Government targets 39% avoidance

Perhaps thinking that they’ve now done enough damage to the residential property investment market via interest deduction restrictions, loss ring-fencing and increased bright-line periods… the Government has now moved its focus to all you tax avoiders out there who have nothing better to do with your businesses in the challenging environment of the new Covid world, than to spend your days thinking up ways of how you can avoid the new 39% personal marginal tax rate.

Introduced for your bedtime reading pleasure (although this one may keep you awake at night rather than help you sleep) is the Government’s consultation document, ‘Dividend integrity and personal services income attribution’. It’s a 54-page masterpiece that seeks your feedback (which is likely to fall on deaf ears) on measures that would limit the ability of individuals to avoid the 39% or the 33% personal income tax rates by using a company structure.

First up it’s a new capital gains tax (oops, did I just hint that?) on the sale of your shares in a company you and/or your associates have controlled (more than 50% interest), where you’ve clearly retained earnings within the company to avoid paying 33% or now 39% personal tax. Basically, without getting into the detail for now (since it is purely a consultation document at this stage), if your company has retained earnings when you sell your shares to another party, then a portion of your historically tax-free capital gain will be treated as a taxable dividend.

Second up, and a few of you may think it’s just basic best practice in any event (because the onus always rests with you to prove the tax position taken) so why waste time legislating for it?... is a proposal to require companies to maintain a record of their ASC and ACDA balances, so that the Revenue can easily verify the non-taxable amount when either shares are repurchased by a company, or the company that is liquidated. I expect most of you will be aware, that an amount paid to a shareholder for a repurchase of their shares is tax-free in their hands to the extent of the available subscribed capital (ASC) per share component. Or, when a company liquidates, a distribution to shareholders will not be a dividend to the extent of the ASC and available capital distribution amount (ACDA) – the latter in essence net non-related party capital gains. The consultation document suggests two options for the new rules – reporting to IR annually akin to present ICA account balance reporting (to me suggests “Big Brother is watching you”), or you simply produce when requested should one of the triggering events occur.

Finally, if Penny and Hooper (a well-known tax case) risk-type reviews and the subsequent introduction of the personal services attribution rules were not enough, the Government is suggesting the existing thresholds to the latter make the rules too narrow, particularly for all the tax avoiders out there. First proposal is to remove the 80% single customer rule – so do more than 80% of the work and not use significant assets to perform the services, then having multiple customers will still trigger an attribution requirement. However, just to stick the knife in a little further, the proposal is also to reduce the working person threshold from 80% to 50%. And just to give the knife a twist once in, increase the substantial business assets thresholds either to $150k or $200k and exclude cost of passenger or luxury vehicles unless the entities business is a transportation one.

I had to chuckle to myself with this last proposal, the suggestion from the Government being that the existing $75k threshold does not accurately reflect the cost of business assets today. Yet mention to them the personal tax rate threshold creep and the silence is deafening!??

This article from the 'A Week in Review' newsletter was originally published Monday 21st March 2022. If you have any questions or would like a second opinion on any national or international tax issues, please contact me [email protected].?

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