Otago Daily Times

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


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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