Portfolio investment entity (PIE) tax settings could be up for review this year as the Inland Revenue Department considers ‘integrity measures’ to safeguard the recent rate hike for high-income earners.
Under the measure introduced by the Labour government last December, the top tax rate for those earning over $180,000 each year will rise from 33 per cent to 39 per cent as of April 1 this year.
But in background briefing papers, the IRD warns that taxpayers may seek to avoid the higher tax rate by using trusts, companies or PIE funds.
While the IRD singles out trust structures (which retain a 33 per cent tax rate) for special attention, the background briefing “also notes that Inland Revenue intends to consult with stakeholders on the other proposed integrity measures including potential changes to PIE tax rates over the first half of 2021 so that they can be legislated for 1 April 2022”.
The paper says PIEs are less prone to income-hiding abuse than trusts but, nonetheless, present some risks to the tax take and investment behaviour.
According to the report, “the difference between the top PIE rate and top personal income tax rate already exists, [but] moving from a five percentage point difference to an 11 percentage point difference could result in a significant diversion of investment into PIEs. This would result in reduced revenue collection and a small economic cost.
“… There is an overlap between how we tax PIEs and savings policy, including KiwiSaver, so we would have to report in more detail on options and issues if you would like further advice on this issue.”
The briefing document says officials are due to report back to government next month on further options, including any PIE rate changes, to back-stop the income tax hike.
An IRD spokesperson said: “Inland Revenue will be reporting to Ministers on possible integrity measures to support the 39% rate, which may eventually form part of a later consultation document.
“No decision has been made on what those integrity measures may cover. The exact timing of both reporting and contents of any eventual consultation document are not yet determined.”
Labour introduced the tax increase for high-income earners in the wake of its landslide win in last year’s election. Assuming no changes to trust, PIE and company tax rates, Treasury estimates the new 39 per cent top rate would raise about $2.2 billion of extra revenue over the next five years.
The enabling legislation also includes new reporting responsibilities for trusts aimed at limiting efforts to avoid the higher tax rate.
In a release at the time, Revenue Minister David Parker said: “If trusts are used for the sole purpose of paying a lower tax rate, it is unfair to all those New Zealanders that pay the right amount of tax. If there is evidence of this type of behaviour we will move on it.”
The background policy paper, however, says the new rate could trigger broader tax system changes in the years ahead.
“Substantial misalignment between the top personal rate and the rate for companies, trusts, and PIEs will raise broader questions about the coherence of New Zealand’s tax policy settings,” the paper says. “There is likely to be considerable pressure on the integrity of the tax system over the long term, in the absence of more substantive reform.”
The new 39 per cent rate will also apply to a range of ancillary taxes including the impost levied on contributions to KiwiSaver and other superannuation schemes.