Inland Revenue (IR) has reported in its Regulatory Impact Statement that high-income earners are restructuring their affairs to channel their income through lower tax rate entities. This move is enabling them to avoid the new top tax rate of 39% that came into effect just over a year ago. It was a 6% hike on the previous top tax rate of 33% and was expected to impact the top 2% highest earners in the country. The current top personal income tax rate applies to income earners that earn over $180,000 a year.
By channelling their personal income through companies and trusts, these high earners are able to take advantage of lower tax rates, with business income tax holding at 28% and the trustee tax rate being 33%. IR asserts that the considerable difference in tax rates is a big incentive for high-income earners to restructure their affairs.
The tax department is estimating that this avoidance could lead to this top tax bracket declaring $3 billion less in income. IR warns that this behaviour could cause the public to lose confidence in the integrity of the NZ tax system.
In their analysis of personal income tax returns of those that earned over $180,000 in the 2020-2021 income year versus the same filings in the 2021-2022 income year, IR found that there was a 13% drop in income earnings from the previous year amongst those that were shareholders of the employing entity. This brought such employees’ earnings down to $166,000, which is below the top tax threshold. The IR has however noted that these findings are based on incomplete data and that they would have to wait until all filings are completed for at least another year.
IR has also highlighted the fact that since the government was voted in after promising to increase the top personal tax rate, there has been an increase in the number of companies and trusts being set up by 28%. It was pointed out that this correlation suggested that structures were being used to reduce the income levels of high earners to below $180,000.
An earlier analysis also found that some high earners were using dividend stripping to disguise their earnings. The research indicated that rather than collect dividends, these people were retaining the profits within the businesses with the expectation to recover these monies when later selling their shares at a premium and reporting the income as capital gains. 350 high wealth individuals with assets above $50 million were confirmed to be using or in control of 8,468 companies and 1,867 trusts.
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