The money go-around

Let’s look at an example of how the budget will affect a typical business. Let’s say it turns over $5,000,000 a year and makes a 10% profit before tax. That is $500,000. Now the 3% reduction in corporate tax means their tax bill will drop by $15,000.

Of the $4,500,000 in expenses, assume half is salaries. That is $2,250,000. And assume all the staff are intelligent and take up Kiwi Saver. That means the employer has to contribute 4% or $90,000. Start to see the problem?

Now the $90,000 will be helped with the tax offset. Let’s say you have 35 staff so the tax credits are $36,400. That still leaves you paying $53,600. Now the tax will reduce by 30% so your net cost is $37,520.

So Dr Cullen’s $15,000 tax reduction has been not just wiped out but with $37,520 of net kiwisaver contributions, you suddenly are $22,520 worse off.

The after tax profit was $335,000. Now it is $312,480. So your after tax profit has dropped 6.7% when it was meant to increase by 4.5%.

So Dr Cullen has in this example imposed extra costs on business equal to increasing the corporate tax rate by around 5%.