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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.
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As flagged during the election campaign, the Government has pushed ahead with introducing a new 39% top tax rate. As with any tax changes, this has knock-on effects that need to be considered.
The new top rate applies from 1 April 2021 to income earned by individuals (including bonus payments, back pays and redundancies) on amounts over $180,000 in an income year, and the PAYE, RWT and other withholding rules are being updated to account for this. It will only apply when the total income is more than $180,000 so there is no change for those earning less than that.
Other employment related tax rates have been modified effective from 1 April to remove any planning opportunities for employers, including:
For income that is going to be earned and taxed in the hand of individuals with income over $180,000 per annum, you should consider the following:
Because the new higher tax rate only applies to individuals, the obvious solution is to redirect taxable income so it is earned by non-individuals. However, this opportunity is limited where the income is derived from providing personal services. There are already a number of rules, court decisions, and Inland Revenue pronouncements limiting when personal services income can be earned by non-individuals.
The last time the individual tax rate was 39% most of the loopholes re-directing personal services income were closed, by use of the attribution rules, and using the general tax avoidance rule in the case of Penny & Hooper. Inland Revenue will be on the lookout for any new loopholes, and move quickly to shut these down.
While the comments below discuss investment options, this is not intended as investment advice and should not be relied upon in making investment decisions.
If you have funds to invest it pays to make sure your investment strategy aligns with your tax profile and goals. For individuals affected by the new 39% tax rate the general recommendation is that â€œpassiveâ€ income sources should, where possible, not be held individually or, if held individually, invested via Portfolio Investment Entities (PIEs), to cap the top tax rate at 28%. A new RWT rate on interest (but not dividends) of 39% is being introduced effective 1 October 2021.
Alternative investment vehicles for investments are:
As always, any restructuring should not be driven by tax reduction reasons, but should be done for genuine commercial reasons (e.g. asset protection, ease of operation) otherwise there is the risk of unwinding due to tax avoidance rules.
Although the trustee tax rate will remain unchanged at 33% for the time being, there are increased disclosure requirements in relation to trusts that will apply from 1 April 2021, including financial information and details of settlors and those with power to appoint. Inland Revenue states that this information will be collected to assess compliance with the new 39% rate and whether there are any structuring issues involving trusts.
The new 39% tax rate will be a major cost to those who derive high income from providing their own labour. Those with investments deriving passive income will have more options and should carefully review the real benefit of making any changes and make sure that they do not fall foul of anti-avoidance rules if they restructure, especially if the amounts are significant. We recommend speaking with your usual Baker Tilly Staples Rodway advisor for guidance.
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