Qualifying Companies) and the removal of depreciation on property with a useful life of more than 50 years, removes the easy tax advantages the residential property investment market has enjoyed. This means the pre-tax cashflow and amortised future capital gain, balanced against inflation, will have to stack up. Residential investment properties become less attractive. For small businesses that rent, there is an argument that the changes will hike rents up. Rents are usually based on value, and if anything, these tax changes make property less valuable because there will be less demand. It may be that rents do not move.
So all up a lot of tax reform here. The Prime Minister John Key and Finance Minister Bill English have been very bold. There are winners and losers and small businesses can fit into both camps. But generally for growing small businesses, this is good news.