Wealthy could mostly get around the 39% top tax rate, experts say

Wednesday, 9 September 2020

Labour’s new proposed top tax band will leave rich-listers largely untouched, some tax experts believe.

Many top earners should be able to partially protect themselves from Labour’s proposed 39 per cent top income tax rate, experts say.

Finance Minister Grant Robertson forecast the new tax rate, which it would impose on income over $180,000 a year, would raise $550 million a year.

But that figure appears to assume that almost all income that people earned over and above $180,000 a year would be caught by the tax change.

Former Inland Revenue deputy commissioner Robin Oliver, who now runs his own tax advisory service, forecast there would be “a lot of seepage”.

Green Party co-leader James Shaw has dismissed Labour’s tax plan as “tinkering”.

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Only income earned over $180,000 in the form of salaries and wages would be likely to be taxed at the new rate, he said.

“That is what you will get – you won’t get much else.”

Most of the income of high earners was structured so it was either taxed at the top company tax rate of 28 per cent and reinvested or invested in portfolio investment entities (PIEs) which also have a top tax rate of 28 per cent, he said.

Evidence presented to Sir Michael Cullen’s Tax Working Group in 2018 suggested that of the $658m paid in tax by “high wealth individuals” in 2014, only $36m – or 5 per cent was paid in income tax.

Another $485m was paid in the form of company tax by companies controlled by high-wealth individuals, and $124m by trusts they controlled, for which tax rates would not be changing.

Labour’s tax change would incentivise more wealthy people who might currently pay tax at 33 per cent to make use of those structures, he said.

Oliver noted the $180,000 threshold at which Labour has proposed the new rate should kick in, was also the top salary that could be earned by MPs who did not have ministerial responsibilities.

While salary-earning executives who were paid more than $180,000 would have a hard time avoiding the new tax rate, their pay was often set with an eye on international markets and they would probably just pay themselves more, he said.

Chartered Accountants ANZ tax leader John Cuthbertson believed people on high salaries, such as company chief executives, might not be able to do much to avoid the tax hike.

”Salary and wage earners are usually stuck with their lot.”

But he agreed that people who earned significant sums from self-employment and investments could have more options.

Big variations between the top rate of income tax, the company tax rate, and top rate of tax on trusts of 33 per cent increased people’s focus on tax planning, he said.

“That creates a fertile market in areas that are not productive,” he said.

“It does put stress on the integrity of the tax systems when you have such a wide differential.”

One simple way that high earners could reduce some of their tax exposure would be splitting their investment income with their partner if they were in a different tax bracket, he said.

Cuthbertson believed Labour’s proposed 39 per cent tax rate could encourage more people to set up trusts or company structures through which to route their income.

That would mostly be “at the margins”, he said.

PWC tax partner Geof Nightingale also warned a “widening gap” between the top personal rate of income tax and the corporate tax and trust rate, would put more pressure on tax administration.

Labour’s tax policy has attracted criticism from both ends of the political spectrum but with a consensus that the dollar impact would not be large.

ACT Party leader David Seymour described Labour’s tax plan as “divisive populism”, while forecasting it would raise “little revenue”.

Green Party co-leader James Shaw said it was “tinkering”.

Covid-19 had increased the wealth of those who owned property and shares, while the median income of “working New Zealanders” had fallen, he said.

“Currently the lucky few are amassing wealth and do not have to pay taxes on those assets, meanwhile everyone else is finding it harder to pay rising rents and bills, or put food on the table.

“Having already ruled out the capital gains tax, locking out any taxes on assets, property or wealth locks in poverty and structural inequality,” he said.

Nightingale voiced the same concern.

“Labour income gets taxed harder and we still have the gap of untaxed capital gains which will be fuelled by quantitative easing,” he said.

“This exacerbates the current distortion in the system.”