New Zealand – Budget Contains New Personal Tax Thresholds, Implications for FBT, ESCT

Why this matters

The higher tax thresholds will mean a potential decrease in taxpayers’ liability.

However, there will likely be an increase in compliance costs and administration to implement this, and the changes may give rise to other unintended consequences.  Companies with international assignees may therefore see a change in their assignment-related costs.

For assignees who are on assignment (or soon will be) to New Zealand and assignees working outside New Zealand (or who soon will be) but who are still subject to New Zealand tax, international assignment cost projections and budgeting should reflect these changes once they come into effect.  Where appropriate, adjustments to tax equalisation packages and withholdings may need to be considered.
 

KPMG Insights

Businesses should not assume that their payroll software or payroll provider will have these changes under control.  There are a number of practical issues to consider, including:

• Making sure that payroll / HR teams are aware of the composite tax rates and thresholds, as well as the consequential FBT / ESCT impacts, as there may well be questions from employees around how different remuneration components are taxed and the impact on their net pay (particularly if lump-sum payments, such as bonuses, are expected towards the end of the tax year).  The composite rates and thresholds could result in overpayments and underpayments of PAYE for the year, not anticipated by employees, which will need to be squared up through a tax return or as part of Inland Revenue’s auto-calculation.
  
  
• Whether FBT should be calculated using the attribution option, rather than the standard rate, in the 2024/25 year to reduce the FBT costs.  This is likely to depend on the types of benefits provided, the effective marginal rates of affected employees, and the compliance costs of the different FBT methods.
  
  
• There is the ability for employers to deduct PAYE rather than ESCT on KiwiSaver contributions. However, as the ESCT thresholds are 20 percent greater than the PAYE thresholds, changing methods may not yield a better tax outcome for employees.

Employers with questions about the tax measures in the Budget and their impact on the organisation’s payroll function may wish to consult with their usual tax professional or a member of the tax team with KPMG in New Zealand (see the Contacts section).