New 39% Personal Tax Rate

The new 39% personal tax rate on income above $180,000 has now been finalised and will apply from 1 April next year (the 2021-22 income year).

Additional changes

Additional amendments to the bill include:

·         A new Fringe Benefit Tax (FBT) rate of 63.93% for all-inclusive pay above $129,6­­­81 and the single rate and pooling of non-attributed fringe benefit calculations.

·         A 39% Resident Withholding Tax (RWT) rate for individuals on interest income.

·         An Employer Superannuation Contribution Tax (ESCT) rate of 39% on superannuation contributions for employees whose ESCT rate threshold amount exceeds $216,000.

·         A 39% Residential Land Withholding Tax (RLWT) Rate (on residential land sales by offshore persons within the bright-line period), except where the vendor is a company.

·         A new 39% non-declaration rate for taxable Maori Authority distributions, where a member has not provided an IRD number.

All bar the RWT rate change will also apply from 1 April 2021. There is no change to PIE tax rates for individual investors or to RWT on dividends.

The RWT rate for interest has been increased for individuals, but from 1 October 2021 to give lenders additional time to update systems. The rate for dividends remains at 33%. Those receiving taxable dividends may have to pay provisional tax. There is no transitional rule to assist those who may see an uplift in their provisional tax obligations.

The RLWT rate increase is also not unexpected, particularly given the recent focus on the residential property bright line test and compliance with it.

Immediate next steps

There should be an immediate focus on the effect of the new 39% rate and the consequential changes on how businesses and employers operate. There are obvious effects on remuneration policies – not only the tax itself but also compliance.

The additional 6% for a payment made on 1 April 2021 (a Thursday) compared to one made on 31 March 2021 will raise practical problems for pay days and dividend payments. The trade-off for early payments will be whether they can be targeted to those directly affected or whether payments to all employees or shareholders need to be made. Timing changes will affect cashflow at a time when COVID continues to mean uncertainty. 

Please contact us if you would like further advice on changes to the personal tax rate and how this may effect you.

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