Tax Rate Increase – What you need to know

It may seem like a bad April Fool’s joke but 1 April and an increase in the top tax rate is only a stone’s throw away.   In this article we discuss the 39% increase introduced by Labour and what you need to consider prior to 31 March.

Application

The new top tax rate is applicable to all taxable income earned by an individual over $180,000 from the 2021/2022 and later income years. For the majority of individuals, the 2021/2022 income year starts on 1 April 2021.

The new rate will obviously apply to all “employment income” derived by employees. This includes extra pay earned in the course of employment, such as bonuses, back pay, redundancy, and retirement payments.  It will also apply to any employee share scheme benefits derived by an employee and accommodation benefits. Although the latter are “non-cash benefits”, they do fall within the definition of employment income.

In support of the tax rate increase, the following consequential changes have also been introduced:

  • Fringe Benefit Tax

The FBT top rate will increase to 63.93% for fringe benefits provided to employees earning an all-inclusive pay of more than $129,681.  This threshold takes into account PAYE that would otherwise have been paid, i.e. it is on a net of tax basis.

  • Employer’s Superannuation Contribution Tax (ESCT) And Retirement Savings Contribution Tax (RSCT)

ESCT applies to superannuation contributions made by a person’s employer e.g. Kiwisaver Employer Contribution. The RSCT rules are an elective regime that allows a retirement scheme contribution, such as a taxable Māori authority distribution or a dividend made by a retirement scheme contributor to a retirement savings scheme, to be subject to a withholding tax called RSCT.

The rates are set at the same rate as basic income tax rates, but only one single ESCT rate applies to the amount of the contribution (it is based on the gross salary or wages of an employee plus last year’s superannuation contribution (before deduction of any ESCT) paid by the employer).

ESCT and RSCT will rise to 39% on superannuation contributions made for an employee whose ESCT rate threshold exceeds $216,000. This is relevant to persons with Kiwisaver as the new 39% rate will apply when the person’s income from employment plus from employer Kiwisaver contributions is over $216,000 per annum.

  • Residential Land Withholding Tax

RLWT will increase to 39%, except where the vendor is a company. If the vendor is a company, the RLWT rate would remain at the company tax rate of 28%.

  • Resident Withholding Tax (RWT)

The  RWT rate for dividends paid from 1 April 2021 will remain the same. Interest paid will be subject to the new RWT rate 6 months later, from 1 October 2021, to allow interest payers  such as the banks time to make system changes. The non-declaration rate would remain at 45%. This applies if an individual does not give their IRD number to the interest payer.

Trust Disclosure Requirements

As noted above, the increased rate will only apply to individuals.  The trustee tax rate remains at 33%. However, to assess compliance with the new 39% rate, there are new disclosure requirements for trusts that will apply from 1 April 2021. The following information is now required to be provided by trustees when filing their tax return:

  • profit and loss statements;
  • balance sheet items;
  • other information to be specified by the Commissioner e.g. any transfers to the trust by associated persons such as loans to or by related parties; and
  • Information on distributions and settlements made during the income year.

ITEMS FOR CONSIDERATION

  • Employers that generally pay accrued bonuses or other salary entitlements post 31 March should consider paying this prior to 31 March so that employees can receive the amount at the current top tax rate of 33%.  
  • Employers that provide fringe benefits and file FBT returns should consider applying the alternate rate rather the single rate option particularly if the majority of employees that receive fringe benefits generally do not have a pay package up to $180,000.  If you would like some assistance with this or you would like to talk through benefits of the alternate rate calculation then feel free to contact us.
  • Employers should consider motor vehicles provided to employees with all-inclusive pay of more than $129,681 as to whether it may be more cost effective to consider other options.  For example a vehicle allowance or potentially an increase in salary in lieu of a vehicle being provided.
  • Employees can consider sacrificing salary in exchange for an increased employer Kiwisaver contributions, to take advantage of the higher $216,000 band above.
  • Where you hold shares in your individual name, consider distributing a fully imputed dividend on or before 31 March 2021 if in the latter year the 39% increase will apply to that individual.  We would also recommend a review of your structure to determine whether a shareholding change would be beneficial, e.g. sale of shares to a family trust, or part sale to a spouse.
  • The new higher tax rate is only applicable to individuals. Self-employed persons or partnerships may wish to evaluate whether any taxable income is better operated out under a non-individual entity such as a company or a trust. We note that any restructuring should be done for genuine commercial reasons and not solely for tax purposes otherwise there is the risk of being subject to the tax avoidance rules.
  • It is also important to consider market-based salaries for shareholder-employees in light of the tax avoidance case:  Penny & Hooper v Commissioner of Inland Revenue [2011] NZSC 95, where surgeons restructured their affairs to operate via family trusts and companies and paid themselves what the Commissioner considered to be an artificially low salary. 
  • We also note that the personal services attribution rules may apply.  The attribution rule applies when a taxpayer who earns income from personal services (“the personal services provider”) inserts an associated entity between him or herself and the party purchasing those services. The purchaser of the services deals with the interposed entity, which derives the income arising, but it is the taxpayer who actually provides the services. If prescribed criteria are satisfied, the interposed entity must attribute an amount to the personal services provider.  Consequently a “one man band” operation contracting to one customer cannot insert a company and pay tax at the 28% tax rate.  Instead the income will be attributed to the individual and taxed at their marginal tax rates up to the 39% rate.

In light of the above we would recommend that you contact your RSM advisor should you have any queries or concerns with the increase and wish to discuss tax planning initiatives that may be available.

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Authors

Lisa Murphy
Tax Partner