Trust Rules Tighten Under New Top Tax Rate

Tighten Trust Rules

This year the top tax rate increased to 39%.  That means Inland Revenue also need to make other tweaks to the tax rules so that all the various tax rates line up.

Because the tax rate for trusts is 33%, there’s an opportunity for people to pay less tax by diverting money into trusts, perhaps in the form of dividends. That can still happen, but if people abuse this system the Inland Revenue (IR) is likely to take action to prevent them from doing so. So the IR wants to keep a close eye on the situation, which means more information is required from trusts.

What’s changing for trusts?

If you have a trust, you’ll now need to provide more information to Inland Revenue each year, to help the IR confirm that tax avoidance is not occurring.  This applies for all annual returns from the 2021-2022 financial year onwards.

The information that trusts will be required to provide now includes:

  • Profit and loss statements
  • Balance sheet items
  • Other specified information such as transfers by associated persons, which might include loans to or by related parties.

Trustees’ own annual returns will also need to include information on distributions and settlements made during the year.

Non-active and charitable trusts are exempt because they are not required to file a trust return.

You can read more about the new compliance rules here.

Worried about paying more tax?

Although you can’t completely revamp your structure to specifically avoid paying the new higher tax rate, this is a great time to review the way your various entities and arrangements are structured. It may be that your previous structures were designed around the old tax rate and they could be adjusted to better suit the new rules.

While trusts used to be a straightforward way to protect your wealth, they are now more complex and nuanced.  Compliance is more onerous and expensive, so if you do have a trust, it is vital to comply with all the regulations, otherwise you risk it being declared a ‘sham’ trust and lose any potential advantages.

We can help you review your set-up and give you advice on whether a trust is worthwhile.

Give us a call on 09 366 7025 or email us at hello@smefinancial.co.nz to get in touch.

Together we can achieve more. 

Should you dive into tax pooling?

Diving into tax pooling

Okay, let’s be honest – paying provisional tax can be tricky. The amounts change from year to year, and bigger payments sometimes coincide with periods of low cashflow. Not to mention that if you underpay your provisional tax, you will likely be charged use of money interest (UOMI) by Inland Revenue (IR).

Tax pooling is designed to help solve this problem and smooth out your tax payments. Let us tell you how.

What is tax pooling?

A tax pool is a fund of money created by many taxpayers paying in their provisional tax. It’s organized by a registered intermediary, which works with both taxpayers and the Inland Revenue. We have partnered with Tax Traders and believe you will not be disappointed by the benefits they can bring.

When you join a tax pool, you pay your provisional tax into the fund. You can make a regular fixed monthly payment, for example, so it’s easier to manage your cashflow.

Your tax is then paid out of this fund on your behalf. The funds are held in an Inland Revenue account, which transfers them against the name of the members of the tax pool as instructed by the intermediary.

If you haven’t paid enough into the pool to cover your tax, the tax pool lends you the money at a cheaper rate than the IRD’s UOMI rate. If you have overpaid, the extra money is lent to other people in the tax pool and you earn interest.

How can you find out whether tax pooling is right for you?

The advantages of tax pooling are lower costs on late payments, earnings on overpayment, and generally making it easier to manage provisional tax payments.

If you’d like to know more about tax pooling, and whether it could work for you, get in touch.

We can help by answering your questions.

Surprise tax bill? Here are six possible reasons

Surprise tax bill

Did you, or someone you know, get a surprise tax bill they weren’t expecting?

Several Kiwi’s have recently been in touch after having received tax bills that took them by surprise, and they’ve been asking Inland Revenue what’s going on.

An Inland Revenue spokesperson has provided six likely reasons that more people seem to have been caught out this year:

  1. Last year, tax bills below $200 were written off as part of the pandemic support measures. This year, it’s back to the usual write-off threshold of $50.
  2. Inland Revenue is now doing tax assessments for everyone, so some people are getting bills or refunds who never have before, including some children with KiwiSaver funds or other investments.
  3. Anyone paid 27 fortnightly wage packets may have underpaid their tax – that can be fixed once IR has the correct information.
  4. Many incorrect tax codes were corrected last year, and for a few people (mainly aged over 65) the IRD made errors which they are correcting.
  5. Pension tax code changes were delayed, leading to some undertaxing which is now being rectified.
  6. Some people’s tax codes are still incorrect.

We can sort out any surprise tax bill issues

Ultimately, the Inland Revenue calculates your tax based on the information they have about you and your business. If they have the wrong information, you may be paying too much tax or too little tax.

We can look at your surprise tax bill and help you work out what’s gone wrong. We can also deal with Inland Revenue on your behalf to give them the right information and ensure you’re paying exactly what’s required and no more. We’ll work with Inland Revenue to get your refund sorted out or to come up with an affordable payment plan.

Get in touch – our tax specialists at SME Financial are here to help.

Rental tax changes are about to kick in – are you ready?

Rental Tax Changes

Earlier this year, the Government announced the removal of tax deductions on loan interest for rental properties. Previously, interest payments could be claimed as a business expense and taxed accordingly, giving property investment a tax advantage.

Now, properties bought from April 2021 onwards will not be able to claim any tax deductions for the interest paid on the mortgages. For all existing rental properties, including holiday home rentals, the tax deductibility is being phased out over four years.

Changes take effect from 1 October

Until October, the old 100% interest tax deductibility is in place. Then on 1 October this year, rental property tax deductibility reduces to 75%: you can still claim three-quarters of your interest payments as a business expense and get a tax advantage. The 75% rate remains in place until 31 March, 2023.

For the following financial year (1 April 2023 to 31 March 2024), you’ll be able to claim 50% of your interest payments as a business expense against your rental income. Then it drops to 25% for the next financial year (1 April 2024 to 31 March 2025). From 1 April 2025 onwards, no interest deductibility will be available. You can read more details here.

What should you do?

To assess how much impact this will have on your situation, we can calculate the difference this is likely to make to your overall gains or losses in the years ahead. Our forecasts will be a good guide, but the exact situation will vary depending on several other factors, too. For instance, as interest rate deductibility reduces, you may also find that rents increase to help you meet the higher costs. However, your mortgage interest payments may also go up, if (as seems likely), interest rates increase over that time.

Ideally, you should think carefully about your rental properties and whether they will still be fulfilling their role in your financial strategy. You might choose to keep them – switching from interest-only to principal-and-interest repayments could be a way to start reducing your interest costs over time. Or you could sell up and invest the proceeds somewhere else.

Talk to us to get a better understanding of what your position will be when these tax changes come into effect, so you can make smart decisions about your financial future.

New tax rule you should consider when buying or selling a small business in 2021

Small Business Accountants

Are you thinking of buying or selling your business? A new tax rule comes into effect on 1 July 2021 that will have an impact on the way you negotiate.

The new rule is designed to create more certainty in purchase price allocation, which is the way the purchase price is divided up between the various types of assets.

Currently, buyers and sellers have been avoiding an agreed allocation, then often allocating different prices to the same asset in their tax returns. This tends to mean underpaid tax, so Inland Revenue (IR) has introduced new legislation to prevent mismatched allocations.

Under these new rules, the buyer and seller of a business should agree on the asset price allocation and then both follow it in their tax returns. If they can’t agree, the seller can set the allocation and notify IR (who can agree or or dispute it). If the seller misses the three month deadline to do this, then the buyer has their chance to set the allocation.

You can read more about the new rules here.

This should now be part of your negotiations

For all sales after 1 July, you should now be negotiating purchase price allocations along with everything else during the sales process. An agreed allocation will be much more straightforward if you can achieve it.

The new rules are quite complex and detailed and it is possible that they will increase compliance costs. If you’re in the process of buying or selling, or are soon to be, you may want to consider the timing. SME Financial is here to guide you through your decision-making-process.

As IR says: “It’s best to talk early with a tax professional to make sure you get the details of your sale right from the start,” so do get in touch with us immediately if you’re considering buying or selling a business.

What will the new top tax rate mean for you?

Tax Rate Changes

If you’re one of the 2% of Kiwis who earn more than $180,000 a year, it’s time to review your financial situation. From April 1, 2021, a new marginal tax rate will apply: for every dollar you earn over $180,000, Inland Revenue will now keep 39 cents instead of 33. This is expected to generate $550 million in extra income for the Government in FY2021, and brings the highest threshold into line with Australia’s, although our new top tax rate is lower than Australia’s 47%.

How much more tax will you pay?

Here are some examples of what extra tax you might pay at various income brackets:

  • If you earn $200,000, you will pay an extra $1,200 a year in tax under the new system.
  • If you earn $300,000, you’ll pay an extra $7,200.
  • If you earn $400,000, you’ll pay an extra $13,200.
  • If you earn $500,000, you’ll pay an extra $19,200.

If you’re an employee, your employer will also pay less into KiwiSaver.

Should you declare a company dividend?

You may need to declare a dividend from your business in this financial year, if profits are likely to be paid out to you next financial year and you’ll earn the top tax threshold. There will be an additional 6% in tax to pay if you miss out on declaring a dividend, so get in touch immediately. We’ll work out if this could apply to you and the extra tax won’t need to be paid.

Do you need to restructure?

If you own a business or other assets, we can help you review your structures. It’s possible these are not set up to make the most of your income under the new tax rate. The 39% top rate is out of line with other rates, such as the 28% maximum rate in a PIE fund investment or the 33% trust rate. By restructuring, we may be able to help you reduce your tax obligations. You should talk to us soon so we have time to get your new structures set up before March 31.

Inland Revenue is watching!

Restructuring your affairs is not a DIY operation. The Government has clearly signalled that it will be looking out for anyone who is intentionally restructuring solely to avoid paying the new higher tax rate. Other taxes are also being tweaked to bring them in line with the new rates, so there are lots of complexities to consider. We can help you review your structures, make changes and ensure those changes are clearly justified.

Give us a call, drop us a note or stop by our offices – we’re happy to help.