New Zealand First wants to slash the tax rate for businesses with turnover below $30 million from 28% to 20%, but behind the headline number lies a crucial question for hundreds of thousands of New Zealanders: would every small-business owner actually receive the 20% rate?
NEW ZEALAND: New Zealand First has put business tax firmly into the election campaign by proposing a significantly lower tax rate for businesses with annual turnover below $30 million.
The party is campaigning on reducing the rate to 20%, compared with the 28% company tax rate currently applying to most New Zealand companies.
RNZ reported that New Zealand First estimates the policy would cost the Crown around $1 billion a year and apply to businesses with turnover below $30 million.
On the surface, the calculation appears simple.
For a qualifying company making $100,000 in taxable profit, an eight-percentage-point reduction would mean company income tax falling from $28,000 to $20,000, leaving an additional $8,000 inside the company.
At $500,000 of taxable profit, the difference would be $40,000.
At $1 million of taxable profit, it would be $80,000.
But turnover is not the same as profit, and company tax is not necessarily the final tax ultimately paid by a business owner.
Those distinctions could become some of the most important details if the policy progresses beyond the election campaign.
First question: what exactly counts as a small business?
The proposed $30 million turnover threshold is striking because it captures businesses considerably larger than what many New Zealanders might traditionally picture when they hear the term “small business”.
A company could, for example, generate $20 million or $25 million in annual sales and still fall below the proposed threshold.
Turnover, however, tells only part of the story.
A supermarket, construction company, wholesaler or transport operation could have millions of dollars in annual revenue while operating on relatively narrow profit margins.
A professional services company might have much lower turnover but a significantly higher profit margin.
That means the $30 million test is primarily determining eligibility according to sales, not how much money the business ultimately earns.
The overlooked issue: sole traders are taxed differently
This is where the proposal becomes particularly important for genuinely small operators.
New Zealand does not currently apply one universal tax rate to everyone running a business.
Inland Revenue says most companies pay company income tax at 28%.
But people operating as sole traders are different.
Self-employed New Zealanders generally pay tax on their net business profit using the individual income-tax system, rather than the company tax rate.
Current individual rates rise progressively from 10.5% to a top rate of 39% on income above $180,000.
That includes many contractors and sole traders.
So simply announcing that the “small-business tax rate” would become 20% does not by itself establish that every self-employed New Zealander would suddenly pay 20%.
The final policy design would need to spell out exactly which legal structures qualify.
Why business structure could suddenly become much more important
If the proposed rate applies specifically to companies, an eight-percentage-point gap between the standard 28% company rate and a new 20% rate could create a substantial incentive for businesses to structure themselves so they qualify.
An even larger difference could exist between a 20% company rate and the 39% top personal income-tax rate.
That does not automatically mean an owner could simply put all their income through a company and permanently pay only 20%.
New Zealand’s tax system already contains rules designed to address income being redirected through companies or other entities to obtain a lower tax rate.
Inland Revenue’s personal-services attribution rules, for example, can in certain circumstances attribute income earned through an associated entity back to the individual performing the work.
The reason is straightforward: without such rules, somebody earning high personal income could potentially establish a company and attempt to have income taxed at the lower company rate.
A new 20% rate could therefore require careful accompanying rules.
A 20% company rate does not necessarily mean owners ultimately pay only 20%
There is another distinction that can disappear in political discussion about company tax.
Company tax and the ultimate taxation of shareholders are connected through New Zealand’s imputation system.
When a company earns profit, it pays company income tax.
If those after-tax profits are later distributed to shareholders as dividends, the tax already paid by the company can generally be attached as imputation credits.
Depending on the shareholder’s personal tax position, additional tax can then become payable.
That means reducing company tax to 20% could provide businesses with substantially more cash to retain and reinvest, but it would not necessarily mean every dollar eventually taken by an owner for personal use is taxed at only 20%.
The distinction between retained company profits and money ultimately distributed to owners will therefore matter.
What could businesses do with the extra cash?
Supporters of lower company taxation generally argue that leaving more money inside businesses can encourage investment.
A company paying less tax could potentially use the additional cash to:
- purchase equipment or technology;
- repay debt;
- increase working capital;
- expand into another location;
- hire additional employees;
- increase wages;
- develop new products; or
- build financial reserves.
But none of those outcomes would happen automatically.
A tax reduction increases the amount of after-tax profit available to a business. Decisions about whether that money is reinvested, retained or eventually distributed to shareholders remain with the business.
That distinction matters when assessing claims about the wider economic benefits of the proposal.
An $8,000 difference for every $100,000 of company profit
The direct company-level effect is easier to understand.
For every $100,000 of taxable company profit:
Current 28% rate
Tax: $28,000
After-tax company profit: $72,000
Proposed 20% rate
Tax: $20,000
After-tax company profit: $80,000
Difference retained by the company: $8,000
For a qualifying company earning $250,000 taxable profit, the difference would be $20,000.
For $500,000 profit, it would be $40,000.
And at $1 million taxable profit, the difference would reach $80,000.
Again, those calculations concern tax at the company level and do not account for any additional tax consequences when profits are distributed to shareholders.
Why the $30 million threshold could create another challenge
Any sharp tax threshold can influence behaviour.
Under the proposal as currently described, a business immediately below $30 million turnover could potentially qualify for a substantially lower tax rate while one immediately above the threshold might not.
How that boundary operates would therefore matter.
Would exceeding $30 million mean the entire company’s profit becomes subject to the higher rate?
Would there be a transition mechanism?
How would related companies be treated?
Could a business split activities between multiple companies?
Would associated entities have their turnover combined?
These are technical questions, but they become economically significant when eight percentage points of company tax are at stake.
Detailed legislation would normally need anti-avoidance and associated-person provisions to ensure businesses cannot artificially reorganise themselves solely to fall below the threshold.
NZ First has previously focused on small business
The proposal fits with New Zealand First’s longstanding positioning around smaller businesses.
Its 2023 small-business policy proposed redefining small and medium enterprises from 19 employees to 50 full-time equivalent staff, alongside tax simplification and other measures.
During parliamentary debate in 2023, New Zealand First also highlighted the importance of businesses employing fewer than 20 people to the New Zealand economy.
The new $30 million turnover proposal therefore represents a different way of drawing the boundary around businesses eligible for targeted assistance.
The billion-dollar question
There is also the fiscal cost.
RNZ reports New Zealand First puts the cost of the policy at around $1 billion annually.
That makes the proposal about more than businesses alone.
A permanent reduction in tax revenue ultimately has to sit within the Government’s wider fiscal position.
The relevant questions therefore include whether the revenue reduction would be funded through lower spending, additional revenue elsewhere, stronger economic activity, increased borrowing, or some combination of those options.
The eventual fiscal modelling behind the $1 billion estimate will be important in assessing the proposal.
What we still need to know
The headline promise is clear: New Zealand First wants qualifying businesses to face a 20% tax rate.
The detailed tax architecture is less clear from the initial announcement.
For business owners, some of the most important questions are therefore not simply whether 20% sounds better than 28%, but:
Which business structures qualify?
Would sole traders receive equivalent treatment?
How would dividends and imputation work with the lower rate?
Would related companies have their turnover combined?
What happens when a business crosses the $30 million threshold?
What anti-avoidance rules would prevent artificial restructuring?
And how would the Government replace roughly $1 billion in annual revenue?
Those details will determine whether the proposal ultimately operates as a targeted small-business incentive, a much broader company tax reduction, or something between the two.
For New Zealand’s small-business owners, the difference could be substantial.
Source: RNZ; New Zealand First; Inland Revenue. Additional analysis and reporting by Webfit News.
