The drop in the company tax rate to 28% and the timing of the cut was unexpected. By introducing the tax cut from the start of the 2011/12 income year New Zealand beats Australia to the jump.
In a move similar to the previous cut in the company tax rate there will be a transitional period of two years during which companies can attach imputation credits arising from tax paid at 30% at an imputation ratio of 30/70.
As with the cut in personal tax rates, any company provisional taxpayer that pays provisional tax based on the standard upift basis – that is, based on a prior year tax liability – will have its standard uplift automatically adjusted to take into account the personal tax cuts.
Thin Capitalisation
For foreign investors into New Zealand who debt-fund their New Zealand business, the reduction in the acceptable percentage for thin capitalisation purposes to 60% from 75% is significant.
In many cases the balance sheets of overseas owned companies will need to be recapitalised to ensure the level of interest bearing debt in proportion to the total value of assets does not exceed 60%. Where the level of debt is higher than 60% the interest expense attributable to portion of the debt in excess of the thresholds is non-deductible.