Grant Robertson has announced that should Labour win the election, they are intending to hike up the top individual marginal tax rate from 01 April 2021 on income over $180,000 to 39% which would add roughly about $500 Million to the government coffers. There should be no other increases to current tax rates.
A lot of work has been done by previous governments to align the tax rates, so as to discourage investment through entities with lower tax rates by aligning the top marginal tax rate to the trust tax rate. Assuming this proposal will go through the disparity in tax rates will no doubt result in effective tax planning all over again.
Taxes that will remain the same:
- Corporate Tax Rate 28%
- Trust Tax Rate 33%
- Individual tax rates on earnings up to $ 180,000 p/a
Keeping the good old trust alive:
With the top marginal tax rate going up to 39%, if Labour wins the upcoming election, keeping the good old trusts alive may make good economic sense. Despite the more onerous rules that are imposed on the Trustees by the Trusts Act 2019 which will come into effect on 31 Jan 2021, trusts will, once again, become an effective tool for tax planning.
Investment income is taxed at 33% if retained in the Trust as opposed to 39% if earned by an individual, assuming that the individual’s marginal tax rate is 39%. A Distribution of accumulated income from a trust, which was already taxed at 33% as trustee income, can be distributed tax-free to the beneficiary on the high marginal tax rate of 39%.
What does this mean for companies & dividend income?
If the tax rate goes up, a dividend distribution from a company to an individual with other income of $ 180,000 or more will be subject to an additional 11% tax. This is made up of 5% RWT deducted by the company and an additional 6% suffered by the shareholder.
Possible Tax Planning Opportunities?
Like anything, every cloud has a silver lining. A major change like this presents itself with tax planning opportunities. Why pay more tax than is absolutely necessary?
One could consider transferring investments held personally to a Family Trust. In the case of shares, care should be taken that imputation credits are not lost due to breach of continuity. Transfer of shares may give rise to loss of tax losses brought forward. Care also needs to be taken in cases where the company is a land rich company where 50% or more of assets is made of residential land, as that may give rise to the application of bright-line rules.
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Article by Martina Evans, the tax expert from Roberts & Associates.