As we all get ready for a break with family over Christmas there are a number of business and personal matters we all start to  think about for 2021 - we cover off in this article how an increase in the top marginal tax rate may change how you hold your shares in your private business and also your investments in general, food for thoght over the break.

1.     Should I own my private company shares in a trust or directly?

This old chestnut has been considered for some time. At present trusts are predominantly used to protect assets and benefit family members beyond our lifetime. When our assets are in a trust, legal ownership has moved to the trust – the assets are owned by the trustees, for the benefit of the beneficiaries.

In a business sense a trust is used to:

·       Protect selected assets against claims and creditors – for example, to protect a family home

·       Set aside money for special reasons, such as a children’s education

·       Protect family money from relationship property claims from children’s partners

·       Manage the risk of claims on the estate.

A further reason a trust structure is being revisited by business owners at present is because the Labour Government has confirmed that the top marginal tax rate is moving to 39% on income over $180,000 – so how you pay yourself is now back under the spotlight. Some background to this as announced by Labour’s finance spokesperson Grant Robertson:

·       The new tax rate applies to income earned in your own name above $180,000. It is considered only 2 per cent of taxpayers would actually pay it.

·       This new tax rate would generate roughly $550 million a year in revenue.

·       The new rate does not apply to income that is taxed in a trust at the trustee rate – this rate is 33%

Business owners have always considered holding their company shares in a trust, and for those who have not made this move this may be the last straw. While much has been debated about the ensuing tax planning that this raises, the better question is why you would not centralise your assets in a trust? 

The use of a trust has many advantages as alluded to above but to focus purely on this tax change for a moment, below is an example of the tax impact of two structures to highlight solely the additional tax cost:

So from the above example, under just this tax rate change the cost to you is a further $10,000 each year.

Broadly speaking, in our view business owners should always own their company shares in a trust for the reasons discussed in this article.  We note the changes under the Trusts Act 2019 should also be reviewed.

2.     Investment income

Having considered your private company investments, attention now moves to other investments you have made such as bonds, shares and property (both New Zealand based and international).

The rules for holding New Zealand investments are fairly clear and the only bump in the road these days is around residential property rental investment where you have tax losses – these are normally ring-fenced for use against future residential rental income. If you have other investments, however, there are still ways for you to consider how these tax losses can be offset.

The rules for holding overseas investments is where complexity comes in and you need to have a firm hand on the wheel. Broadly speaking, if you have paid more than $50,000 on overseas shares you are entering the world of whether these is a specific tax exemption available to you (so you just return tax on dividends) or whether you need to be reporting tax on an unrealised basis. Without getting into the detail (yes, I still need your attention) some key take-aways for you to consider are:

-        If you breach the NZ$50,000 threshold and any of these investments are in Australia an exemption can apply;

-        If you breach the NZ$50,000 threshold and the investments are outside of Australia you may be required to return tax on 5% of the opening value of the investments as at 1 April or use what’s referred to as a comparative value method which is more a comparison of the opening and closing values. If there is unrealised profit you pay tax, if there is a loss you pay no tax.

-        If you hold more then 10% in the overseas investment you may be exempt from the unrealised tax.

These are just the New Zealand based rules. You also need to be mindful of the local rules for your investments – for example if you hold more then US$60,000 of investments in the US these investments could be subject to US Estate Tax in the US.

What is clear with the drop in tax revenues around the world and with New Zealand firmly in the international information sharing regimes is that these tax rules will be more firmly enforced so you need specialist tax advice to ensure you are compliant.

Sounds too complicated, what should I do?

Whether you are planning to review your business structure / how you hold your investments or sit on the fence, the questions you need to ask yourself are (a) Are my assets protected in the best way? (b) Do I understand how my investments are taxed in New Zealand and overseas? (c) Do my assets provide a legal mechanism to protect family money in the future? (d) Is the way I hold my assets minimising my total costs, which includes the imposition of tax?

The easiest way to get some comfort on this is to talk to your tax advisor or give us a call. We would be happy to guide you through this labyrinth and give you peace of mind that you have the right structure in place and that your tax liabilities are being managed correctly.

Graham Lawrence (Director)