2021 has been an eventful year to say the least – we’ve battled Covid and lockdowns, Trump reluctantly left the Oval office, Britain was no longer a member of the EU and Internet Explorer was replaced with Microsoft Edge.
It has been no less eventful in the world of tax with, among other things, the introduction of the 39% top marginal tax rate from 1 April 2021 and significant changes to the taxation of residential investment property being announced. The recent announcement of Inland Revenue’s high wealth individual (“HWI”) research project has also made a stir with questions raised around the use of the Commissioner’s new power to request information.
HWI research project
The HWI research project is intended to assist Inland Revenue to better understand the effective tax rate paid by HWI individuals on their “economic income” (which will be wider than taxable income, as it captures items like capital gains). Approximately 400 HWIs (generally those with a net worth exceeding $50 million) have been selected for the study. They were identified from various sources, including the media and information held by Inland Revenue’s own high net worth compliance team. It is a wide-ranging project with information on HWIs, their dependent family members and their related entities being collected going back to the 2016 income year (the year beginning 1 April 2015).
Inland Revenue’s information gathering powers
Although the HWI project impacts only 400-odd HWIs and their families, the project is of broader interest for two reasons:
- the use of Inland Revenue’s newly legislated powers to require taxpayers to provide information for tax policy development purposes; and
- what the information collected will ultimately be used for.
New powers to obtain information for policy development
The Commissioner of Inland Revenue already has wide powers to obtain information for enforcement purposes, either by requesting documents or by physically searching a taxpayer’s premises. A physical search is relatively uncommon and only where it is considered evidence may be at risk of being destroyed. However, a simple information request by the Commissioner is a lot more common.
The main information gathering power is contained in section 17B of the Tax Administration Act 1994 and requires a taxpayer to provide any information the Commissioner considers “necessary or relevant” for any purpose relating to the administration or enforcement of an Inland Revenue Act. Its scope is very wide and allows the Commissioner to also demand information from third parties, such as advice and documents held by the taxpayer’s auditors, accountants, banks, or other advisors, whether in New Zealand or offshore. The requirement that the information must be “necessary or relevant” is a fairly low threshold which means that the Commissioner can, in practice, obtain almost any information she wants. In essence, Inland Revenue has more powers to gather information on a person than the police, as part of an audit or investigation!
The Commissioner’s powers have been expanded with the introduction of new section 17GB. The lack of data to support effective tax policy development was noted by the last Tax Working Group. In particular, the lack of information on the wealth of New Zealanders was highlighted as a key gap. New section 17GB is intended to address this.
Some have argued that section 17B is sufficient for the Commissioner to obtain general information about taxpayers. Nevertheless, in 2020, Parliament passed a new law, under urgency, giving the Commissioner the power to gather any information she considers relevant for a purpose relating to the “development of policy for the improvement or reform of the tax system”. While the Commissioner is prohibited from using information gathered under this new power for enforcement purposes, concerns have been raised about how this power will be applied in practice, including potentially for political purposes. The HWI research project has brought a number of these issues to a head.
Setting aside potential wider concerns about when and how these powers will be utilised, it is important to note that:
- both sections 17B and 17GB are subject to both legal privilege and tax advice non-disclosure (“TAND”). Legal privilege is very wide, but TAND is limited to tax advice documents (which have their own definitions). So, the scope for not providing information is accordingly limited.
- there are a range of penalties and actions the Commissioner can take if the taxpayer fails to comply with an information demand. Firstly, the Commissioner can apply to the District Court for an order requiring the person to provide the information. Failure to comply with such a Court order is an offence carrying a penalty of imprisonment for a period not exceeding three months or a fine not exceeding $1,000 for each offence. The Commissioner can also prosecute a taxpayer under section 143, 143A and 143B of the Tax Administration Act. These offences carry a range of penalties, up to a term of imprisonment not exceeding five years, or a fine not exceeding $50,000 (or both).
So, what should you do if you have received an information request under either section?
Do not ignore it.
Get in touch with your tax advisor as soon as possible to discuss how best to approach it. Sometimes Inland Revenue’s information requests are simple and can be dealt with quickly. However, for more complex requests, it is often helpful to discuss the scope of the request with Inland Revenue. Sometimes demands are wide because Inland Revenue is not exactly sure what it’s looking for. A conversation can often help to narrow the scope of the request and to open a line of communication with the relevant Inland Revenue officer which will often make the process a lot smoother for all involved.
Potential tax policy implications of the HWI research project
Inland Revenue has been clear that its HWI research project will not include any policy recommendations. However, with public release of this research likely to be in early 2023, this is likely to inform parties’ tax policies for the next general election. It remains to be seen whether this could mean a capital gains tax is back on the table or if other options such as wealth, death or inheritance taxes will be explored.
39% tax rate integrity measures
While we will have to wait until 2023 for the findings of the HWI research project to be released, we expect to see Inland Revenue consulting on further integrity measures to buttress the 39% marginal tax rate in 2022. Particularly, with the trust tax rate remaining unchanged at 33%.
Domestic trust reporting requirements
Inland Revenue has indicated that it is keeping a close eye on the use of trusts to accumulate income to avoid the 39% rate. This includes through a new reporting regime for domestic trusts (the “domestic trust reporting requirements”).
From the 2022 income year onwards, trusts subject to the domestic trust reporting requirements will need to disclose the following additional information to Inland Revenue:
- details of transactions between associated parties (unless minor and incidental)
- details of all settlements on the trust, including details of who made the settlement
- details of all distributions, whether taxable or not
- details of those who have the ability to appoint or dismiss trustees or add/remove beneficiaries.
Such trusts will also need to prepare financial statements that meet Inland Revenue’s minimum requirements. (Note: non-active trusts, charitable trusts, trusts eligible to be Māori authorities and foreign trusts (which are subject to their own reporting requirements) will not be subject to these reporting requirements).
The domestic trust reporting requirements will provide Inland Revenue with a significant amount of information on the use of trusts. Whether and how that ultimately informs a change to the trust tax rate, or other legislative measures, remains to be seen.
Other integrity measures
While trusts are a key focus, we expect Inland Revenue to also consider other integrity measures next year.
This includes the use of companies, which are also subject to a lower tax rate. While there are income attribution requirements for closely-held companies (including as a result of the Penny & Hooper decision), an area Inland Revenue could focus on is over-drawn shareholder current accounts (as evidence of “income” being made available to shareholders without a tax top-up). A possible tax policy response could be to treat overdrawn current accounts as a deemed dividend for tax purposes.
We also expect to see greater use of the general anti-avoidance provision to target structures and behaviour that Inland Revenue views as being incompatible with the 39% rate.
So, watch this space!
Mark your diaries
- Now - Contact your bank if you are subject to the 39% marginal tax rate and have not updated your resident withholding tax (“RWT”) rate. Also check your PIE tax rate (“PIR”) is correct. Interest and PIE income is automatically included in your income tax return and ensuring the correct RWT / PIR is selected will help avoid an unexpected year-end tax liability.
- 15 January 2022 – this is when the second installment of 2022 provisional tax is due for payment.
- 31 March 2022 – this is the filing date for your 2021 income tax return, if KPMG is your tax agent. If you have not yet submitted your information to prepare your tax return, please do so as soon as possible.
The KPMG offices will be closed from 23 December 2021 to 15 January 2022. If you have any urgent queries arise during this time, please contact your local KPMG advisor in the first instance.