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What a year 2020 was; Australian wildfires, a new president of the United States, a Labour majority, and Covid-19.
During 2021, we will start to see the true impact that Covid restrictions and lockdowns have had on business revenue and balance sheets, as well as many new weird and wonderful changes in the world of tax.
Most of the tax changes proposed in 2020 were in response to Covid. It is safe to say that in 2021 we may see more tax changes in relation to Covid recovery.
The Government may also look ways to generate in more tax revenue as we come out of Covid with a deficit due to all the extra spending/stimulus pumped into the economy and a burgeoning public sector.
One thing we know for sure is that the new 39% personal tax rate on income above $180,000 comes into effect from April 1, 2021 the (2021-2022 Income year). Consequently, this means new rates for FBT, RWT, ESCT, RLWT, and the rest of the alphabet soup. All these rate changes will also apply from April 1, 2021. The FBT one in particular may make some employers reconsider the provision of benefits to employees, or at least how the FBT costs are calculated and/or are allocated.
However, company and trust tax rates remain unchanged at 28% and 33%, respectively. For now. Inland Revenue also has new information-gathering powers for trusts and other entities. This will mean trustees and beneficiaries may have to be more cautious when it comes to (aggressive) tax planning. The Government has made it clear that with an increase in such activity (e.g. retention of profits in these entities but cash still flowing out to individuals for consumption), they could increase the trust tax rate to 39%, which Inland Revenue recommended should have been done in the first place.
Of course, they are likely to suggest that such is not a new tax, in breach of election commitments, but rather a buttressing of the existing 39c tax rate for individuals .
One measure that was introduced during Covid was a temporary loss carry-back scheme, which allows businesses that anticipate being in a loss position for 2020 or 2021 tax years to carry some, or all, of the loss back to the preceding income tax year, to enable an immediate cash refund of prior tax paid.
A more permanent loss carry-back scheme is on the agenda for the 2022 income tax year. Given the limitations of the temporary regime for SME businesses, it is yet to be seen if this option will be transformative.
Currently, if a company experiences a change of ownership of 51% or greater, it cannot carry forward its tax losses to be offset against future profits under continuity rules. The Government intends on passing some legislation before the end of March 2021 (effective April 1, 2020), introducing a same or similar business test. Australia and UK both currently use a “same or similar” test (albeit, ironically, quite different), which allow a company to carry forward losses despite changes of ownership, provided the company carries on the same type of business.
This comes at a time where some companies may be looking to raise capital to stay afloat, and will assist in succession planning, and is therefore a very welcome improvement to the tax system.
Low value asset write-off threshold was temporarily increased to $5000 from $500 due to Covid to try to increase cash flow to businesses. This is increasing from $500 to $1000 permanently going forward with application on and after March 17, 2021. Yes, I know — why not March 31?
Last year we had large discussion around excessive and skyrocketing house prices, with plenty of talk and suggestions of capital gains taxes or wealth taxes. The Labour Government has committed to not implementing a capital gains tax so long as we have a Jacinda-led government. Accordingly, the bright-line rule has been in the spotlight politically (in terms of a potential extension beyond five years) as well as on Inland Revenue’s radar (in terms of application of current rules). The IRD has recently sent out letters to a lot of taxpayers regarding potential undisclosed bright-line income from numerous property sales over the past few years.
Although not a perfect process, acknowledged by the IRD, it is once again a reminder that they have access to a lot of information and have the ability to be proactive around reminding taxpayers of their (potential) tax obligations.
Although no-one can accurately predict what is going to happen in 2021, to quote Benjamin Franklin — “nothing can be said to be certain except death and taxes”, and I am picking there is going to be some very interesting debate about the latter.
- Scott Mason is a senior tax partner at Findex in Dunedin.