On 2 December 2020, legislation was introduced by the Government that increased the top personal marginal tax rate to 39 percent on income over $180,000 from the start of the 2021/22 income year.
Three other changes were included in that legislation. It introduced:
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new information gathering powers for the purpose of tax policy development
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a new requirement for most trusts that derive assessable income to prepare financial statements, and
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increases in the information that trusts must disclose as part of the income tax return filing process.
This legislation was enacted under urgency and did not go through the usual consultation process. At the time, David Parker signalled that if trusts are being used for the sole purpose of paying a lower tax rate “we will move on it”.
Fast forward one year and three things have happened.
1. Inland Revenue has initiated a research project in which it is examining the lives of 400 New Zealand taxpayers worth in excess of $20m to estimate their effective tax rate on economic income (which is broader than taxable income). A range of information will be demanded for the 2016-2021 income years including details of partners and dependants, significant personal assets (how much they cost, and the date acquired), real estate interests, details of companies and trusts, and other financial flows. This information is being demanded under the new legislation referred to above, with requests separated into three tranches due in November 2021, January 2022 and May 2022, each delving further into the lives of these taxpayers to enable IR to measure the ‘household’s’ total income. The results of IR’s research project will be released in an anonymised form in mid-2023.
2. On 15 October 2021 IR released an Officials Issues Paper seeking feedback on what level of detail should be required within a trust’s financial statements pursuant to a future Order in Council. A draft operational statement was also released by IR on the same day that proposes how the new information gathering powers will apply to trusts. Based on the draft statement the following types of information will need to be submitted each year:
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a statement of profit or loss and a statement of financial position
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details of taxable and non-taxable distributions and who they have been paid to, and
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the nature and value of any settlements onto a trust, and who a settlement has been made by.
3. There’s been an increase in information required that ties in with IR implementing a new IT system that enables an unprecedented ability to analyse and manipulate data.
During the build up to the general election in 2020, Jacinda Ardern ruled out Labour bringing in a capital gains tax under her leadership. However, as the new information that is being gathered is analysed, it might reveal a segment of income being used for the necessities and luxuries of life that have not been taxed – which could open the door for a generational change to the basis on which income tax is levied.
We’ll keep you posted, but if you have any queries, please get in touch.