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Who is affected and when
If your income is taxed at the company rate then you'll be affected by the change. See Taxing companies to see if this applies to you. The change takes effect from the start of your business's 2012 income year. For most, this is from 1 April 2011.
What aspects of your tax are affected
The change of rate affects:
- calculation of income tax (including provisional tax)
- allocation and use of imputation credits
- the rate of other tax types that are based on or linked to the company tax rate.
Calculation of your income tax
If you pay tax at the company rate, all income you receive from the start of your 2012 income year is taxed at 28%. Instructions for the following annual income tax returns will be updated at the relevant times, for you to use the correct rate:
- Companies (IR4)
- Clubs and societies (IR9)
- Registered superannuation funds (IR44).
You need to start using this reduced rate from when you calculate your first 2012 provisional tax payment onward. (The specific dates for these depend on your business's balance date.) The rate change affects provisional tax calculations differently depending on whether you are using:
- the standard option (see Provisional tax basics), or
- the new ratio option (see Changes to provisional tax).
(The Estimation option means the new rate is automatically taken into account.) Read our Provisional tax guide (IR289) and Tax Information Bulletin Vol 22 No 7 (August 2010) for more information.
The company tax rate change affects imputation in a range of ways. Even if the tax payments that generate imputation credits are made at the previous rate of 30%, those credits might not be distributed until after the new rate has started to apply. This means a set of transitional rules are needed, to cover the changeover to the new rate.
The area of imputation affected most is the maximum imputation ratio, which the new rate sets at 28:72. We have allowed a rate changeover window, during which you can allocate credits that relate to tax paid at 30% at the previous maximum ratio. This prevents any potential disadvantage to your shareholders.
Find out more about how the company tax rate change affects imputation for:
- companies distributing imputation credits attached to dividends, and
- shareholders receiving and claiming those credits.
Read the Tax Information Bulletin Vol 22, No 7 (August 2010) for more information.
Related rates linked to the company tax rate
A range of other tax rates are based on or linked to the company tax rate. The following tax activities are affected:
- 2010/11 closing balances for BETA (branch equivalent tax accounts) (IR408) and Conduit tax relief (IR406) will be multiplied by 28/30 to adjust them for the new rate.
- Calculations of FITC (foreign investor tax credits) are affected by the transition to the new maximum imputation ratio.
The following rates also change to 28%, parallel with the new company tax rate:
- income tax rate for widely held savings vehicles (an existing category of businesses redefined in the new legislation)
- the maximum PIR (prescribed investor rate) for investors in a PIE (portfolio investment entity) from 1 October 2010.
- FDP, being the rate for income received up to the end of the 2012 year, in the form of dividends from an overseas company of which you are a shareholder.
For companies that pay FDP and have a non-standard balance date, be aware that the new rate applies from the start of your 2011-12 income year. If your balance date falls part-way through a quarterly payment period, then you will need to calculate your FDP based on which income year the dividends were received.
For example, your balance date is 31 August, and you received some dividends during July or August 2010, and some during September 2010. When calculating your 30 September quarterly payment, use the previous 30% rate for those received before your balance date (July/August), and the new 28% rate for those received after it (September).
The affected returns and forms will be updated at the relevant time, for you to submit the correct information. Read the Tax Information Bulletin Vol 22, No 7 (August 2010) to get the full details.
Business structure changes
The rate change may prompt you to consider changing your business structure. Seek advice from your professional adviser or tax agent if you are considering:
- changing your balance date.
In either case, you will need to comply with a range of rules and accounting adjustments.