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Tax Talk | New top tax rate

The Government has passed legislation to implement a new top personal tax rate of 39% applying on income over $180,000 with applicability from the 2022 year (so the year commencing 1 April 2021 for most individuals).

While most of the measures are as expected, there are a few key points of note:

 

The nasty surprises

Contained within the Bill are a pair of nasty surprises that have generally gone unnoticed by the media:

 

Change in FBT rates

While the FBT single rate percentage is increasing from 49.25% to 63.93% as expected, the alternate rate used during the first three quarters of the year has also increased from 43% to 49.25%. This increase in FBT should be taken into account when doing budgeting around benefits provided to employees, such as company cars or health insurance. FBT is likely to become a short-term cash flow drain to business, even if it ultimately gets squared up in the fourth quarter.

 

Trusts required to file additional information

When the Labour Party made their election announcement that a top personal tax rate of 39% would be introduced, a number of commentators pointed out their naivety around the use of trusts the last time there was a difference between the top personal tax rate and the trust rate.

However, the lesson from 2000 to 2010 has been learned and the government will be requiring trusts to file an annual return to Inland Revenue containing the following information:

  • A profit and loss account and balance sheet for the trust for the income year
  • The amount and nature of each settlement that is made on the trust in the income year, with an exception for minor services
  • The name, date of birth, country of tax residence, tax file number and taxpayer identification number of each settlor who makes a settlement on the trust in the income year
  • The amount of each distribution made by the trust in the income year
  • The name, date of birth, country of tax residence, tax file number and taxpayer identification number of each beneficiary who receives a distribution from the trust in the income year
  • The name, date of birth, country of tax residence, tax file number and taxpayer identification number of each person having a power of appointment

In addition, Inland Revenue will have the ability to retrospectively request this information for years between 2014 and 2020.

There will be some exceptions for non-active trusts, charitable trusts, foreign trusts and Maori Authorities.

This will increase compliance costs for trusts and we expect will, in addition to the Trusts Act 2019, act as further impetus around determining whether a trust structure remains suitable.

 

The pleasantries

No change to PIE rates

As expected, there will be no change to the top portfolio investor entity (PIE) rate of 28%. This means that where an individual has income of more than $180,000, returns from PIEs will be taxed at a rate 11% less than their top marginal tax rate. This will undoubtedly make collective PIE investments more appealing for high-income individuals than previously, especially as the New Zealand investment environment becomes more sophisticated.

 

No provisional tax impact

Previous changes in personal tax rates, whether upward (as in 2000) or downward (as in 2010) have been accompanied by changes in the standard uplift method calculation for the year of the change. This increase in the top personal tax rate is not being accompanied by a change in the standard uplift method calculation for the year of the change.

 

Comment

While most of the information required under the new trust information requirements should be available in light of the Trusts Act 2019 and the Anti-Money Laundering and Countering Financing of Terrorism Act 2009, nevertheless, this creates additional compliance costs for trusts.

The gap between the corporate rate (28%) and the new top personal tax rate is mostly addressed by court judgements on tax avoidance in the early 2010s, as well as other existing anti-avoidance measures.

It appears the gap between the trust rate (33%) and the new top personal tax rate will be mostly addressed by the new information gathering requirements, as well as threats from the Minister of Revenue that the trust rate will be revisited if there is evidence of widespread avoidance of the new top personal tax rate. It is interesting such threats are being made in light of comments during the election campaign that the trust rate would not be increasing.

We are concerned with the gap between the top PIE rate (28%) and the new top personal tax rate. This discrepancy will undoubtedly encourage high income individuals to funnel their investments into PIEs where they could obtain the benefit of a considerably lower tax rate.

If you have any queries regarding the new tax rate or the new trust filing requirements, please contact your Baker Tilly Staples Rodway advisor.

DISCLAIMER No liability is assumed by Baker Tilly Staples Rodway for any losses suffered by any person relying directly or indirectly upon any article within this website. It is recommended that you consult your advisor before acting on this information.

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