Tax rate change enacted along with big-brother information gathering powers

By Robyn Walker and Veronica Harley
 

The Government is currently in the process of passing under urgency a tax bill which increases the top tax rate for individuals to 39% for the 2021-22 and later income years for annual income which is more than $180,000. The Taxation (Income Tax Rate and Other Amendments) Bill is expected to complete its remaining parliamentary processes on Thursday 3 December 2020.

This Bill implements the Labour Party’s manifesto commitment made for the 2020 general election. The new statutory income tax rates for individuals are:

The bill also includes consequential tax rate changes to PAYE and secondary tax rates, fringe benefit tax (FBT), resident withholding tax (RWT) on interest, employer’s superannuation contribution tax (ESCT), residential land withholding tax (RLWT), retirement savings contribution tax (RSCT) as well as the Maori Authority distribution non-declaration rate.

While the new top rate may only hit the back pockets of the 2-3% of top income earners, these rate changes will impose further costs on employers and payroll software providers who will need to ensure that payroll systems and processes are all updated to cope. All rate changes, except for the RWT rate increase, will apply from 1 April 2021 (hence the urgency). The RWT rate increase will apply from 1 October 2021 to allow interest payers additional time to make system changes.

Of note, is that the new single rate of FBT will increase from 49.25% to 63.93% for fringe benefits provided on or after 1 April 2021. The alternate rate (being the rate that can be paid during quarters 1-3 before completing a quarter 4 square-up) has also increased from 43% to 49.25%. Given this, employers wanting to minimise FBT costs and save cash will need to revisit the FBT options, such as pooling benefits and or performing the full 4th quarter attribution calculation next year. Employers who have not previously been attributing fringe benefits will need to start thinking now about what information collection policies and procedures will need to be in place by 1 April 2021 in order to allow a fringe benefit attribution to be undertaken. For this purpose, the all-inclusive pay thresholds will change to:
 

We note that “all-inclusive pay” is essentially the total of after-tax cash income plus the GST inclusive value of fringe benefits provided to each individual employee, hence why the thresholds are lower than the taxable income thresholds.

The Government has also taken the step of strengthening its information gathering powers. The Bill significantly expands obligations to provide Inland Revenue with information on the use of and financial position of trusts, particularly around distributions and settlements made by trustees to beneficiaries. The reason is because the current trustee tax rate of 33% has not changed (as yet) and Inland Revenue is concerned that taxpayers will endeavour to use trusts to structure around the 39% rate. We have listed the additional information in the box that will need to be provided with effect from for 2022 income year.

The commentary to the legislation indicates that the “other information” required by the Commissioner is likely to include details of any loans to or from related parties.

This new requirement will impose additional compliance costs on most trusts with taxable income (there are exemptions for non-active trusts, charitable trusts and foreign trusts, with the latter type already subject to disclosure rules). There is also a new power to collect information as part of increased disclosures for prior years (going back as far as the 2014 income year), where it exists. The commentary to the Bill states this is necessary to assist in understanding and monitoring the changes in the use of structures and entities in response to the new 39% tax rate. The Commissioner will notify a trustee if it wants to collect this prior year information.

Inland Revenue report that there are currently 245,000 trusts filing tax returns with Inland Revenue, so even if each individual trust had a very modest increase in compliance costs this very quickly adds up to a very significant increase in compliance costs across all taxpayers.

When questioned in Parliament, the Minister of Finance did not rule out a future change in the trustee tax rate if the information collected points to the top tax rate being avoided through the trust structures. In particular, it is clear through the official information released with the Bill that Officials from both Inland Revenue and The Treasury were in favour of the trustee tax rate immediately increasing to 39%. Cabinet, however, opted in favour of the following option put to them “a decision on whether to increase the trustee income tax rate to 39 percent be deferred to a later date pending information on whether there is a behavioural response to avoid paying the new personal income tax rate”. Tax policy officials have also been directed to undertake further work investigating measures to support the integrity of the new personal income tax rate, with Officials having a deadline of February 2021 to report to the Government before undertaking public consultation in the first half of 2021.

Finally, under the guise of clarifying the Commissioner’s information gathering powers, there is also a proposed new wide power which allows the CIR to request “any information that the Commissioner considers relevant for a purpose relating to the development of policy for the improvement or reform of the tax system”. This is a scarily widely drafted power enacted under urgency with no chance of consultation. There is no good reason why this power had to be enacted under urgency without proper consultation as it has no direct link to the 39% tax rate.