Navigating the New Zealand Budget 2024/25: what does it mean for small business owners?

The 2024/25 budget has been a topic of significant interest, especially for small business owners who are the backbone of the economy. With the budget announcement, there are several key takeaways that small business owners should be aware of. ​

The government has announced that the personal income tax and independent earner tax credit (IETC) will differ starting July 31, 2024. They're also going to change how much money families can get from the Working for Families scheme (WFF), in-work tax credit (IWTC) and the minimum family tax credit (MFTC). Because of these changes, the taxes such as Fringe Benefit Tax (FBT, businesses pay on the benefits they give their employees like a company car), and the resident withholding tax (i.e. tax on interest and dividends), will also be affected.​

Here below is the new tax rate thresholds on personal income:  ​

Provisional tax stays the same unless you choose to estimate. It's best to talk to your accountant about this, but in most cases, we recommend sticking with the Standard option. This way, you won't risk having to pay extra interest or fines.​

If you're using AIM, your accounting software provider (e.g., Xero) will update your tax rates for you, so you won't need to do anything.​

Read more: Residual vs Provisional vs Terminal taxes - confused?​

For the 2024/25 income year, we will need to use a transitional rate to reflect the threshold changing during the year. The transitional rate applies to the income that falls between the old and new tax range and has been calculated based on the number of days the old and new rates apply to that income.​

Don’t worry, we will calculate this for you. If you’re not working with an accountant, register for Beany today.​

Unfortunately, you cannot split your income by the month it was earned. So, when you do your taxes, there might be a bigger difference than usual. This means you could get a bigger tax refund or you might have to pay more tax, depending on when you earned the money.​

No matter when your balance date is, the same transitional rates will be used for all tax returns for March 2025. This means you don't have to worry about using different rates for different balance dates, and you won't have to make any changes to tax returns for other years.​

RWT rates follow the same thresholds and rates as personal income tax so the RWT thresholds will change on 31 July 2024. The RWT will be squared up as part of your 2025 tax return.​

New thresholds to align with the personal tax rate thresholds will apply from 1 April 2025.​

FBT can be complicated. We recommend checking in with your accountant on your situation.​

Read more: What is fringe benefit tax?​

Portfolio investment rate (PIR) thresholds will change from 1 April 2025 to reflect the personal income tax threshold increases. The table below shows the new rate.​

One of the most notable changes in the budget is the expansion of eligibility for the Independent Earner Tax Credit (IETC): it extends the income limit to $70,000 per annum*. This adjustment is set to benefit an additional 420,000 individuals, including small business owners who don’t receive Working for Families, main benefits, or Superannuation. ​

*The independent earner tax credit (IETC) is a tax credit available to those New Zealand tax residents earning income (after expenses and before losses) between $24,000 and $48,000 and who are not in receipt of Working for Families Tax Credits, NZ Superannuation, a veteran’s pension, a main benefit, or an overseas equivalent of any of these. ​

The credit is based on whole months of eligibility. If, at any time during  a month, a customer received one of the exclusion types of income, they are not entitled to any IETC for that month. ​

Whilst the lower threshold of $24,000 is not changing, the upper threshold is increasing to $70,000, with abatement taking effect from income earned over $66,000. ​

The maximum annual entitlement remains at $520.​

As this change is also taking effect during the financial year, there will be a transitional calculation similar to the income tax. The eligible months will be calculated on an annual basis rather than working out how many months you are eligible for in each threshold period.​

If you are not sure how to calculate this, get in touch with your accountant or sign up for Beany. ​

Read more: What is Independent Earner Tax Credit and how do I get it?​

The budget has introduced changes to the Working for Families tax credits, which are expected to impact small business owners positively: ​

On one hand, it may lead to increased consumer spending, benefiting small businesses that cater to family needs. On the other hand, it provides more disposable income for families and stimulates economic activity. ​

Read more on Working for Families on IRD’s website.​

There’s also an increase in funding for IRD audits over the next 4 years. This is to strengthen audit activity with a particular focus on the hidden economy and debt collection. If you have any concerns regarding this, please get in touch with your accountant. If you are not working with an accountant, contact us or sign up today.​

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