39% personal tax rate legislation introduced

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:

• A new Fringe Benefit Tax (FBT) rate of 63.93% for all-inclusive pay above $129,6­­­81 and the single rate and pooling of non-attributed fringe benefit calculations.
• A 39% Resident Withholding Tax (RWT) rate for individuals on interest income.
• An Employer Superannuation Contribution Tax (ESCT) rate of 39% on superannuation contributions for employees whose ESCT rate threshold amount exceeds $216,000. (The ESCT rate for contributions in respect of past employees and contributions to defined benefit schemes will also be 39%.)
• A 39% Residential Land Withholding Tax (RLWT) Rate (on residential land sales by offshore persons within the bright-line period), except where the vendor is a company.
• A new 39% non-declaration rate for taxable Maori Authority distributions, where a member has not provided an IRD number.

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:

• Financial information, including profit and loss statements, balance sheet items, and other information to be specified by the Commissioner (for example, any transfers to the trust by associated persons).
• Distribution, including non-taxable distribution, information, such as identity details for beneficiaries – e.g. their name, IRD number and date of birth. Inland Revenue could also require other information relating to distributions to be reported, which could include, for example, the source of the distribution.
• Settlement information, including identity information for settlors such as name, IRD number and date of birth, as well as the amount and nature of each settlement. In addition, for the 2021–22 tax return year, trustees will need to provide settlor details from prior years, if not provided to Inland Revenue already.
• Identity information on those with the power under the trust to appoint or dismiss a trustee, to add or remove a beneficiary, or to amend the trust deed.

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:

• Businesses will need to attribute benefits to employees if businesses want to avoid a 30% FBT increase for those on a less than $129,681 package. This will increase compliance costs for employers, especially those who have not used the attribution method in the past. It may mean that employers prefer cash remuneration where possible.
• The 39% ESCT rate for past employees will be penal. Only 2% of taxpayers are expected to be earning more than $180,000, so the new rate will over tax most superannuation contributions. This is especially the case for defined benefit schemes.  Many will be in “pension” phase so that the total income earned by pensioners is likely to be less than $180,000 per year. In many other cases, the benefit of the income of the fund is for the employer who is liable for any shortfall for pensioners. The tax rate for many employers is 28%. The ESCT rate change over-taxes.

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.