Otago Daily Times

How might Labour tin­ker with tax pol­icy after big elec­tion win?

- Business · Tax Credit · Finance · Taxes · Income Tax · Corporate Tax · New Zealand · Dunedin

AFTER Labour’s land­slide vic­tory a week ago, many New Zealan­ders may now be more se­ri­ously con­sid­er­ing the im­pact of the pro­posed 39% tax rate to be im­posed on per­sonal in­come earned over $180,000.

The new top rate should be the only ma­jor tax change to come out of this elec­tion given that Labour does not have to horse­trade with the Greens over their sug­gested wealth tax, although Labour’s tax poli­cies also in­clude a freeze on fuel tax in­creases and clos­ing tax loop­holes to en­sure multi­na­tional cor­po­ra­tions pay their fair share of tax in New Zealand.

But then what does a man­date for ac­cel­er­ated change in a postCovid­19 world re­ally mean in tax terms? Sec­ondly, how will New Zealan­ders be re­spond­ing to th­ese an­nounced changes?

I can only make a semied­u­cated guess, as un­doubt­edly the prime min­is­ter and her lead­er­ship team will still be de­bat­ing this very point while they try to seek to ap­pease/re­tain their new cen­trist­vot­ing block from mid­dle New Zealand while ac­knowl­edg­ing the slightly harder eq­uity view of their tra­di­tional leftist con­stituency.

I think the fi­nal­ity of ‘‘no new taxes’’ and ‘‘no wealth taxes’’ state­ments dur­ing the cam­paign will make it very dif­fi­cult to in­tro­duce any new regimes/ taxes, but there is an op­por­tu­nity to still make progress on the taxbase eq­uity mat­ter through tin­ker­ing, bear­ing in mind such may not hap­pen im­me­di­ately as the busi­ness tax take (and ac­tiv­ity) may be some­what sup­pressed in this con­tin­u­ing Covid­19 en­vi­ron­ment.

‘‘Tin­ker­ing’’ in my mind is firm­ing up pol­icy in­ter­pre­ta­tions to be less tax­payer­friendly, broad­en­ing the view of what ‘‘avoid­ance’’ is, and likely lim­it­ing the ef­fec­tive­ness of var­i­ous tax­payer­friendly, al­readyan­nounced Covid­19 mea­sures, all dressed up in a ‘‘pay your fair share’’ eq­uity flavour; a bit like the po­si­tion­ing on the dig­i­tal ser­vice tax.

For ex­am­ple, if you are con­sid­er­ing re­struc­tur­ing your affairs over the next pe­riod to re­spond to the 39% tax rate for in­come over $180,000, you should be aware of the IRD’s view on what may con­sti­tute tax avoid­ance, as any tax ben­e­fits can be re­versed and there can be ex­po­sure to 100% short­fall penal­ties.

The IRD may con­sider that a key is­sue in the anti­avoid­ance con­text is the tax­driven use by pro­fes­sional per­sons of busi­ness ve­hi­cles such as com­pa­nies, trad­ing trusts and part­ner­ships in a way that the in­come de­rived is di­verted to other tax­pay­ers on lower tax rates or ar­ti­fi­cially re­tained in such ve­hi­cles. Re­struc­tur­ing em­ploy­ment re­la­tion­ships to con­trac­tor re­la­tion­ships may be sim­i­lar. Tak­ing draw­ings from your com­pany or trust for le­git­i­mate pur­poses is, in prac­tice, ac­cept­able. How­ever, those think­ing of pay­ing lower salaries but with­draw­ing large sums in sub­sti­tu­tion of pay­ing a wage or a share­holder salary should be aware of the risk that the IRD may con­sider this con­sti­tutes tax avoid­ance.

Re­ten­tion of prof­its in trad­ing en­ti­ties is valid, es­pe­cially where such is used for rein­vest­ment in tough times but be aware that any changes to his­tor­i­cal be­havioural pat­terns can be re­viewed in hind­sight.

Cur­rently, as the tax rate on trustee in­come, the div­i­dend with­hold­ing rate and the top tax rate are the ex­act same at 33%, there is less mo­ti­va­tion for tax­pay­ers to re­struc­ture their affairs in this way. How­ever, as the 39% top tax rate comes back in next April, this could be­come an area of in­creased interest for tax­pay­ers but, con­se­quently, also for in­creased re­view for the IRD which has the com­pounded ben­e­fits of ac­cess to data, time and hind­sight.

Scott Ma­son is a tax spe­cial­ist and man­ag­ing part­ner at Fin­dex in Dunedin.

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