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Terry Baucher's surprised there's no tax surprise in the Budget, but expects tax debate in election campaigning

Public Policy / analysis
Terry Baucher's surprised there's no tax surprise in the Budget, but expects tax debate in election campaigning
tax

The big tax surprise in the Budget is that there is no tax surprise. Surprisingly, well to me at least, the Government included no changes to income tax and other thresholds and there is little indication of any such changes ahead in the Budget documents.

The destruction wrought by the January floods and Cyclone Gabrielle may have interrupted plans for such changes. Of course, the Government could be keeping its powder dry for the coming election campaign. No doubt we will find out when the campaigning begins in earnest.

On the other hand, the increase in the trustee tax rate to 39% with effect from 1 April 2024 should not have come as a surprise. Inland Revenue recommended the trustee rate should also be increased to 39% when the top personal income tax rate of 39% was introduced in 2021. It was only a matter of time before the trustee rate rose and the publication of Inland Revenue’s High Wealth Individual Research Project provided a clear opportunity for the Government to do so.

In the accompanying press release announcing the measure Minister of Revenue David Parker noted that new Inland Revenue information shows a near 50% increase in trust income taxable at the trustee rate from $11.4 billion in the 2020 tax year to $17.1 billion in the 2021 tax year. The top 5% of trusts with taxable income accounted for $13.3 billion or 78% of all trustee income in the 2021 tax year.

As a tax policy measure, it is logical and is expected to raise $350 million annually. (There will be some exemptions for disabled and deceased estates).

I expected an announcement about the OECD’s Base Erosion and Profit Shifting international tax rules similar to the initiatives included in last week’s Australian Budget. There was no such move although the forecasted tax revenue for the June 2027 includes an estimate of $25 million as the initiative takes effect. Asked about this in the Budget Lockup, Grant Robertson specifically ruled out a Digital Services Tax.

Nor did we see any moves for increased or targeted depreciation measures as was also in the Australian Budget, although the new 20% rebate for game development studios matches an Australian measure. The gaming industry is exactly the sort of low-emissions, high wage, high growth export industry we need so the move is welcome.

Looking at the numbers, tax revenue is projected to rise from $114.6 billion for the June 2023 year to $122.6 billion for the June 2024 year. About a billion dollars of the increase is the effect of fiscal drag where wage rises crossing tax thresholds mean higher average taxes for earners. Resident Withholding Tax on interest has almost doubled to an expected $1,659 million for the current year to June 2023, a direct effect of the dramatic increase in interest rates over the past year. Proof, perhaps, that every interest rate rise cloud has a silver lining, for the Government at least.

There are a few interesting snippets from digging through the Vote Revenue Estimates of Appropriations. Last year’s Cost of Living payments were budgeted as costing $706 million, but according to the Appropriations the final cost was $50 million lower at $656 million.

Inland Revenue’s funding appropriation for June 2024 shows a $23.2 million or over 20% boost from $110.6 million to $133.8 million for its investigation, audit and litigation activities. Debt management gets a significant increase too, although the provisions for impairment and debt write off totalling $931 are actually down from the estimated $985 million for the current year.

Overall, from a tax perspective this was a surprisingly quiet Budget especially considering it’s an election year. Grant Robertson was quick to brush off questions about electioneering but on the tax front at least I think we can expect to see more in the coming months. The debate over tax rates, tax thresholds and capital gains taxes are all to come.

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33 Comments

Election bribes incoming

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Another nail in the coffin for trusts. About time I might add.

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Why? A trust can own a company that pays 28% tax receiving a dividend exactly equal to the amount it plans to distribute to beneficiaries when necessary meaning no trustee tax is ever paid. Previously the difference between 28% and 33% meant that simplicity and convenience resulted in some people paying the trustee tax rate, with the difference more than doubling adding a company looks more and more attractive. The trust enables the payouts to be split based on discretion at the time instead of being set ahead of time. The key take away here is that those who can afford good accountants will not be affected whilst middle New Zealand gets to pay more!

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If trust income is paid out to beneficiaries then the trustee rate doesn't matter. The new trustee rate will ensure wealthy people will either get taxed at 39% if the income is in their hands, their trustees hands or their minor children's hands. Harder to hide.

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That sounds pretty dumb to me Heavy. If the beneficiaries have tax rates lower than 39%, and income is attributed and distributed to them, then it makes no sense that the income should be taxed at 39%. That is just insanity. Lets hope National show common sense and drop the top tax rate back to 33%. After all, this Government has collected significantly more tax than any other Government before it, spent all of it, borrowed even more and spent it, and not improved NZ one jot. Just goes to show, if spending money was the answer, Labour would have solved all NZ's problems 60 years ago. But no, tax and spend for no result is their mantra.

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The point is that the beneficiaries are wealthy individuals already earning above $180k and therefore being tax at 39% for each dollar over that amount. What they can do now is transfer all income over $180k to their trusts which only pay 33%. The arbitrage between the top tax rate and trustee rate makes the top tax rate redundant for the wealthy able to afford smart tax advisers. The alignment of the top tax rate and trustee rate stops that tax avoidance.

As for National saving the day, it has already confirmed it will not scrap the top tax rate in its first term (https://www.1news.co.nz/2022/11/27/luxon-national-wont-touch-39-tax-rat…). If it were to scrap the 39% trustee rate it would be an obvious sign for the rich to syphon their wealth back into trusts. National don't want the bad publicity of being the party looking out for 2% of the population.

As for Governments spending like drunken sailors, everyone forgets National's spending spree on Canterbury earthquakes and the bail out of SCF and AMI resulted debt to GDP going from 5.4% when they took power in 2008 to a peak of 25.5% in 2013 (https://tradingeconomics.com/new-zealand/government-debt-to-gdp). Labour's debt increase is not as high percentage wise and it has had to deal with severe natural disasters and Covid. Sometimes money has to be spent, both National and Labour accept this.   

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My point with adding a company under the trust is that instead of holding money in the trust at 39% tax you can hold it in the company at 28% tax. The trust will then never make any money because the company will never pay it out, until there is a reason to send money to the beneficiaries, at which point the company pays out a dividend of exactly the amount of the distribution to beneficiaries meaning that the trustee tax rate is never hit. Money either continues to accumulate at the 28% corporate rate or it gets paid out at the beneficiary tax rate.

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Leaving money in a company is not an issue. That is why the corporate tax rate is 28%. A concessionary rate that encourages reinvestment of company profits. It is only when shareholders seek to transfer value out of the company that taxation becomes an issue (i.e. dividends).

Currently if those dividends are paid to individuals who have over $180k of income they'll pay 39% on any dividend paid to them by the company. With the 33% trustee rate those high income persons started transferring all the shares to their trusts which only paid tax at 33% on dividends.

Your example of having low income beneficiaries can be used without the need of a company. However, most high wealth individuals won't have lots of low income beneficiaries they want to give money to. E.g. Mr X earns $1m in dividends from several investments. From the 2022 tax year he pays 39% on $820k of that income. In the 2022 tax year he transfers his shares to the Mr X Trust which pays 33% tax and then pays the funds to him tax free. With the legislation change the Mr X trust now also pays 39% on the $1m dividends. Mr X now needs to find 5 friends or relatives with no income  who can be allocated the trust income as beneficiary income to avoid the 39% rate (i.e he and his 5 friends/relatives now get $166k each to stay under $180k). Once those 5 friends/relatives get the money are they required to give it to Mr X? If so at best tax avoidance and at worst tax evasion. If the 5 friends/relatives get to keep the $180k no tax issue but talk about cutting off nose to spite face. 

 

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The normal process is to leave the money in the company and re invest until a favourable tax regime is present taking out only what is needed when it is needed. You might not care that the $100,000 for your child’s medical school tuition comes out at your 39% tax rate ($164,000 in pre tax income) instead of at your child’s marginal tax rate (requiring $140,000 in pre tax income), but to some of us $24,000 is a lot of money. Sure the super wealthy on millions might find it trivial but if mom and pop are just regular doctors making roughly $180k a year each (because they choose to work for the govt to help people instead of going private to earn multiple times that, like our current government is pushing them to do), that $24,000 would represent about half a doctor’s annual disposable income or 20-30% of their annual after tax & kiwisaver take home pay.

Using the trust to enable the distribution as the trustees see fit further enables the same process to be repeated for grand kids, it also offers a level of protection and helps with complex continuity of share ownership company stuff.

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Heavy, a higher Trust tax rate doesn't nullify smart tax advisors. What was laughable was this Government claiming that the "wealthy" are have been generating income in Trusts to avoid tax. Horseshit. When the tax rate on Trustee income was 33% and the top marginal rate was 33%, there wasn't an issue. And if National scrap the 39% rate, they will likely scrap the 39% income tax rate. So again, no issue.

On Nationals "spending spree" that you describe, it isn't even on the same planet, let alone ball park as this bunch of clowns. And on your stats, debt to GDP stood at 70.3% at 29 November, 2022. https://www.stats.govt.nz/information-releases/government-finance-stati…

With $18bn of that happening in the year ended June, 2022. And then there was this comment "Central government net debt had been decreasing in nominal terms from 2012 to 2019".

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what about LTC's that own rental properties. Accountants were pushing for transferring to Trusts/ THose who did would regret it now

Unless you could distribute to beneficiaries
The cost and complexities are increasing to maintain them, better off KISS (keep it simple stupid)
only winners are lawyers and accountants

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Not following Aussie on Tax shifting by international players is a failure. Agree with writers comment.

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The government basically just announced that from next Year the marginal tax rate on minimum wage workers will be 30% !

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How do you work that out?

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No tax bracket movements plus not particularly aggressive measures to reign in inflation mean that next year the min wage will rise by more than the 1.64% ($0.38/hr) difference between the current min wage and the 30% bracket. 40hrs x (0.38 + 22.7) min wage x 52 weeks = $48,006.4 which attracts a marginal tax rate of 30% (31.5% if you include the acc levy)

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Remember that this is the budget but Labours still reserved its future tax policies for the election. Failure to attack bracket creep might be part of their plan for voter demographic softening up for additional CGT/Land/Wealth/Death duties etc

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That's pretty crafty actually (the minimum wage thing). I'll give them kudos for that.

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You do realise they only pay 30% tax on the amount they earn above 48000. 6.40 in your example.

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Basically if a min wage worker works any overtime or a stat day they will get all the extra taxed at 31.5% (including acc levy)?

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Is far less sexy than your original assertion. 

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My assertion about marginal tax rates? How so?

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Factor in WFF abatement of 25c in the dollar and the tax rate on that overtime is getting up to over 50%, at another 12% for a student loan, of which they spend the remaining after tax dollars and pay GST of 15% on the remaining. 

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Reminds me of someone I hired off the SB once. They were livid that after the dust settled, their work week only resulted in $150 more than sitting at home. 

- You have a whole $150 more than you had before

- You're actually doing something

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If the difference between not being at work or being at work is a) travel and b) potential extra childcare costs for a full week s a result then it's a bad deal. 

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Yup , its really hard to get people to see are still better off, many people i try to employ are happy to work , but don't like the idea of paying tax / having their benefit possibly reduced.  

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Wouldn't they be better off paying less tax on the first $48000 , or having a tax free first $5 or $10 k?

There's another bunch of people who cant work a full week, or otherwise don't make the equilvalent of 40 hours at the minimum wage , they are the ones that probably really need help. 

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Probably has something to do with doubling our budget deficit. 

Just whip the workers harder, might be able to squeeze out enough for a benefit increase too. 

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TOP's Tax Switch Calculator - released yesterday :-)

https://taxswitch.nz/

 

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Ouch , anyone owning land gets whacked. 

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Oddly enough, that's not the case. Because Lifestyle Blocks are classed as non residential (mine is, I checked on the Switch calculator!) I'd pay no LVT despite some urban dweller paying over $4k LVT on a section with similar land value. Doesn't seem fair, but likely to make LB's much more sought after. Unintended consequences anyone?

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oh , either is mine. I just put in the value. And it also only came up with the value of the address title , not the value of the other 8 titles that are under the same address.  

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I imagine it also has trouble with unit titles (apartments)?  So, I assume, many land-holdings will be excluded when inserting the address.  They will likely need to add further layers for rural, rural-residential, commercial, unit title, etc. - and of course these might need a different % applied to them when the policy is designed more fully.

But for the bulk of urban-dwelling, salary-earning homeowners and non-home-owners, I hope it provides a good indication.

 

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yes, a higher level of detail would be necessary if it came to past. 

Good on them for coming up with something different , and presenting the numbers to the voters. 

I don't think it is fair on the asset rich (usually only because their primary residence has grown in value so much ) cash poor , and for that reason wouldn't vote for it . I would vote for it if it excluded the primary residence. 

 

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