By Brett Crombie, director, Straightedge Accounting.
Now that the dust has settled on the election [2020] and the new Government has been sworn in, it is worth revisiting the campaign promises and considering what tax changes are in store for us.
Labour campaigned to increase the top individual income tax rate from the current 33 percent to 39 percent and we can expect this to occur quite shortly.
This top tax rate will kick in on income over $180,000, so will only affect a small fraction of wage earners. Estimates are that this extra tax will generate an extra $550 million of tax. This may sound like a lot, but as a percentage of overall tax revenue it is not very much.
In the 2018/19 financial year total tax revenue to the Crown was $86.5 billion, so this extra tax bracket will only generate about an extra 0.6 percent of revenue.
One downside to this new tax bracket is that there will now be quite a spread between this top individual tax rate of 39 percent and the tax rate for trusts (33 percents) and especially companies (28 percent).
Some readers may recall that prior to 2009 there was a similar spread between tax rates for individuals, trusts and companies. This spawned a variety of tactics by which business owners changed the amount and method of extracting money from their businesses in order to avoid paying the top tax rates.
For any business owners contemplating these tactics caution is in order, becuase there is a point at which such changes are viewed as tax avoidance in the eyes of the IRD.
The relevant rules around tax avoidance in New Zealand were most clearly outlined in the Supreme Court case of Penny and Hooper v Commissioner of Inland Revenue [2011], which involved two Christchurch orthopedic surgeons who were judged to have taken artificially low salaries for the purpose of avoiding the top individual income tax rate.
No doubt the IRD will be taking a keen interest in any reappearance of similar tax avoidance arrangements.
Capital gains and wealth taxes
Labour campaigned on a capital gains tax before the 2017 election, but subsequently pulled back from implementing it. Current Labour policy is that there will be no capital gains tax while Prime Minister Jacinda Ardern is in charge.
It is timely to recall though that we already have a type of capital gains tax. It is more commonly known as the bright-line test, which taxes capital gains made on residential land (other than for a main home) that is bought and sold within five years.
With regard to wealth taxes, the Green party campaigned for a tax on individuals’ net wealth over $1 million. Despite Labour entering a ‘Co-operation Agreement’ with the Green party, Ardern made firm comments ruling out such a tax during her tenure.
In summary, neither of these taxes are likely in the next three years.
Fuel taxes
Of particular relevance to contractors and high consumers of fuel is that no changes to fuel taxes are expected.
Labour stated during its campaign that it will not raise fuel taxes. The current fuel excise tax is about 77 cents per litre, with an extra 10 cents per litre on fuel sold in the Auckland region.
One caveat to this is that if higher oil prices cause higher pump prices, the amount of GST does in fact increase, which is a rather stealthy way for the Government to increase its fuel tax take. Recent rises in global oil prices on the back of the Covid-19 vaccine announcement may indeed lead to increased pump prices before long.
Transformational or tinkering?
Overall the next three years are unlikely to be transformational from a tax perspective. With the transformative taxes such as capital gains and wealth taxes ruled out, all that remains are relatively minor tweaks to the status quo.
For contractors and related businesses this at least gives some degree of stability for the short term. In the longer term, there is a reckoning coming, given that the Government has been running up big spending deficits in an effort to counter the economic impact of the pandemic.
Ultimately these deficits will need to be balanced and one way of doing so is through increased taxation, so tax policy is bound to remain a topic of much debate over coming months. LG
Brett Crombie is a chartered accountant, qualified lawyer and former Inland Revenue tax investigator. He is the owner of Straightedge Accounting, which provides tax, accounting and business advisory services. Contact Brett on, 021 301 022, or email brett.crombie@straightedge.nz