A decrease in employment income and restructuring to lower tax rate entities are two noticeable changes in taxpayer behaviour since the introduction of the 39% marginal tax rate, according to Inland Revenue’s (IR) early analysis of high-income earners.

The sale of shares from individuals to trusts and a marked increase in dividend payments in March 2021 have also shown up.

The new top marginal tax rate of 39% for individuals with income over $180,000 came into effect from April 1, 2021 (the 2021-22 income year). IR’s analysis focused on about 119,000 taxpayers. It should be noted that more than 40% of the income tax returns for this population have not yet been filed for the 2021 tax year as they have a due date of March 2022. So, the information held for the 2021 year will not be complete until after that date.

Decrease in employment income for owners 

High-income employees who work in their own businesses have shown a 13% decrease in their average income. This drop may reflect a change to alternative means of remuneration as business owners have options for structuring their remuneration. These include declaring income throughout the year (subject to PAYE), declaring annual income (taxed through their personal income tax returns or remuneration through dividends (after tax has first been paid at the company level).

Meanwhile, for those not associated with their employer, the decrease is just 5%. 

Importantly, IR noted that many businesses have experienced a reduction in income as a result of COVID and that this could affect owners’ remuneration. The full picture will not be available until 2022 personal income tax returns have been filed. 

Restructuring to lower tax rate entities (companies, trusts and partnerships)

The target group has formed 10,633 new companies, 2630 new trusts, and 362 new partnerships since November 2020. This represents a 28% increase in the volume of new entities established by this taxpayer group as compared with the prior 12-month period.

Sale of shares from individuals to trusts

The transfer of shares (or other income producing assets) from individual holdings to a trust enables the final tax on future earnings to be determined at the trustee rate rather than individual marginal tax rates. The use of trusts can provide a permanent tax advantage as income taxed at the trustee rate of 33% can subsequently be distributed tax free to the individual recipient as tax paid trustee income. 

Increased payment of dividends in March 2021

IR surmised that the likely driver behind the large spike in dividends paid out in March 2021 was to ensure they had a maximum tax rate of 33%. It is thought the dividends represented an accumulation of multiple years’ retained earnings rather than a higher-than-average income earning year in 2021.

IR acknowledges that companies are entitled to make dividend payments if they can. Further IR scrutiny is expected where the dividend amount has been retained by the company. There may be good commercial reasons to advance funds back to a company.

CA ANZ is monitoring what integrity measures may develop and intend to further engage with IR to provide further member certainty. Earlier, CA ANZ hosted a member knowledge sharing webinar last year with IR on likely acceptable/non-acceptable restructuring and personal arrangements considering the top personal tax rate change to 39%. A follow-up session was held as part of the ‘Talking Tax – the key issues’ program that ran in November 2021 in substitution for the tax conference.