Tax rate changes
In a move that was well telegraphed by the finance minister, personal income tax rates are changing today (as in, 31 July). The line was much touted during electioneering was that they were combatting ‘bracket creep’– this is effectively where the effects of inflation cause your personal tax rate to increase – as your income and costs go up because of inflation, the tax brackets stay at the same place meaning effectively you pay more. It is also often referred to as ‘taxation by stealth’.
The last time these brackets were adjusted to account for inflation was 2010 – 14 years ago. At that time, the median income of New Zealanders was a smidge over $40k. In June 2023, it was a smidge over $66k. And the tax on those amounts? Stay with me here, we’re going to get a bit maths-ey for a moment; the 2010 median earner would have been paying $6,090.70 in tax –an effective tax rate of 15%, while the 2023 median earner paid $12,878.80 in tax, an effective tax rate of 19%. Had the tax brackets kept in line with inflation, the 2023 median earner would have had a tax bill that was around $2,600lower.
As much as we are no fans of this stealthy tax increase, there is another side of the coin. Presently NZ has a deficit of infrastructure of just about every kind. Whenever it rains, sewage flows into the waterways around our major cities, our roads are simultaneously unsafe and congested, there is insufficient public transport, the academic achievement at our schools is falling, our police force has low morale, and we are unable to staff our dilapidated hospitals. So the other side of the coin is; should we be investing more into NZ rather than addressing this tax bracket creep?
It’s a moot point now as it comes into effect today. For anyone we prepare tax returns for, we will take this into account for your 2025 tax returns. If you have staff and are using payroll software, the software *should* sort this out automatically and you will only need to update any automatic/recurring payments to staff. And for those of you still working out PAYE manually, time to join the 21st century!
(In)solvency
The commencement of liquidation proceedings against the high-profile Auckland eatery SPQR grabbed plenty of headlines over the last couple of weeks. It was pointed to as an example of how tough the hospo industry is doing it right now and spurred on more calls for interest rates to drop.
However, what has garnered somewhat less fanfare is the contents of the Liquidators First Report. And this should serve as a cautionary tale for anyone in business. The Liquidators First Report showed that the owners had withdrawn $1.4 million out of the business, and the business was owed a further $1.2 million from ‘related parties’. Put simply, all of the available cash had been taken out by the owners – not in the form of salaries or dividends, but in ‘advances’ from the business to the owners.
This becomes a cautionary tale for two reasons. First off, the deficiency of cash was a significant contributor to the failure of SPQR. But secondly, the owners may well end up on the hook for that cash. At the very least, they are in for a decent whack of legal bills. From time to time, we point out to people that they are drawing out too much cash from a business. We don’t do that because we are stingy fun-sponges (or at least not ONLY because of that). When we make this recommendation, we do so to try to help you avoid the type of train wreck that SPQR has become.