Otago Daily Times

Top tax rate change alert

- TAMSYN PARKER Business · Tax Credit · Finance · Taxes · Society · Income Tax · Personal Finance · New Zealand · Value Added Tax · Corporate Tax · Wellington, New Zealand · Gary Hooper

WELLINGTON: High earn­ers are be­ing urged to be wary of re­struc­tur­ing their fi­nances ahead of a higher top tax rate.

The new Labour Gov­ern­ment is ex­pected to in­tro­duce a new top tax rate of 39% for those earning more than $180,000 from April next year.

That means there will be a sub­stan­tial gap be­tween the top tax rate and the com­pany tax rate of 28% as well as the trust tax rate of 33%.

Deloitte tax part­ner Robyn Walker said an in­evitable out­come of an in­crease in tax rates would be that some peo­ple would look at whether there was a more ‘‘tax ef­fi­cient’’ way to struc­ture their af­fairs.

‘‘Mov­ing in­come from be­ing earned per­son­ally to be­ing earned through an al­ter­na­tive ve­hi­cle is an op­tion for tax­pay­ers to con­sider.

‘‘The 11% dif­fer­ence be­tween the top per­sonal tax rate and the 28% com­pany tax rate may be ir­re­sistible to some high earn­ers,’’ she said.

A per­son on $200,000 would pay $58,119 in tax un­der the new rate, but un­der a com­pany struc­ture that could fall to $56,000 a year.

But it would be higher un­der a trust struc­ture at $66,000 in tax.

That was be­cause both trust and com­pany tax were charged at a flat rate, while in­di­vid­ual in­come tax was pro­gres­sive.

Only the amount of money earned over the $180,000 thresh­old would be taxed at the top 39% rate.

Any moves to re­struc­ture to trans­act through com­pa­nies or trusts came with a tax avoid­ance warn­ing, Ms Walker said.

‘‘Any re­struc­tur­ing which is un­der­taken for pre­dom­i­nantly tax rea­sons is likely to be re­viewed by In­land Rev­enue.’’

She also pointed to a warn­ing re­leased by Labour as part of its tax pol­icy an­nounce­ment that if it saw ex­ploita­tion of the trust sys­tem it would move to crack down on it.

The warn­ing stated: ‘‘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.’’

New Zealand has had a 39% top tax rate be­fore, from 2001 to 2010, when the Labour gov­ern­ment be­gan low­er­ing it. When Na­tional was elected it scrapped the top rate.

In 2011, the Supreme Court found orthopaedi­c sur­geons Ian Penny and Gary Hooper avoided in­come tax by pay­ing them­selves low salaries via a struc­ture of com­pa­nies and trusts.

Af­ter the judge­ment, the IRD said those who made vol­un­tary dis­clo­sures would need to pay ex­tra tax only for in­come earned dur­ing the pre­vi­ous two years.

That re­sulted in mil­lions of dol­lars in tax be­ing paid.

Ms Walker said the top tax rate change also had im­pli­ca­tions for fringe ben­e­fit tax and res­i­dent with­hold­ing tax (RWT), which is ap­plied on div­i­dends and in­ter­est from other in­vest­ments such as sav­ings in the bank.

If the fringe ben­e­fit tax did not in­crease to take into ac­count the top tax rate, there would be an in­cen­tive for high­in­come earn­ers to try to sub­sti­tute salary for perks in or­der to have a lower tax cost.

With­hold­ing tax could also be in­creased in line with the top tax rate, she said.

That could mean if an in­di­vid­ual did not tell their bank which with­hold­ing tax rate they should be on, they could be au­to­mat­i­cally de­faulted on to 39% tax on any in­ter­est they earned.

Ms Walker said the res­i­dent with­hold­ing tax on div­i­dends could stay the same or in­crease de­pend­ing on what the Gov­ern­ment de­cided. The last time the top tax rate was 39%, it stayed at 33%.

But that meant high­in­come earn­ers should be pre­pared to put some money aside to pay tax on those div­i­dends, she said.

‘‘If you are in­vest­ing di­rectly, and are earning over $180K, you just need to be pre­pared there will prob­a­bly be a top­up to be paid at the end of year — as­sum­ing the RWT rate doesn’t move.’’

It could also en­cour­age high earn­ers to in­vest via a port­fo­lio in­vest­ment en­tity, which had a top tax rate of 28% rather than di­rect share in­vest­ment.

The Gov­ern­ment is ex­pected to out­line the de­tails of its new tax leg­is­la­tion in a Bill be­fore Christ­mas. The new top tax rate is due to come in from April 2021. — The New Zealand Herald


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