Tax cuts: How much extra you will get?

David Hall and Anne Mason say changes to tax rules for investment properties will probably have a slight effect on their finances. Photo / Christine Cornege

Tax calculator – how the Budget affects you

CASE STUDY 1: LOW INCOME EARNER

Low-income couple Munish and Sarah Pathak have gained almost twice as much as expected from the Budget, despite paying GST even on their rent.

They will gain almost $27 a week from the income tax cuts, about $6 a week more than expected, because the tax rate on income between $14,000 and $48,000 a year has been cut from 21 per cent to 17.5 per cent instead of the predicted 19 per cent.

They will still pay an extra $14 a week in GST, as expected. But their net gain from the tax switch alone will now be $13 a week compared with the $7 they expected.

Mr Pathak, 26, works for 60 hours a week at $13.26 an hour, just above the minimum wage, as a security guard at Auckland City Hospital. He earns $41,371 a year gross, giving him almost the maximum benefit from the cut in the 21 per cent tax rate.

His wife, Sarah Pathak, 20, is a fulltime nursing student on a student allowance of $150 a week. Her allowance will go up by $3 a week in line with a 2 per cent increase in all benefits to compensate for the GST hike.

The couple pay $245 a week for a room in a hostel. Rents in such long-stay accommodation are subject to 60 per cent of the standard GST rate, so the GST on their rent will go up from 7.5 to 9 per cent.

Their net $13 gain could still be wiped out if their rent and other costs rise by more than 2 per cent.

Their landlord, Abacus Unitel general manager Mike Newman, said this week that their rent would rise by more than that because he held off the annual adjustment in February so he would not have to raise prices twice in one year.

"I don't think there will be enough balance," Mr Pathak said last night.

"With increasing GST, that means an increase in everything else like your rent. The tax cuts are not going to give you that much money anyway, so it will be pretty much the same thing."

CASE STUDY 2: AVERAGE INCOME EARNERS

Average-income couple David Hall and Anne Mason will be only marginally better off after yesterday's Budget - and could end up worse off depending on the impact on their investment property.

Mr Hall, a Hamilton teacher, earns the average wage of $50,000 a year. Ms Mason earned $12,000 last year as a part-time English teacher for foreign students, making their household income only fractionally short of last year's national median of $63,900.

Figures released with the Budget show that, if they have a typical spending pattern, they will pay $19 a week in higher GST from October, but income tax cuts of $25 a week will put them $6 ahead.

But they could be hit by three other changes.

First, they will get slightly less in Working for Families tax credits than they might have expected because the $36,827 income level at which credits start reducing has been frozen, instead of adjusting with inflation.

Second, they benefit from the 20 hours free childcare policy for most of the 24 hours a week that their 3-year-old spends in childcare. They are unsure how the Budget's changes in childcare funding will affect them.

Third, they own an investment property through a loss-attributing qualifying company, which currently allows them to deduct losses at Mr Hall's marginal tax rate of 33 per cent but have their profits taxed at the company rate of 30 per cent.

The Budget will make their company a "flow-through" entity. This appears to mean that Mr Hall's new marginal tax rate of 30 per cent will apply to both losses and profits.

"It will probably affect us slightly," Ms Mason said.

She noted that experts thought the Budget was "good for the economy".

"We might start spending more and feel more relaxed."

CASE STUDY 3: SUPERANNUITANTS

Superannuitants Les and Ngaire Williams will get a double boost from the Budget - they get the same tax cuts as everyone else, plus a 2 per cent lift in their pension.

World War II veteran Mr Williams, who is 90 next month, and his wife, 77, rely largely on their married superannuation of $489.42 a week, apart from a small "something in the bank".

Their super will go up in October to $511.06 after tax, a rise of 4.4 per cent, because of the combination of tax cuts and a 2.02 per cent increase in the actual rate of super.

They could also be hit harder than usual by the GST increase because they own their own house. The GST hike will be softened for many younger people still paying rent or mortgages, because rents and mortgage payments are generally exempt from GST.

But Mr Williams said the couple managed on their existing pension and were "not great high flyers".

Even if they spent their entire pension on items subject to GST, their GST bill would go up in October by only $10.87 a week, leaving them $10.77 a week better off.

Mr Williams was sceptical last night.

"They get out and quote a lot of figures but you have no way of checking on those figures whatsoever," he said.

"I thought Key shouldn't have gone on the way he went when he was going at Goff [on TV]. I thought Goff put it over quite well."

Other welfare beneficiaries will not get the same double benefit as superannuitants. For example, the gross unemployment benefit for a single adult will actually be cut by $5 a week to offset the tax cuts and keep the increase in the net benefit to just 2.02 per cent - up from $194.12 a week to $198.04.

Gross benefit rates will also be cut to keep the net increase to 2.02 per cent for sickness, invalid and domestic purposes benefits and student allowances.