We saw yet another relatively quiet week on the tax front, perhaps not surprising in the run up to Election 2020. I don’t think anyone would have been surprised with that result however, with the exception perhaps that Labour this time was not going to need to hold anyone’s hand for the next three years and has the mandate to govern alone.
So, what’s next on the taxation agenda then, with Jacinda and her team getting ready to take the reins again within three weeks.
Well if they do indeed stick to their pre-election tax policy promises, then the only changes in store in the short term at least, are an increase in the top personal tax rate to 39% for income above $180,000, and if the OECD doesn’t hurry up and reach some sort of consensus, the introduction of a digital services tax, targeting predominantly multi-national corporations.
It has been just over a decade since we last saw the 39% top rate, the implementation of which also saw the introduction of section GB 27 – attribution rule for income from personal services ‘PSAR’. Section GB 27 at the time, was IR’s newest addition to its arsenal of specific anti-avoidance provisions. The increase to the top personal tax rate, saw no corresponding amendments to either the company or trustee tax rates (both 33%), so there were concerns that taxpayers would shelter themselves from the impact of the higher rate, via the use of interposed entities – most commonly a self-employed person (‘working person’) restructuring their business into a company which was wholly owned by a trust.
Section GB 27 contained a 4-step test, PSAR applying if all 4 of the following tests were satisfied:
- 80% or more of the interposed entities personal services income was from the same person (widened to include associated parties of the person), and,
- 80% or more of the work was done by the working person (widened to include a relative of the person), and,
- The working persons net income for the year, assuming PSAR applied, would exceed $70,000, and,
- Substantial business assets were not required to be used to derive the personal services income.
Like any new toy, IR played around with PSAR quite a bit in its first year or so, issuing the usual scare tactic blanket dump of fishing letters to all and sundry, suggesting that ‘you’d better front up with your voluntary disclosures before we get to you’.
For those of you who were around at the time, you may also recall that the Revenue were not just satisfied with using their new toy in its current form, but were also keen to see how they could modify the personal attribution concept, extending their review activities to those who had interposed entities (many well before any inclination was given as to the tax rate increase) and had multiple clients (so GB 27 of no application), but were not paying themselves what IR considered was a ‘market salary’. Particularly targeted were those who had capped their company shareholder salary to $60,000 (the 39% threshold at the time), and would have minimal defences to IR’s assertions that they were clearly flouting the system to avoid the 39% tax rate, even when they had been paying themselves this level of salary for some time.
However, like all toys, once they grew a bit older, and new toys arrived under the tree, and we saw the top marginal rate reduce to 33% again, in more recent years I have not experienced the same level of enthusiasm from the Revenue to raise the personal attribution issue. Sure, with a lower company tax rate now than both the individual and trustee rates, there is the potential to obtain a timing deferral by retaining profits within the walls of the company rather than paying larger shareholder salaries or dividends, however as most of us will appreciate, many of our SME clients just want the cash in their hands to live on, so deferring the pay-outs just to temporarily save 6% is out of the question in any event.
Like all articles I write, hopefully for the reader there is some purpose behind the topic, and I can say that yes there is for this article too.
The FAQ attached to Labour’s tax policy statement says that there are no plans to increase the trustee rate at the same time, there being a view that there are legitimate reasons for people to use trusts. However, that stated viewpoint also comes with the attached warning – “But if we see exploitation of the trust system then we will move to crack down on those people who are exploiting it. The Government has invested more than $30 million into IRD’s capacity to go after people dodging their tax obligations, and we will continue this work.”
So my suspicion is that we will start to see a re-emergence of the attribution questions by IR, for those clients paying themselves salaries of less than $180k, retaining profits within the company to an extent that coupled with the shareholder salary there is a quantum in excess of $180k, with the retained profits being paid out as dividends to a shareholding trust shortly thereafter. Thankfully, according to Labour, only the top 2% of income earners will be affected by the new top tax rate, so we will not see the influx of letters coming across our desks as we did when the trigger threshold was only $60,000.
In closing, no commentary I have seen yet as to timing, but my guess would be a kick-off date of 1st April 2021, for income years commencing post that date.