Labour delivers on its promise to increase the top personal tax rate, along with consequential changes to the ESCT, RWT, FBT and other rates

Many will be aware that the Labour Government has introduced a new top personal income tax rate of 39% which will apply to personal annual income that exceeds $180,000 from 1 April 2021.

The legislation to give this effect was swiftly introduced to Parliament following the opening of the House on 2 December 2020 in the Taxation (Income Tax Rate and Other Amendments) Bill and was passed into law on 7 December 2020 in the form of the Taxation (Income Tax Rate and Other Amendments) Act 2020 (Tax Rate Act).  

In connection with the new top personal tax rate, there will also be other consequential tax changes.  These include changes to employer’s superannuation contribution tax (ESCT) which applies to superannuation contributions made by an employer.  ESCT is not applied in the same way as personal income tax rates as only one rate applies to the amount of contribution.  Instead it is applied to the ESCT Rate Threshold which is the gross salary or wages of an employee plus last year’s superannuation contribution (before deduction of any ESCT) paid by the employer. The Tax Rate Act introduces a new rate of 39% on superannuation contributions made for an employee whose ESCT rate threshold amount exceeds $216,000 ESCT.   

Other consequential changes are also being made to the following:  

• PAYE rates
• fringe benefit tax (FBT) rates, including introducing a new top FBT rate of 63.93%
• the taxable Maori authority distributions non-declaration rate
• resident land withholding tax (RLWT) rate
• retirement savings contribution tax (RSCT)
• resident withholding tax (RWT) on interest

These will all come into effect on 1 April 2021 (at the same time as the new personal income tax increase) with the exception of the change to RWT rate which has a later application date to allow interest payers time to implement required system changes. However, while system changes will also need to made for most of the above, including the ESCT changes, there is no extended timeline for those taxes.

The good news is that portfolio investment entity (PIE) tax rates for individual investors and RWT on dividends are unchanged. We expect that individuals will be carefully considering their personal arrangements and whether to take advantage of lower tax rates for companies, trusts and PIEs.  This has been acknowledged in the regulatory impact statement as an unintended integrity impact and will no doubt be monitored carefully.  

The bad news is that the Tax Rate Act includes new disclosure requirements for trustees in the annual trustee tax returns. These new disclosures will be used to assess compliance with the 39% rate and also to monitor the use of structures and trusts as a result of the new top personal tax rate. While the tax rate increases were largely anticipated, the speed at which the Tax Rate Act was introduced and the lack of consultation on the Tax Rate Act (particularly in relation to the new trust reporting requirements) has been disappointing.