The recently passed Taxation (Consequential Rate Alignment and Remedial Matters) Bill will introduce new legislation on 1 April 2010 providing some welcome tax relief for low-income investors, but only if they take the initiative to look out for themselves.

The law was designed primarily to align new income tax rates with the withholding tax levied on bank account interest. But account-holders will have to nominate their correct tax level or they will be assigned the highest withholding tax level of 38%. This applies to all new accounts opened from 1 April 2010, and for all other accounts from 1 April 2011.

However, the new tax rates also apply to income derived from Portfolio Investment Entities (PIEs), including most KiwiSaver accounts.

For those investors earning $14,000 p.a. or less in ordinary income, which would include the vast majority of the 200,000 under 18 year olds enrolled in KiwiSaver schemes, the PIE tax rate will drop from 19.5% to 12.5%. But, the KiwiSaver providers can’t assume to know what it's members income situation is, so the investors must take the initiative to contact their KiwiSaver providers and confirm their eligibility for the new lower rate, in order to avoid being overtaxed.

There is another quirk in the new legislation too that allows those who have earned $14,000 p.a. or less in either of the two previous income tax years (1 April to 31 March of the following year) immediately before the relevant tax year, to earn up to $48,000 from PIE investments that would be taxed at the low rate of 12.5%. A distinct opportunity for school leavers earning less than $48,000 p.a. for the initial 2 years in the workforce to gain some additional tax relief on their KiwiSaver investments.

The new RWT rates from 1 April 2010 will be:

*From 1 April 2010 interest payers have the option to withhold RWT for companies at the rate of 30%. Interest payers are required to withhold RWT for companies at 30% from 1 April 2011.

If you're currently receiving interest which has RWT deducted at the rate of 19.5% you'll be automatically moved to the new 21% rate from 1 April 2010. If you expect your annual taxable income to be $14,000 p.a. or less or over $48,000 p.a. from 1 April 2010, you may want to change your RWT rate to the appropriate 12.5% or 33% rate.

You should only elect the 12.5% rate of RWT if you expect your taxable income for the whole tax year (1 April to 31 March of the following year) will be $14,000 or less. If you claim the lower rate and then earn over the threshold amount you may end up with a tax bill next year.

If you want to change your RWT rate, you'll need to do this by contacting your bank or investment provider from 1 April 2010.

If individuals or businesses fail to provide their IRD number and/or elect an RWT rate for new bank accounts opened from 1 April 2010, they will have RWT deducted from the new account at the new no-notification default rate of 38% until they do provide the necessary information.

However, if the IRD consider that you're having RWT deducted at a rate that is inconsistent with your level of income, they may contact your bank or interest payer and advise them to correct your rate.

PIE changes

New prescribed investor rates (PIR) will also apply for income years commencing on or after 1 April 2010.

New PIRs from 1 April 2010

To work out your PIR for the 2011 income tax year (1 April to 31 March of the following year) you need to use your taxable income from either of the two previous income years. See below for the different income thresholds and PIRs.

Taxable income was $14,000 p.a. or less …

If your taxable income was $14,000 p.a. or less, and your taxable income plus your PIE income or loss was:

·       $0 to $48,000 p.a. in either of the previous two income years, your PIR is 12.5%

·       $48,001 to $70,000 in either of the previous two income years, your PIR is 21%

·       $70,001 p.a. or more in both of the previous two income years, your PIR is 30%.

Taxable income was $14,001 to $48,000 …

If your taxable income plus your PIE income or loss was $0 to $70,000 p.a. or less in either of the previous two income years, your PIR is 21%.

If your taxable income plus your PIE income or loss was $70,001 p.a. or more in both of the previous two income years, your PIR is 30%.

Taxable income was more than $48,001 …

If your taxable income plus your PIE income or loss was any amount in each of the previous two income years, your PIR is 30%.

If your taxable income plus your PIE income or loss was $70,001 p.a. or more in both of the previous two income years, your PIR is 30%.

To find out more visit - www.ird.govt.nz

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