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The new top rate should be the only major tax change to come out of this election given that Labour does not have to horse-trade with the Greens over their suggested wealth tax, although Labour’s tax policies also include a freeze on fuel tax increases and closing tax loopholes to ensure multinational corporations pay their fair share of tax in New Zealand.
But then what does a mandate for accelerated change in a post-Covid-19 world really mean in tax terms? Secondly, how will New Zealanders be responding to these announced changes?
I can only make a semi-educated guess, as undoubtedly the prime minister and her leadership team will still be debating this very point while they try to seek to appease/retain their new centrist-voting block from middle New Zealand while acknowledging the slightly harder equity view of their traditional leftist constituency.
I think the finality of "no new taxes" and "no wealth taxes" statements during the campaign will make it very difficult to introduce any new regimes/taxes, but there is an opportunity to still make progress on the tax-base equity matter through tinkering, bearing in mind such may not happen immediately as the business tax take (and activity) may be somewhat suppressed in this continuing Covid-19 environment.
"Tinkering" in my mind is firming up policy interpretations to be less taxpayer-friendly, broadening the view of what "avoidance" is, and likely limiting the effectiveness of various taxpayer-friendly, already-announced Covid-19 measures, all dressed up in a "pay your fair share" equity flavour; a bit like the positioning on the digital service tax.
For example, if you are considering restructuring your affairs over the next period to respond to the 39% tax rate for income over $180,000, you should be aware of the IRD’s view on what may constitute tax avoidance, as any tax benefits can be reversed and there can be exposure to 100% shortfall penalties.
The IRD may consider that a key issue in the anti-avoidance context is the tax-driven use by professional persons of business vehicles such as companies, trading trusts and partnerships in a way that the income derived is diverted to other taxpayers on lower tax rates or artificially retained in such vehicles. Restructuring employment relationships to contractor relationships may be similar. Taking drawings from your company or trust for legitimate purposes is, in practice, acceptable. However, those thinking of paying lower salaries but withdrawing large sums in substitution of paying a wage or a shareholder salary should be aware of the risk that the IRD may consider this constitutes tax avoidance.
Retention of profits in trading entities is valid, especially where such is used for reinvestment in tough times but be aware that any changes to historical behavioural patterns can be reviewed in hindsight.
Currently, as the tax rate on trustee income, the dividend withholding rate and the top tax rate are the exact same at 33%, there is less motivation for taxpayers to restructure their affairs in this way. However, as the 39% top tax rate comes back in next April, this could become an area of increased interest for taxpayers but, consequently, also for increased review for the IRD which has the compounded benefits of access to data, time and hindsight.
■ Scott Mason is a tax specialist and managing partner at Findex in Dunedin.