November Tax Alert

Article

What a new Government and Minister of Revenue means for tax

Tax Alert - November 2020

By Robyn Walker and Blake Hawes
 

The general election in October provided for a number of potential tax changes depending on the outcome of the voting process. With the results being a clear majority for the Labour Party, we can now expect to see election proposals translated into actual policy. So, what were the proposals for tax:

  1. A new top rate of 39% on income earned above $180,000 from 1 April 2021
  2. No new taxes or any further increases to income tax over the next term
  3. Closing loopholes so multi-national corporations pay their fair share

The most significant, and most pressing, of these is the introduction of a new 39% personal tax rate from 1 April 2021.

While a new tax rate and threshold may seem like a fairly simple change which should require minimal work, like most things to do with tax, the reality is surprisingly more complex than just putting $180,000 and 39% into Schedule 1 of the Income Tax Act 2007. The reason for this is that our tax system is made up of a range of withholding taxes which are designed to withhold tax at source at a rate which best approximates the marginal tax rate of the recipient. So despite the 39% rate only being expected to impact 2% of individuals, all the withholding tax regimes will likely need to adjust to accommodate the new rate.

A change to add in a new rate won’t just require PAYE tables to change but it is expected to also mean new rates and thresholds for all other employment taxes, such as:

  • a new 63.93% top fringe benefit tax (FBT) rate
  • either a new rate for employer superannuation contribution tax (ESCT) or a reintroduction of a previously repealed fund withdrawal tax
  • a new rate of retirement scheme contribution tax (RSCT)

Other taxes applying to individuals also need to be considered, for example:

  • a new resident withholding tax (RWT) rate for interest
  • whether the RWT rate for dividends should move to 39% (it is currently set at 33%)

From a practical perspective, this will require some swift legislation in order to allow taxpayers (and their tax software providers) to be ready come 1 April. Most critically, employers will need to ensure payroll software is upgraded for the new rates.
 

Structuring considerations

An inevitable outcome of an increase in tax rates is that some people who the tax is designed to target will relook at how they earn their income and will consider whether there is a more “tax efficient” way to structure their affairs.

The most obvious point here is that there has been a clear signal that it will only be the personal tax rates changing and the company tax rate will remain at 28% and the trustee rate will remain at 33%. Moving income from being earned personally to being earned through an alternative vehicle is an option for taxpayers to consider.

The eleven percent difference between the top personal tax rate and the 28 percent company tax rate may be irresistible to some high earners; however, any moves to restructure to transact through companies or trusts comes with a tax avoidance warning. Any restructuring which is undertaken for predominantly tax reasons is likely to be reviewed by Inland Revenue. Upon the release of its tax policy the Labour Party put out this warning:

“We are not going to increase the trust rate because there are legitimate reasons for people to use trusts. But if we see exploitation of the trust system then we will move to crack down on those people who are exploiting it. The Government has invested more than $30 million into IRD’s capacity to go after people dodging their tax obligations, and we will continue this work.”

A New Minister

Earlier in the week we found out the details of who holds the portfolios in the 53rd Parliament. After 3 years looking after revenue (amongst other important portfolios), Hon Stuart Nash has relinquished the title of Minister of Revenue, with Hon David Parker stepping in. Minister Parker has some experience in tax, having served on the Finance and Expenditure Committee from 2002 to 2005 and 2011 to 2014; while also holding portfolios which are complementary to his new revenue portfolio, including being Associate Finance Minister and the Minister of Trade and Export Growth in the 52nd Parliament. The new Minister has a commerce and law background, which will come in handy in his new revenue portfolio.

On top of the change to the top personal tax rate and the potential introduction of a digital services tax, the new Minister will have some other pressing priorities:

  1. Coming to grips with the Inland Revenue’s Business Transformation project
  2. Completing work on previously announced COVID-19 reforms, including the introduction of a “same or similar business test” for the carry forward of tax losses
  3. Having the Taxation (Annual Rates for 2020-21, Feasibility Expenditure and Remedial Matters) Bill reinstated and completing its Parliamentary processes before 31 March 2021
  4. Setting a new tax policy work programme

With COVID-19 leaving gaps in the revenue base and rising debt that will need to be repaid, the continued ability to efficiently and effectively collect taxes takes on greater significance. While the Labour Party tax policy was fairly short, it will continue to be a busy portfolio because, as they say, tax policy never sleeps.

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