Election Outcome and Tax Policies
After Labour’s victory in the 2020 General Election, proposed tax policy changes are now likely to be implemented. Labour has ruled out a Capital Gains Tax, but we wouldn’t be surprised if a change was made to the Brightline Test holding period, increasing it from five to ten years.
The Green Party had notably been campaigning for a wealth tax, which Labour has repeatedly ruled out. Given that Labour has won enough seats to govern alone, the possibility of a wealth tax does now seem unlikely.
Labour’s election campaign promised no income tax changes for 98 per cent of New Zealanders, however a new top marginal income tax rate of 39 per cent for individuals earning over $180,000 is likely to be implemented on 1 April 2021, and is expecting to raise $550 million of revenue a year.
For some of us, this provides a sense of déjà vu as we remember the 39 per cent tax rate between the 2001 to 2009 tax years. We saw disputes in the courts regarding the requirement to pay fair market salaries, legislation requiring income to be attributed to individuals, and various policy statements from Inland Revenue.
As differences in tax rates widen, it impacts behaviour by incentivising tax planning to minimise the application of top tax rates. Currently, there is little difference between the top income tax rates – 33 per cent for trusts and individuals and 28 per cent for companies. It also leads to further inequity within the tax system because it is typically employees who are unable to alter how they are taxed, while business owners have greater flexibility to alter how their income is taxed.
For example, a distribution of accumulated income from a trust that has already been taxed at 33 per cent, may be distributed tax-free to a beneficiary who has a marginal tax rate of 39 per cent. Individuals with investment income may also be further incentivised to invest in Portfolio Investment Entities (PIEs), instead of shares where the top tax rate is capped at 28 per cent. Conversations are likely occurring right now regarding whether shares in companies should be moved from personal ownership into trusts, and whether this is tax avoidance?
For a company, this means that by 31 March 2021, it may be beneficial to pay dividends and bonuses out to shareholders to reduce the amount of tax to be paid. With the likely change in the personal tax rate if paid after 1 April 2021, individuals with incomes over $180,000 would have 6 per cent more in tax to pay.
Ultimately, this policy provides an opportunity for individuals to explore their different options to ensure efficient tax planning. However, utmost care should be taken when restructuring one’s affairs to avoid undesirable consequences, such as breaching the solvency test, shareholder continuity resulting in the loss of imputation credits, tax losses, or potentially undertaking a tax avoidance arrangement. We are here to help you navigate these issues, so please give us a call.