Tax & the Election - what it means for your business

19 October 2020

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While I'll miss the occasionally humorous vandalism on some election hoardings, thankfully the election is over with. Politicians (respectfully…) can get on with governing.

It does give us as business owners the chance to plan for the next three years.

Fundamentally we're looking at Labour's stated policies, and what they would mean for business. Yes, there may be a green-tinge to some of them in time, which right now we can't plan for. So, focusing on what we know from Labour here's how we're planning.

39% Personal Tax Rate

The highest profile change is the 39% personal tax rate for any income earned above $180,000. To be clear, this only applies to the income earned above $180,000 (so if you earn $190,000, you'll only pay the 39% on $10,000).

We've had 39% tax rates in the past (2000 to 2009), and frankly it was great for accountants. People poured into rental properties to reduce their tax and became rather creative. We don't expect this to happen to the same extent this time around - but people will still look to accountants for opportunity.

That said, with the rate kicking in at a higher level (previously it applied to income over $60,000 - not the $180,000 as it is now), fewer people will chase the opportunity.

We expect the new personal tax rate to apply from 1 April 2021.

Trust Tax Rate

They have been clear that the trust tax rate of 33% will not be changing (nor will the company 28% rate). This means you're better to have income earned by a trust than in your personal name (if you're personally earning above $180,000).

If you're earning above $180,000, it's not a matter of simply switching from a company to a trust structure. Remember we've had a 39% rate before - people tried that and got (rightfully) hauled over the coals. It's a nuanced to debt funding, dividends and distributions rather than people trying to solve all their tax structure by restructuring.

Wealth Tax

The Green Party campaigned on a Wealth Tax (effectively Capital Gains Tax in a different guise). This would have a significant impact if implemented.

However, Labour have been clear that they will not implement a Wealth Tax irrespective of any negotiations with the Green Party.

At the Business Breakfast we hosted with Grant Robertson, Finance Minister, he was clear:

We won't be implementing the wealth tax

- Grant Robertson

He couldn't be more black and white about it than that.

Other Taxes

During the campaign, Labour committed to not increasing fuel taxes over the coming three years (to be honest, we did get slugged over the previous three years).

Other levies will be increased in line with their usual annual increases as part of the Budget. If there's any area we expect to change post negotiations with the Green Party it's here. We'd expect to see the introduction of further levies in areas like waste, pollution and non-electric vehicles.

What you need to do

Say you run a small mechanics business. You earn $130,000 per year as the owner working in the business. You've left $20,000 each year in the business to help it grow.

10 years in you've got $200,000 tied up in a couple of vehicles, some equipment and your workshop fitout. You've also got debtors (money owed to you by your customers), and some cash in the bank to get your business through.

Being burnt out, you decide to close your business. You want to sell everything, and turn that $200,000 into cash.

The first $50,000 will be taxed at 33% (in a simplified sense).

The remaining $150,000 will be tax at 39%. An ugly scenario.

There are steps you need to take now to avoid paying 39% on the cash you've got invested in your business.

For more information please drop us an email (hello@convexaccounting.co.nz). 

In short....

The new Government's tax policies are far from revolutionary. It's minor tinkering, rather than fundamental change.

For your business, it's about clearing any profits in your company to yourselves personally prior to the change. To find out how 

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for more help feel free to reach out. Get in touch with Hamish Mexted