Introducing the 39% Tax Rate
From 1 April 2021, the top personal tax rate is increasing to 39%. This has repercussions for taxpayers, even those who aren't earning over $180,000.
- Extra employment payments, like bonuses, redundancy, backpay taxed at 39%
- Top ESCT rate for superannuation contributions like Kiwisaver increase to 39%.
- FBT rates increase from 49.25% to 63.93%
- Dividend withholding tax rate increase to 11% instead of 5%.
- Residential land withholding tax increase to 39%
- Top Interest RWT rate increase to 39% from 1 October 2021.
Below are some suggestions for tax planning, but we suggest that you call us to discuss any changes you wish to make. We will need to consider anti-avoidance provisions in tax law as well as a desire to save taxes.
Sole traders employing family members
If you want to employ a spouse to reduce your income from self-employment, you will need to seek IRD permission. You will need to describe the hours and duties of the spouse. If you employ your child, you don't need to seek permission from IRD, but be careful to be reasonable in what you pay. You will usually have to register as an employer and deduct PAYE on the family member's behalf, unless they are a contractor.
Shareholder salaries from companies
If you have discretion over salaries to shareholders, it's time to review them. Make sure that your salary decisions have a basis in market salary trends for the industry, hours and conditions of work, not just the profit of the company. If you are dropping shareholder salaries, are there valid commercial reasons for the reduction? Make sure you document your reasons at the time of review.
You can set up a company to provide services, but you can't deliberately structure your transactions with a more than incidental tax advantage. If the profit of the company is derived mainly from personal effort, rather than use of assets or effort of other employees, then you would normally expect more than 80% of the profit to be paid out as shareholder salary.
Income attribution rules apply when the working person performs services through an associated entity which invoices 80% or more of its income to one customer, and taxable profit is over $70,000. In these cases, IRD will treat the net income from personal services as taxable to the working person, regardless of salary agreements, usual partnership rules or Look Through Company allocation rules.
Fringe Benefit Tax alternate rates
Using the alternate rate calculation for FBT will be vital, as the majority of employees will be earning under $180,000. This means keeping better records, matching taxable benefits to the employees who benefitted from vehicles, low interest loans, insurance policies and discounted goods and services.
Investments in portfolio investment entities have a maximum tax rate at 28%. You will still need to weigh up the risks, liquidity and expected returns of your intended investments, so talk with your financial adviser first.
Trust ownership of shares
As long as the working person is drawing a reasonable salary then the remaining profit can be retained by the company with tax paid at 28%. If the shares are owned by a trust, dividends are taxed at 33% so DWT is payable at 5% by the company.
Before you make any changes to shareholding, you should talk with us about whether to declare a dividend first, to utilise existing imputation credits. We would also need to consider the new trust disclosure rules.
Dividends before 31 March 2021
Even if you are not changing shareholding you should consider whether the company can declare a dividend to shareholders before 31 March 2021. From 1 April 2021, if the shareholder pays tax at 39% and dividend tax credits (imputation credits and DWT) are only at 33%, the increase in tax liability may push the taxpayer into provisional tax territory for the following year.
If the company needs working capital to maintain solvency in a time of uncertainty, then paying out a dividend may not be possible. You will need to consider what is best for the company.
The increase in the top personal tax rate to 39% will widen the tax gap between individual, companies and trusts. The opportunities for making tax savings are easier for people in business than for salary and wage earners. Tax structures need to be workable and have a sound basis in commercial common sense. Consult with your chartered accountant before the tax changes on 1 April 2021.
- Serena Irving
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The information and examples given in this article are general in nature and are not personal investment, financial or tax advice. We recommend that you contact the author or another professional advisor for advice that is specific to your needs. Serena Irving is a director in JDW Chartered Accountants Limited, Ellerslie, Auckland. JDW is a professional team of qualified accountants, auditors, business consultants, tax advisors, trust and business valuation specialists.