The Government yesterday introduced, under Parliamentary urgency, legislation for the new 39% personal tax rate on income above $180,000. The new rate will apply from 1 April next year (the 2021-22 income year).
The Taxation (Income Tax Rate and Other Amendments) Bill also contains a number of consequential amendments:
All bar the RWT rate change will also apply from 1 April 2021. There is no change to PIE tax rates for individual investors or to RWT on dividends.
Both the company and trust tax rates are unchanged at 28% and 33%, respectively.
However, Inland Revenue has new information gathering powers for trusts (other than certain exempt categories, such as charitable and non-active trusts). As part of the annual income tax return, information required to be disclosed will include:
In addition, Inland Revenue will have the power to request a trustee to provide prior year information for up to seven years (i.e. from the 2014-15 to the 2020-21 income year), if it is within their knowledge, possession or control.
Labour’s signature election tax policy was a new 39% personal tax rate. That has now been implemented, with effect from next year.
What was unclear, as part of the election policy announcement, were other rate changes, if any. That has been clarified, in part.
As expected, other employment related tax rates, such as for FBT and ESCT, have been aligned. A couple of observations:
The RWT rate for interest has been increased for individuals, but from 1 October 2021 to give lenders additional time to update systems. The rate for dividends remains at 33%. Those receiving taxable dividends may have to pay provisional tax. There is no transitional rule to assist those who may see an uplift in their provisional tax obligations.
The RLWT rate increase is also not unexpected, particularly given the recent focus on the residential property bright line test and compliance with it.
The company and trust rates are unchanged, but with a clear shot across the bow for trustees. Inland Revenue will be watching closely the use of trusts. The new information requirements for trustees (with penalties for non-compliance) will help Inland Revenue.
The Commissioner will have the power to request information for past years, if that is available. It is yet unclear how this discretionary power will be applied by Inland Revenue and what other information may be sought, and from whom. Trustees will need to be prepared. Further, trustees should consider the combined impact of these changes with the new Trust Act 2019 on their obligations and administration of the trust.
There should be an immediate focus on the effect of the new 39% rate and the consequential changes on how businesses and employers operate. There are obvious effects on remuneration policies – not only the tax itself but also compliance.
The additional 6% for a payment made on 1 April 2021 (a Thursday) compared to one made on 31 March 2021 will raise practical problems for pay days and dividend payments. The trade-off for early payments will be whether they can be targeted to those directly affected or whether payments to all employees or shareholders need to be made. Timing changes will affect cashflow at a time when COVID continues to mean uncertainty.
What is not clear is whether these are the only consequential changes.
A continued focus on trusts has been signalled. Any changes will depend on behavioural changes, if any. However, any tax law changes may not be quick – it will take time for the behavioural change to become obvious to Inland Revenue and for law changes to be made.
Accordingly, we expect that Inland Revenue will consider the use of section BG 1, the general anti-avoidance rule, more often. This will create more uncertainty as it is not clear what specifically the 39% rate policy change intends is acceptable behaviour for trusts.
The election policy does limit further changes. However, the Tax Working Group raised concerns regarding the use of companies so that the 33% tax rate does not apply. A 39% rate, albeit limited in its application, is a greater difference (from the company to the top personal rate).
We therefore expect to see a focus on “base maintenance” measures which will be justified as applying to tax avoidance. In our view, it is not so simple. Any moves to further tax interactions between companies and shareholders will raise fundamental questions. Not least, why are capital gains distributed by companies taxable when we do not have a capital gains tax?
The answers to these questions, although not “blowing in the wind”, may arrive soon enough.