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Terry Baucher assesses the IRD's proposal for a big stick to counter top tax rate avoidance, potential tax changes make a difference to the cost of living, and what you should do to get ready for tax year end

Business / analysis
Terry Baucher assesses the IRD's proposal for a big stick to counter top tax rate avoidance, potential tax changes make a difference to the cost of living, and what you should do to get ready for tax year end
A big stick

Last week I mentioned that Inland Revenue had released a discussion document, Dividend Integrity and Personal Services Income Attribution, which set out its proposals for measures to limit the ability of individuals to avoid the 39% or 33% personal income tax rate through use of a company structure. This is what we call integrity measures designed to support the integrity of the tax system. In this case, the proposals are to support the objective of the increase in the top tax rate to 39% and to counter attempts to avoid that rate by diverting income through to entities taxed at a lower rate.

Now this paper is pretty detailed and runs to 54 pages. There’s a lot in here which will get tax agents and consultants sitting upright and reading the fine print as in some cases they will be affected directly. It's actually the first of potentially three tranches in this area. Tranches two and three will consider the question of trust, integrity and company income retention issues, and finally integrity issues with the taxation of portfolio investment income. And the reason for the last one is that portfolio investment entity income is taxed at the maximum prescribed investor rate of 28%, which is undoubtedly attractive to taxpayers with income which is now taxed at the maximum tax rate of 39%.

The Inland Revenue discussion document has three proposals. Firstly, that any sale of shares in the company by the controlling shareholder be treated as giving rise to a dividend for that shareholder to the extent the company and its subsidiaries has retained earnings.

Secondly, companies should be required on a prospective basis, i.e. from a future date, to maintain a record of their available subscribed capital and net capital gains. These can then be more easily and accurately calculated at the time of any share cancellation or liquidation. That's a relatively uncontroversial proposal.

And thirdly, the so-called “80% one buyer test” for the personal services attribution rule be removed. This one will probably cause a bit of a stir.

The document begins by explaining these measures are required to support the 39% tax rate. There's a lot of very interesting detail in this discussion, for example it notes that with the top tax rate of 39%, the gap between this and the company tax rate of 28% at 11 percentage points is actually smaller than the gap in most OECD countries.

But then, as the document says, “However, New Zealand is particularly vulnerable to a gap between the company tax rate and the top personal tax rate because of the absence of a general tax on capital gains.”

And so to repeat a long running theme of these podcasts, this lack of coverage of the capital gains has unintended consequences throughout the tax system. And this question of dealing with this arbitrage opportunity between differing tax rates is, in essence, a by-product of that.

As Inland Revenue notes, one answer would be to align the company, personal and trust tax rates. This was the case until 1999, when the rate was 33% for companies, individuals and for trusts. But this ended on 1 April 2000 when the individual top rate went up to 39%. And since then, the company income tax rate has fallen to 28%.

So this is a matter which needs to be addressed. There’s a really interesting graph illustrating the distribution of taxable income and noting there’s a huge spike at around $70,000, where the tax rate rises to 33%.

Taxable income distribution: PAYE and non-PAYE income
(year ended 31 March 2020)

There's also some interesting data around what high wealth individuals pay in tax. For the 2018 income year, Inland Revenue calculated the 350 richest individuals in New Zealand paid $26 million in tax.  Meanwhile the 8,468 companies and 1,867 trusts they controlled, paid a further $639 million and $102 million in tax respectively, indicating a significant amount of income earned through lower rate entities.  

It appears to Inland Revenue that tax is being deferred through retention of dividends in companies.

The opportunity in New Zealand is that a sale of the shares under current legislation would bypass the potential liability on distribution. The shareholder is basically able to convert what would be income if it was distributed to him or her, to a capital gain. And clearly, the Government wants to put an end to that, but can't because it doesn't have a capital gains tax.  The discussion document therefore proposes that any sale of shares in the company will be deemed to give rise to a dividend.  This will trigger a tax liability for the shareholder.

The paper goes into detail around this particular issue, and I think this is going to be quite controversial. Because although I could see a measure where a controlling shareholder sells shares to a related party such as, for example, someone holding shares personally sells them to a trust or to a holding company, which they control. You could see straight away that Inland Revenue could counter this by arguing it's tax avoidance.

But the matter gets more complicated where third parties are involved. And this is where I think the rules are going to cause some consternation because it proposes transactions involving third parties would also be subject to this rule. That, I think is where most pushback will come in on this position.  Without getting into a lot of detail on this there could be genuine commercial transactions resulting in some might say is a de facto capital gains tax.

The proposal is not all bad. If a dividend is triggered, then the company will receive a credit to what is called its available subscribed capital, ie, its share capital, which can later be distributed essentially tax free.

In making its proposals, the paper looks at what happens in Australia, the Netherlands and Japan and draws on some ideas from there. It's interesting to see Inland Revenue looking at overseas examples.  All three of those jurisdictions, to my knowledge, have capital gains tax as well, but they still have these integrity measures.

But the key point is this question that any sale, will trigger a dividend. There’s no de-minimis proposed. This could disadvantage a company trying to expand by bringing in new shareholders. It might have to use cash reserves it wants to keep to pay the withholding tax on the deemed dividend.  The potentially adverse tax consequences for its shareholders might hinder that expansion. I expect there will be a fair degree of pushback as a lot of thought will go into responding to this proposal.  It will be interesting to see exactly what comes back.

Cleaning up tracking accounts

Less controversial and something probably overdue, is the proposal for what they call tracking accounts to cover the question of a company's available subscribed capital, and the available capital distribution amounts realised from capital gains. Both of these may be distributed tax free either on liquidation or in a share cancellation in the case of available subscribed capital. But the requirement for companies to track this is rather limited, and these are very complicated transactions.

As the paper points out, the definition of ‘available subscribed capital’ runs to 40 subsections and 2820 words. So, there's a lot of detail to work through, and if companies haven't kept up their records on this, then confusion may arise if, say, 10 years down the track they're looking to either liquidate or make a share cancellation.

I don't see this proposal causing much controversy. I think Inland Revenue's proposals here are fair and probably something that should have been done a long time ago. They will apply on a prospective basis, as I mentioned earlier on.

Personal services income attribution - a 50% rule?

And then finally, the third part deals with personal services income attribution.  And what this part does is picking up the principles from the Penny and Hooper decision.  This was the tax case involving two orthopaedic surgeons, which ruled on the tax avoidance issues arising from the last time the tax rate was increased to 39%.

The discussion document is basically trying to codify that decision.  The intention is to put an end to people attempting to use what you might call interposed entities, lower rate entities, to avoid paying tax personally. The particular issue it's driving at is when an individual, referred to as a working person, performs personal services and is associated with an entity, a company usually, that provides those personal services to a third person, the buyer.

Inland Revenue is now looking at a fundamental redesign of this personal service attribution rule, which was designed to capture employment like situations. It was really designed where contractors might be providing services to basically one customer (the ‘80% one buyer rule’) and in effect, they were employees.  However, they could potentially avoid tax obligations by making use of an interposed entity with a lower tax rate.

Inland Revenue thinks that 80% rule is too narrow. The proposal is to broaden its application and by doing so it can at the same time deal with the issue that arose with the Penny and Hooper case.

Under current legislation, Bill is an accountant who is the sole employee and shareholder of his company A-plus Accounting Limited. The company pays tax at 28% on income from accounting services provided to clients and pays Bill a salary of $70,000, just below the 33% threshold. Any residual profits are either retained in the company or made available to Bill as loans.

The proposal is to remove that 80% one buyer rule and so that now Bill's net income for the year, if it exceeds $70,000 will all be attributed to him where 80% of the services sold by that company are provided by Bill.  Sole practitioners and smaller accounting firms and tax agents will find themselves in the gun. In fact, the discussion document suggests maybe this threshold of 80% should be lowered to 50%.

Now, you might think that the bigger issue is not the 33% threshold at $70,000, but the $180,000 threshold, so why do we want such a low threshold for this rule to apply? The discussion document points to the evidence that shows that there is income deferral going on. It appears to be at the $70,000 threshold (see the graph above) and wants to put an end to that.

So that's a more detailed look at what is a very important paper. It's likely to generate quite a lot of controversy and feedback from accountants and other tax specialists. It's also another part in the long running tale of the implications of not having a capital gains tax. But certainly, this one will run and run. Submissions are now open and will run through until 29th April. I expect all the major accounting bodies and firms will be responding.

Using tax to mitigate cost of living impacts

Moving on briefly, there's been a lot to talk about what tax changes could be done to help the increased cost of living. And Daniel Dunkley ran through some of the proposals.

One idea that pops up regularly is the question of removing GST from food. My view, which I expressed to Daniel and is also probably that of most tax specialists, is that this would undermine the integrity of GST, because we don't have any exemptions on that. 

I also don't think it would achieve the objective that is hoped for. There is, regardless of what people might say, an administrative cost to splitting out tax rates, having zero rate for food and standard rate for other household goods in your shopping trolley. And that differential, that cost involved, will be passed on to customers.

So the full effect of the GST decrease will never flow through to customers. To be perfectly frank; supermarkets and operators will play the margins around this. I suggest you have a look at what's happened with the fuel excise cut. It was 25 cents, but in every case did the pump price fall by 25 cents? And how could you tell because prices move around so much?

As I said to Daniel, and has been a longstanding view of mine, if the issue is getting money to people who have not enough money, give them more money. The Welfare Expert Advisory Group was staunch when it said that there was a desperate need to raise benefits. We also saw how the temporary JobSeeker rate was increased when COVID first hit. So, this issue of increasing benefits hasn't gone away.

The best position would not be to tinker with the tax system. You could perhaps look at tax thresholds, definitely, but they still would not be as effective as giving people an extra $30-40 or more cash in hand.

End of year preparations

And finally, the end of the tax year is fast approaching, so there's plenty of tax issues that you might want to get done before 31st March. A key one to think about is if you're going to enter the look through company regime, you need to get the election in before the start of the tax year. In some situations you might have more of a bit of a grace period for dropping out of the regime, as part of the Government’s response to the Omicron variant. But it you are electing to join the regime, I suggest you file the election on or before 31st March.

Coming back to companies and shareholders another important issue is the current accounts of the shareholders. You should check to see if any shareholder has an overdrawn current account (that is more drawings than earnings). If so, then either see about paying a dividend or a salary to clear that negative balance, although of course, you're up against the issue of the higher tax rate I discussed earlier. If that's not possible, charge interest at the prescribed fringe benefit tax rate of 4.5%.

Companies may have made loan advances to other companies, look at those carefully because you may need to charge interest there to avoid what we call a deemed dividend.

Another very important matter is if there are any bad debts. If so, then consider writing them off before 31st March in order to claim a deduction. And then if you're thinking about bringing forward expenditure to claim deductions such on depreciation, then do so.

Companies should check their imputation credit accounts balances and make sure these are positive. There are mechanisms through tax pooling to manage this problem if you miss a negative balance.

Well, that's it for this week. I’m Terry Baucher and you can find this podcast on my website tax or wherever you get your podcasts. Thank you for listening, and please send me your feedback and tell your friends and clients. Until next time, ka pai te wiki, have a great week.

Terry Baucher is an Auckland-based tax specialist with 25 years experience. He works with individuals and entities who have complex tax issues. Prior to starting his own business, he spent six years with one of the "Big Four' accountancy firms including a period advising Australian businesses how to do business in New Zealand. You can contact him here.

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'If the issue is getting money to people who have not enough money, give them more money. The Welfare Expert Advisory Group was staunch when it said that there was a desperate need to raise benefits. We also saw how the temporary JobSeeker rate was increased when COVID first hit. So, this issue of increasing benefits hasn't gone away. The best position would not be to tinker with the tax system. You could perhaps look at tax thresholds, definitely, but they still would not be as effective as giving people an extra $30-40 or more cash in hand.'

Surely, the logical end of this is to give everyone a UBI, a nontaxable universal basic income, as TOP advocates. Although, of course, that would require considerable tinkering with the tax system to recoup part of that money from those at the poorer end who have other income, and all of it (and then some) from those at the upper end who have no need of it.


Would the UBI be set above or below existing benefits (including super, accommodation supplements, emergency payments and loans etc).

If below, would that be tough titty or would there still be a top up and all the administration that goes with that.


Emergency benefits and special-needs benefits are unavoidable in a just society. The accommodation supplement is a blight that merely enriches landlords, but can only be replaced by the mass building of income-related state rental housing. As for the level of a UBI matching NZ Super: perfectly doable, as long as the flat tax on other income and a land tax are levied at rates that pay for it and subdue inflation.


Perhaps incentivise work by a tax rebate. Those who earn up to say $60k pa get a rebate at years end, basis first $20k tax free. That way you have to work to earn it. Long ago incentives were given to encourage life insurance cover, the premiums being a tax deductible. Shouldn’t hurt the IRD they collect plenty of provisional tax to off set. That then avoids the criticism of meaning top earners getting their first 20k tax free, as they would be above the threshold for the calculation to be triggered.


Wait till your UBI is eaten away by inflation, paid for via 'money-printing' then stopped tenuously by the government.. all while you're enjoying a 33% flat-tax-rate. 

Milton Friedman - Universal Basic Income | Negative Income Tax:


If you want to help people "who don't have enough money", don't give them money, teach them how to handle money.


I’d suggest a lot (not all) would be better off if we gave them condoms. Struggling with 2 kids, hell lets have 4 more.

Giving money to people with zero financial literacy is a waste of time. Alcohol vs vegetables, cigarettes vs porridge, TAB vs buying your kid a fleece jersey from The Warehouse.


"But then, as the document says, “However, New Zealand is particularly vulnerable to a gap between the company tax rate and the top personal tax rate because of the absence of a general tax on capital gains.”"

Not quite being able to get my head around this I interpret this as shares are shuffled around currently to avoid tax because there is no capital gains tax whereas if there was capital gains tax shares being shuffled around would be subject to capital gains tax so dis-incentivising this share shuffle.


I'll just copy what I put up on my Twitter feed: I'm totally over all of this nonsense:

3 reasons to leave NZ:

1. Covid policy ( @nzlabour have kept the rights destroying traffic lights framework: we still have tyranny).

2. Co-governance (no future 4 peaceful democracy based on individual rights - a race based system will see declining living standards and ultimately a violent uncivil society).

3. Diabolical envy ridden tax policy from @grantrobertson1 No desire to practice 2022.

Regarding (3) practicing tax in New Zealand from 2022 is going to be a litigious, intrusive - IRD will be all through our business people's private lives - and simply impossible shit fest. No interest deductions landlords. 39% via a vis co/trusts - moronic legislating unseen b4.

Totally over this little gulag in the South Pacific.



Okay bye!


Good news! The "Hermit Kingdom" is coming to its eventual end. 


Btw how many twits are you feeding ... jokes


..  you're a good man , Mark ... pleased to see you posting here... this appalling government of talentless wastrals  needs to be booted out ASAP ... they're crushing us under a weight of drab , heartless bureaucrats .... Jacinda prays that Covid is still an issue in 2023 , so she can continue  to politicize it into another election win ...

Wake up Kiwi sheeples ... she's scamming you !


How about the IRD go and audit the hell out of the wage subsidy, I know alot of businesses claimed and didn't need from Accountants, Lawyers, valuers and others. I know my accountant who sends an account once a year changed the date it usually comes which no doubt would of been the strategy to have the decline in revenue. I would expect they could claw back at least 5b to 10b. All these business owners are driving new European vehicles and brought another house.


I agree. I suspect there are many dubious claims. The wage subsidy is another in a long list of things from this Government that was a good idea with good intentions, but poorly executed.


Much as I totally agree with the sentiment, it was as far as I can see designed simply for one purpose and that was to shovel money out into NZ. Not so sure they caref who actually got it.


Hi Terry

Thank you for your coverage of this issue.

This issue is much wider than just the absence of a capital gains tax. Relative to other countries, New Zealand is peculiarly dependent on income taxes rather than social security taxes or generalised expenditure taxes. In almost every other OECD country taxes on capital incomes are designed to be lower than taxes on labour incomes, to prevent the distortions that arise when taxing capital incomes. By linking social security payments to the social security taxes people pay on their labour incomes, other countries reduce the incentive to keep income in their companies: if you pay fewer social security taxes, you get a smaller pension later in life. New Zealand broke with orthodoxy nearly fifty years ago by not adopting a social security based tax system, with the result that we end up accentuating the problems you describe.

The extremely high fraction of taxes collected as income taxes also accentuates the problems that arise when you have a tax system that does not tax capital gains . As is well understood, there is no need for capital gains taxes under an expenditure tax system, as consumption is taxed when income is spent. Most countries have adopted some form of EET system to partially convert their income tax into an expenditure tax, but NZ broke with orthodoxy (again) by scrapping its EET system in the late 1980s. This makes a capital gains tax more important in New Zealand relative to other countries.

Personally, I have no problem if people pay tax when they spend their income rather than when they earn it - and i am in good company in this regard, not just because expenditure taxes are routinely acknowledged as more efficient than income taxes (particularly if they are designed like those we have in New Zealand) but on the philosophical grounds that it makes more sense to tax what you take out of society (personal consumption) than what you put into society (paid goods and services) . John Stuart Mills said the same thing.   But I do agree that the current mishmash of taxes imposed in New Zealand looks more and more like a scheme designed by Heath Robinson 

It is a pity that New Zealanders no longer bother to ask whether our three major departures from tax orthodoxy (social security taxes; EET retirement income treatment; capital gains taxes) are working properly, or are leading to a pile up of unintended consequences. The major winners appear to be tax accountants and lawyers, which is universally regarded as a sign of a badly designed tax system. I wonder whether the lack of challenge to the current system is because so many of the people designing or commenting on tax policy are so old, and they are defending their 1980 and 1990s babies rather than wondering whether the system we have inherited from the late 20th century is fit for purpose in the 21st century.








You only have to look at some of the above comments to see what happens when people start talking tax. It's more likely to head in the direction of benie bashing and to many kids.

I've forever been disappointed in Helen Clarke's government mid 2000s. They had huge surpluses and I thought at the time it was a real opportunity to change our tax base and shift from personal tax and it's rediculous WFF and accomodation supplement in particular. But that chance was bypassed with more of the same shit.


Logical and to the point . 

Will no doubt be ignored by Terry as incompatible with " CGT is the cure-all" mantra - never mind that NZ already has unusually high taxes on capital income.