How will it affect us?
In 2017, we introduced five fictional Kiwi families and explained how National and Labour’s families packages would affect them. Now, they return to examine the Tax Working Group’s proposals. Susan Edmunds and Andy Fyers report.
Every day Kiwis will bank an extra $595 a year under a proposed tax shake-up – but they’ll need to think twice before relying on property for a nest egg.
The Tax Working Group released its report yesterday and we have analysed what it actually means for New Zealand families – from the solo mum doing her best on a benefit, to the double-income family looking to sell their boat, to the couple with one kid considering whether to buy a business. And across five scenarios, one thing is consistent: more money as the cash from a capital gains tax is given back to workers through tax cuts. But, those looking to invest in property may need to rethink as any profit earned from that second home or bach would be subject to the new capital gains tax.
Hamilton solo-mum Selena Petrov heads the poorest of our families. She takes home $35,000 a year from a benefit and has three kids to take care of.
Petrov would get a tax cut.
The best tax cut she would get is if the Government adopted the proposal to increase the 10.5 per cent tax rate, currently applied on income up to $14,000, to the highest suggestion of $22,500. She would pay $595 less a year – 10.5 per cent on the first $22,500 and then 17.5 per cent on the rest.
If the other recommendation, of a rate of 10.5 per cent up to $20,000, was adopted, she’d be $420 better off a year. But the Tax Working Group rejected the idea of taking GST off food, or to reduce its rate.
The Bennetts are a soleincome family living in Dunedin, with mother Joan on $49,000 a year, while Fraser looks after the kids.
Joan Bennett would also be in line for a tax cut – she would find almost half her income was being taxed at the 10.5 per cent tax rate under the working group’s 10.5 per cent-to-$22,500 proposal.
That would mean $595 extra a year. If the group’s other proposal, of a 10.5 per cent bracket to $30,000, was adopted, with an increase in the rate for the next tax bracket to 21 per cent, she could have a tax break of $1120 a year.
She’d also notice more in her KiwiSaver account. At the moment, she puts in $1470 or 3 per cent of her income a year, matched by her employer. Her employer pays $257.25 in tax via the employer superannuation contribution tax. The Working Group is recommending that be refunded to those earning up to $48,000 and clawed back for those earning between $48,000 and $70,000. Bennett would get almost the full benefit of that refund into her KiwiSaver account.
She would also see more in the member tax credit. The group wants to increase that from 50c per $1 invested up to $1042 a year to 75c. That means she’d get $781.50 in her account from the Government each year, not the $520 she currently gets. She’d also pay less tax on her KiwiSaver returns – the proposal is to cut the bottom two KiwiSaver PIE tax rates by five percentage points each, from 10.5 per cent and 17.5 per cent.
That means if Joan were to make $1000 a year in her KiwiSaver account she would pay only 12.5 per cent of it in tax – $125 – rather than 17.5 per cent – $175. But her KiwiSaver fund manager would have to pay capital gains tax on an accrual basis on capital gains on Australian and New Zealand shares in her fund.
Mum and dad Jasmine and Iuta Seuseu live in Papakura with Jasmine’s sister Leilani and their three kids. Iuta works as a teacher earning $64,000, while Leilani works as a casual part-time kitchen hand bringing in $14,000.
Nothing would change for Leilani – she already pays the lowest tax rate.
The biggest tax cut Iuta could get would be $595. He’d benefit from the increased member tax credit in KiwiSaver, too, but would probably pay some capital gains tax through his fund.
They plan to sell the boat they bought before they had kids as they no longer use it. This will be exempt from capital gains tax.
Steve and Craig Chin-Wilson both work in Nelson, bringing in $115,000 in total. Steve is a lawyer who makes $90,000 a year, currently working from a home office, while Craig is a part-time sales assistant who makes $25,000. They have one child.
Both men will probably get a tax break of $595 a year – although Craig could get $1120 if the 10.5 per cent-to-$30,000 option was adopted.
The bigger problem, though, is that Steve wants to buy a local law firm. It isn’t doing well and he wants to build it up. If he then sells it for more than he paid so that the family can move closer to his parents in Auckland, he’ll have to pay capital gains tax on that increase in value.
Even though Steve works from home, because more than 50 per cent of the property is used as their private dwelling, he can choose to treat the property as his excluded property, and keep it exempt from capital gains tax. But that means he’ll have to stop claiming any costs relating to the property, such as rates and interest on the mortgage, back on his business tax bill.
His parents plan to sell their investment properties bought in the 1980s in Auckland to help the Chin-Wilsons buy a house in the bigger city. If they do this in five years, they’ll only be charged on capital gains made since the tax was introduced.
Michael and Abigail SaxonMahuta have two kids. Abigail works as a public servant making $120,000, while Michael is a part-time office assistant making $30,000. Michael has an older farmer brother who has no kids and plans to leave him his property.
They would probably each get a tax cut of up to $595 – although Michael could get $1120 with the 10.5 per cent-to-$30,000 option.
They’ve been talking about buying a rental property and this might put them off. They’d hoped to build up some capital gains as a nest egg for retirement. But once the policy is introduced, any capital gains will be taxed. If they went ahead anyway and eventually sold, it would make sense for them to assign the gain to Michael, if they could, because his income tax rate is lower.
Michael’s brother could still leave them his farm, tax-free. Abigail owns shares that her parents bought for her. If she were to sell them, she would pay a tax on any gains in value made after the policy was introduced.