Taking steps to prepare for the 39% tax rate

As the increase in New Zealand's top personal tax rate approaches, it is important to consider if there are steps that should (or should not) be taken to reduce its immediate impact. From 1 April 2021 the new personal income tax rate of 39% will apply to annual income over NZ$180,000. Before the income tax rate increase takes effect, there is an incentive to take steps to pay high income earning employees early and before the new rate applies. However, before taking such steps it will be important to consider the tax and employment law implications carefully.

Employers and employees

We expect that employers will consider a number of steps that could be taken before 1 April 2021, examples include the following:

• accelerating bonus payments;
• accelerating share awards, or bringing forward the share scheme taxing date on existing employee share plans and share option plans; 
• bringing forward the payment of cash (and non-cash) dividends for shareholder employees; and
• early delivery of non-cash benefits subject to fringe benefit tax (FBT)

Inland Revenue have, however, noted caution when taking such steps. They have indicated that they may be concerned if employers artificially accelerate payments solely to take advantage of the tax benefit, particularly if employers pay amounts early where the employees are not contractually entitled to the payments or if employers selectively pay an amount early to those employees earning over $180,000. Inland Revenue will have the ability to review PAYE records to identify any such early payments and could challenge the tax treatment. 

Accelerated payments also give rise to a number employment law considerations. Any accelerated payments by employers should be carefully and expressly communicated to the employee. If an accelerated payment requires a variation to an existing bonus plan or individual employment agreement (IEA) this should be documented. Employers will often wish to retain maximum discretion in respect of the entitlement to a bonus, the amount of any bonus, and the date of payment. Accordingly, if an employer were to pay bonuses early, the employer should record the basis on which it is being paid and expressly rule out (i) any on-going entitlements to accelerated payments; and (if appropriate) (ii) any payment should the employee give notice prior to payment. Finally, given the recent decision of the employment court in Metroglass (under appeal) employers should be aware of their obligations under the Holidays Act 2003.

Self-employed

Self-employed individuals, such as partners in partnerships and contractors, are also likely to consider taking steps to mitigate the impact of the 39% rate. 

Steps that will be considered by self-employed individuals will include:

• transferring their business into a trust or company, so as to benefit from the lower trust and company tax rates. The 11% differential that now exists between the top rate of tax at 39% and the company rate at 28%, will make the use of companies more common;
• for those operating in partnerships, the new income tax rate applies to the 2022 income tax year (rather than from 1 April 2021) and so they will be reviewing their balance dates to determine the point from which the new rate will apply

Again, Inland Revenue will be considering what they regard as acceptable steps that self-employed individuals can take prior to the change. It is possible that Inland Revenue will issue specific guidance on some or all of the above, so it will be important to take advice to protect your position.

Should you have any questions, please get in touch with our tax and employment experts.