Top tax rate
Legislation to increase the top tax rate was introduced and rushed through parliament under urgency. By rushing this Bill through parliament, the normal democratic process has been circumvented as interested parties are denied the opportunity to make submissions against the Bill at the Select Committee stage. As discussed below, there are some aspects of this bill that warrant a robust review process.
As expected, the new top tax rate of 39% for individuals earning more than $180,000 has required consequential changes to other tax types. The consequential changes include introducing new rates for resident withholding tax (RWT) on interest, resident land withholding tax (RLWT), employer’s superannuation contribution tax (ESCT) and retirement contributions savings tax (RCST). These changes are all well targeted and will only impact those earning $180,000 or more.
As we anticipated, FBT rates are also being increased to reflect the new tax rate. There will be a new top FBT rate of 63.93%. As discussed below, these changes are not very well targeted and will create some “collateral damage”.
The FBT changes are going to create considerable additional compliance for employers who currently adopting compliance saving concessions like the “single rate concession”. The single rate concession rate is going to shift to the new top rate of 63.93%. This means that these employers will need to use the far more complex “alternate rate” calculation to avoid overpaying FBT. Also, there will be a cashflow disadvantage for using alternate rate for quarters one to three as the rate for those quarters is increasing from 43% to 49.25% (for no obvious reason).
Finally, the rates for the pools of non-attributed benefits have been increased from 49.25% to 63.93% (major shareholders) and from 42.86% to 49.25% for other employees. This seems to be a sneaky tax increase that is not justified by a 2% of taxpayers being on a new tax rate.
While it was inevitable that a new top FBT rate would need to be introduced, there are design flaws in the FBT changes that increase the compliance burden and potentially the amount of FBT payable for the employers of the 98% of taxpayers who are not affected by the tax rate changes. Since the select committee stage of the bill has been bypassed, there doesn’t seem to be an opportunity to improve the design of the FBT changes before the rules come into force.
Trust information
The Government is concerned that trusts will be used by taxpayers to avoid the new top tax rate. To address this, the tax bill passed yesterday included a requirement for trusts to provide the Inland Revenue with further information.
The information that will be required to be supplied to Inland Revenue includes:
- Profit and loss statements; and
- Balance sheet; and
- Details of distributions and settlements made in the period; and
- Personal details for such IRD numbers, tax residence, and date of birth for:
- Settlors making settlements during the year; and/or
- Beneficiaries receiving distributions; and/or
- Persons holding the power of appointment and removal of trustees and beneficiaries.
- “Other information required by the Commissioner” – the commentary includes that this could include the likes of loans to or by related parties.
This information will be provided as part of the trust’s tax return.
Non active trusts, charitable trusts, trusts that are eligible to be a “Maori Authority”, and foreign trusts will be exempt from these requirements. In the case of foreign trusts, New Zealand resident trustees already have similar reporting obligations.
The Government has time and time reiterated that the increase in top tax is only supposed to impact 2% of taxpayers. However, with these changes it has decided to add a considerable compliance burden to the many hundreds of thousand taxpayers who have trusts that are not in any way being used to divert income of individuals earning $180,000 or more. Therefore, this change seems to be a significant overreach. It is a shame that the Government has denied people the opportunity to submit against these changes.
The Inland Revenue is being given the power to seek this trust information can be requested from 2013/14. This will create significant compliance for trustees if they are required to dig out 7 years’ worth of records. This seems to be an overreach by the Government. Again, it is a shame that the Government has robbed people the opportunity to comment on this.
The changes will apply from 1 April 2020.
Other updates
Bright lines
The Inland Revenue has embarked on a crackdown on compliance with the bright line rules for the sale of residential property. The Inland Revenue recently publicly stated that they estimate around 25% non-compliance with the bright line rules.
Inland Revenue has compiled a list of taxpayers who they think have sold a residential property and not returned the necessary tax. Inland Revenue has supplied a list of those who they think are not meeting their obligations to their accountant/tax agent (if they are linked to one); or have/or will write to taxpayers individually if they are not linked to an accountant/tax agent.
The Inland Revenue data included taxpayers whose returns were not yet due, taxpayers who had filed returns including bright lines income, and taxpayers who are not subject to bright lines because of the main home exemption. The Commissioner of Inland Revenue acknowledged that there were issues with the Inland Revenue data in a speech to a Chartered Accountants of Australia and New Zealand conference soon after the Inland Revenue started contacting taxpayers and tax agents. Therefore, the estimate of 25% non-compliance makes for a good headline but is likely to be considerably overstated. However, there will be many taxpayers who have not met their obligations either due to ignorance of the rules or by deliberately excluding the income.
Inland Revenue have focused a lot of their audit activity towards land for the past 15-20 years, and with the political spotlight being on property prices, Inland Revenue focus audit activity in relation to land can only be expected to increase significantly. Inland Revenue generally gets a good “return on investment” on land related audit activity.
Inland Revenue have had direct access to Land Information New Zealand (LINZ) data for decades. Anyone expecting that they can hide a transaction subject to the bright line rules from the Inland Revenue is kidding themselves and should take professional advice as soon as possible.
Extension of sick leave
The Government is being criticised for pushing ahead with its proposal to double sick leave entitlements from 5 to 10 days. Most people would agree that extending sick leave is a good idea in principle and, in fact, it is estimated that about 50% of employers already offer 10 days or more sick leave.
The main criticism is that the timing of the change is not ideal as there are still many businesses trying to recover from the impact of Covid-19. Many commentators are estimating the cost of this change to employers at around $1b per annum. This will affect business confidence.
Further, it is the hardest hit industries like hospitality and smaller retail stores that are most likely to be impacted by employees abusing sick leave entitlements.
This change is expected to apply from the middle of 2021.