Hi, I am Iain Craig, BDO’s Eye on Tax and I am here to briefly outline what Tax Changes the new Government will introduce following the election.
With the new Government being Labour led there is a sense of continuity in tax. It’s kind of BAU but with a twist.
New Personal Tax Rate
I am referring of course to the introduction of a new personal tax rate of 39% on income earned in excess of $180,000. This increases the gap between the company tax rate and PIE tax rate of 28% and the trustee rate of 33% which will bring out its own implications.
We expect this rate to be introduced from 1 April 2021, so for those of you who own a business we suggest contacting your adviser and undertake the following action points.
- Review your business ownership structure and consider if it is fit for purpose. For example, if you own the shares in your company, should they be owned by a trust?
- Check if you should pay out a fully imputed dividend from the company prior to the change in shareholding.
- Review how you remunerate your senior people and see if there is an opportunity for some tax efficiencies.
Of course, we have been here before. When the top tax rate was last at 39% there was a change in tax payer behaviour which Inland Revenue regarded as being of an avoidance nature. Whether this was the use of a trading trust to conduct business or the suppression of remuneration below market value, care will need to be taken in navigating around the case law precedent and legislation that followed when undertaking the above reviews.
If you consider paying a dividend prior to the change in tax rate remember the company must be able to satisfy the solvency test and there will be a RWT cost of 5% when the dividend is paid.
If you consider transferring shares in your company from individual ownership to a trust, remember this will create a change in shareholder continuity for the carry forward of imputation credits and tax losses.
This provides a nice segue into one other tax change we can expect to be introduced and that is the carry forward of tax losses under a same business test.
Carry Forward Tax Losses
The carry forward of tax losses under a same business test was announced as part of a suite of COVID-19 relief measures., which included:
- Reintroduction of building depreciation
- Low value asset write-off threshold being increased to $5000 temporarily
- Carry back of tax losses
- Increased refundability of RDTI (Research & Development Tax Incentive)
While legislation has been introduced for the above measures, we still await details on the tax loss carry forward rules.
While it is expected to be based on the Australian legislation, we are hopeful those Australian rules may be “Kiwified” to allow companies to be able to adapt to the new business environment without losing those losses. Details are expected later this year.
Watch Iain Craig and Mark Lodder talk about the proposed tax changes in the RETHINKing the Tax Landscape webinar.
If you have an questions, please contact your local BDO office.