IR warns high earners not to try to be clever dodging 39% tax rate

Friday, 12 March 2021

Inland Revenue is warning high-earners not to try to side-step the new 39 per cent top rate of income tax that will apply to annual income over $180,000 from next month.

IR official Tony Morris said the department would be keeping “a close watch for any activity by such people that looks like its primary aim is to avoid the 39 per cent”.

“If that’s how it looks to us then we’ll take the necessary action,” he said.

IR was talking directly to tax agents “and putting out a range of direct communications that are effectively a warning message and a guide to what kinds of activity will concern us,” he said.

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“The message really is, if you’re in doubt, or have questions, the best thing to do is seek advice. And of course, you can seek rulings from Inland Revenue,” he said.

People who earn their income through regular employment would appear to have few ways to avoid the impact of the new tax band.

But some tax experts have warned it could encourage other high earners to restructure their tax affairs, where possible, for example to book more income in the form of company profits that are taxed at 28 per cent, and through trusts.

Chartered Accountants ANZ tax leader John Cuthbertson said in September that salary and wage earners were usually “stuck with their lot”, but agreed people who earned significant sums from self-employment and investments could have more options.

IR's comment about the significance of people’s “primary aim” suggests – as would be expected – that it will be looking at people’s motivation for any changes they make to the way they manage their financial affairs when considering whether they would be likely to be within the law.

Morris said IR would reissue an alert it first put out in 2011 that covered the diversion of income from one business entity to another.

“While we haven’t substantially changed our approach to this, it reframes the alert in the context of the new 39 per cent rate,” he said.