New Zealand 2024-25 Budget delivers personal income tax cuts and additional funding for Inland Revenue

• The 2024 Budget introduces limited personal income tax cuts, increasing the thresholds that apply across the low- and middle-income bands from 31 July 2024.

• Changes have also been made to various other tax rates to reflect the changes made in the Budget, including the resident withholding tax and fringe benefit tax rates.

• These changes will have payroll system implications for employers, payroll providers and fund managers.

Executive summary

On 30 May 2024, the New Zealand Government delivered the 2024 Budget, which included personal income tax cuts targeted largely at low- and middle-income earners and families.

The amendments lift the personal income tax thresholds, except for the highest band, with effect from 31 July 2024. The Government expects that the net effect of these changes will reduce the amount of personal income tax payable by an average New Zealander by NZ$30 per week.¹ Additional tax relief is provided through increases in certain worker and family tax credits, also broadly applicable from 31 July 2024.

Additional consequential rate changes are made to other tax types that are linked to the personal income tax rates. These include changes to employer superannuation contribution tax and the prescribed investor rates relevant to portfolio investment entities, including KiwiSaver funds.

The personal tax cuts had been expected to apply from 1 July 2024, but have been deferred to allow employers, payroll providers and fund managers an additional four weeks to ready systems. Additional complexity arises because the rate changes apply part way through the New Zealand tax year (typically 1 April to 31 March). In particular, employers using the fringe benefit tax attribution method will be required to adjust calculations across the current and next tax years.

Detailed discussion

Personal income tax thresholds changed

The Budget announcements have now broadly delivered the tax relief campaigned on by the National Party ahead of the 2023 General Election. Finance Minister Nicola Willis described the tax cuts as "modest but meaningful."

The changes to the thresholds are as follows:²

For workers earning more than NZ$14,000³ (approximately 90% of New Zealand households), the tax cuts save New Zealanders between NZ$4-NZ$40 per fortnight.⁴

These tax changes will commence on 31 July 2024, rather than the previously expected date of 1 July 2024. The postponement provides additional time for employers and payroll providers to adjust systems to reflect the changes.

As the rate changes apply part way through the New Zealand tax year (1 April — 31 March) composite personal income tax rates will be applied for the current 2024-25 tax year as follows:

Most New Zealand individual taxpayers have their end-of-year income tax assessment automatically completed by Inland Revenue. The composite rates above will apply when Inland Revenue performs the overall income tax assessment.

Additional tax credits provided for individuals and families

The NZ$3.7b⁶ package also provides for an increase in targeted tax credits, aiming to provide further relief to low-income workers and families.

Specifically, the eligibility cap for the Independent Earner Tax Credit — a tax credit previously available to individuals earning below NZ$48,000⁷ — has been lifted to NZ$66,000.⁸ The credit, which provides up to NZ$520⁹ per year to eligible workers, will now apply beyond a full-time minimum wage and capture taxpayers earning up to the New Zealand median wage. This will see an additional 420,000 New Zealanders eligible for the credit.

For families, the Budget introduces a limited increase in the in-work tax and minimum family tax credits, both part of the Working for Families tax credit group. The result is expected to bring an additional 160,000 eligible families an average of NZ$50 per week.¹⁰ In addition, the Budget provides an ability for parents of young children in registered early childhood care to receive a refund of fees paid for the care, referred to as the FamilyBoost tax credit. The credit would apply quarterly, allowing eligible parents to claim up to 25% of costs incurred. The credits will abate fully for families earning more than NZ$180,000.¹¹

Consequential changes to other tax rates

Various tax rates have been adjusted as a consequence of the personal income tax cuts outlined above.

These include changes to:

• Various pay-as-you-earn (PAYE) thresholds and rates appliable to secondary income and extra pay

• Fringe benefit tax (FBT) thresholds for those using the attribution method

• Employer superannuation contribution tax (ESCT)

• Retirement scheme contribution tax

• Prescribed investor rates for portfolio investment entities

• Resident withholding tax (RWT) thresholds.

Inland Revenue has acknowledged that "calculating and implementing a mid-year change could create significant compliance challenges for employers, payroll service providers, and managed funds." As such most of the consequential changes outlined above take effect from 1 April 2025 (the start of the next tax year). Notably however the changes to RWT and the formula to calculate FBT payable under the attribution method, are required to take effect from 1 April 2024.

Fringe benefits calculated using the attribution method

The current attribution formula is designed to calculate the FBT payable assuming personal income tax and FBT rates are broadly the same. Because the changes to personal income tax and FBT thresholds are set to apply from different dates, the current formula may result in an amount of FBT payable that effectively claws back the tax relief the new personal income tax thresholds provide for the 2024-25 tax year. As such the new FBT formula mitigates this issue by focusing on all-inclusive pay (i.e., the sum of net cash pay and the value of taxable fringe benefits received by the employee) less the net cash pay (i.e., the amount left in hand of the employee after tax).

The rates used for the attribution will change as follows:

2024–2025 tax year (1 April 2024 — 31 March 2025)¹²

2025–2026 tax year (1 April 2025 — 31 March 2026)¹³

Commentary accompanying the Bill that progressed the Budget measures through Parliament on the 31 May provides worked examples and can be accessed here.¹⁴

Employer superannuation contribution tax

Employer superannuation contribution tax (ESCT) changes are also required as a result of the income tax threshold changes. The ESCT applies most commonly to KiwiSaver employer contributions. The thresholds of the ESCT are 20% greater than the personal income tax thresholds.

The proposed thresholds are set out below:

Implications for employees in New Zealand on assignment

The rate changes described above also have consequences for employers who have either sent employees on overseas assignments or brought employees to New Zealand.

Specifically, employers will:

• For outbound employees, need to consider whether hypothetical tax withholding should be recalculated to account for the personal tax rate changes from 31 July 2024 or as part of the employee's year-end tax equalization calculations, when employees are sent offshore on tax equalized assignments

• For inbound employees, need to consider whether any adjustments should be made to the calculation of New Zealand remuneration for any employees with their remuneration determined based on a guaranteed net income position; this consideration applies whether the adjustments are made in the current financial year or when determining future changes in assignment remuneration

Employers should consider effect of any proposed reduction in gross New Zealand remuneration in light of employment/assignment contracts, New Zealand immigration requirements and New Zealand employment law.

Observations

The threshold changes announced in this Budget have been characterized as adjusting the New Zealand tax brackets for inflation. For context, no changes had been made to the thresholds since 2010. That meant that as wages grew over the period so too did the tax take as individuals inched up the personal income tax bands, referred to as fiscal drag.

Though it is welcome to see the Government endeavor to address the fiscal drag issue, the changes made only go so far, as the threshold changes are insufficient to fully offset the impact of inflation over the past 14 years.

Further as there is no ongoing commitment to continue inflation adjusting the tax brackets over time, fiscal drag will continue to be an issue as wages grow. This is reflected in the Budget forecasts with overall New Zealand tax revenue expected to increase from NZ$111b in 2023 to NZ$146b¹⁶ by the end of the forecast period in 2027-28. Part of the projected increase is likely attributable to expected wage growth as well as expected population growth.

Overall, the income tax changes provide modest relief (on average, NZ$30¹⁷ per person, per week), targeted primarily toward lower- and middle-income workers and families. The package seeks to strike a balance between providing relief to ease the cost-of-living pressures for lower-income New Zealanders and not exacerbating inflation. The modest relief reflects the fiscal pressure that the Government is facing given other funding priorities and an increased debt track following the global pandemic. Whether that balance was well struck, remains to be seen.

This Budget represents the final step in the delivery of this Government's pre-election tax promises. Looking ahead, major tax reform is not expected to be on the agenda for the remainder of this term (elections being due again in 2026).

Speaking to the Government's fiscal strategy, Minister Willis noted that the Government "does not see the need to seek major additional sources of revenue." Willis also noted that New Zealand will not be in position to provide further tax relief, including changes to the top income tax bracket, until Government books are returned to surplus.

Further tax relief may well be the Government's intent, but the Budget also indicates that the fiscal headroom is tight in the coming years. The plan for now is one of fiscal restraint and continued focus on investment efficiencies, resulting in a return to surplus by 2027-28.

However, as a growing population puts pressure on public sector budgets or climate impacts create unforeseen costs, it may yet become a necessity to alter the mix of taxation to keep the books in balance.

Contact Information

For additional information concerning this Alert, please contact:

Ernst & Young Limited (New Zealand) Auckland

• Paul Dunne, New Zealand Tax Policy Leader
• Sladjana Lines, Tax Policy
• Rohini Ram, People Advisory Services

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.