Taxation (Tax Rate Increase) Bill: First Reading SpeechRevenue
I move that the Taxation (Tax Rate Increase) Bill be now read a first time.
The bill introduces a top personal income tax rate of 39 percent on incomes above $60,000 from the next income year. This is a small increase of 6 cents in the dollar for those who can most afford to help sustain basic services like health, education and superannuation.
Ninety-five percent of people will not be asked to pay more tax. Instead, only the top 5 percent of income earners will pay more. The increase is expected to bring in $465 million in extra revenue in the next fiscal year.
It is estimated that half the extra revenue will be paid by those earning $140,000 a year and above. The Government's view is that people on high incomes can -- and indeed should -- make a greater contribution to paying for improving New Zealand's social fabric.
The benefits of living and working in New Zealand come from the type of society that we build. A bit of extra tax collected from a section of society that can well afford to pay it will help us build the type of society we all want to live in. Everyone will benefit from this, including those who are being asked to contribute more.
Even with a 39 percent top tax rate, New Zealand's income tax rates are modest by international standards. The top rate in Australia is 47 percent, in Ireland 44 percent, in the United Kingdom 40 percent, and in the United States 39.6 percent.
The increase in the top personal income tax rate requires a number of associated changes because it is aligned with tax rates on other forms of income. Therefore the bill introduces several related amendments.
The tax rate on extra emoluments, or lump sums, will also rise to 39 percent for high-income earners.
Similarly, those who earn income from secondary employment will be able to choose the new 39 percent withholding rate. This will prevent their having unexpected tax bills at the end of the year.
Another associated change is being made to the provisional tax rules. This will ensure that high-income earners pay their increased taxes now, rather than deferring them until their terminal tax date. Provisional taxpayers who pay next year's tax on the basis of a previous year's liability will have to calculate that previous year's tax using the new tax rates.
The Government realises that this requirement will increase compliance costs for some provisional taxpayers. We did look at simpler methods, such as increasing the provisional tax uplift factor, but they would have been much less accurate in calculating how much additional provisional tax one should pay.
Likewise, the bill introduces a 39 percent resident withholding tax rate on interest. The purpose is to allow high-income earners to choose a resident withholding rate equal to their personal tax rate. This will reduce the need for them to pay any under-deducted tax on interest.
The bill also reduces the non-declaration rate on interest. The non-declaration rate applies to those who do not give their banks their IRD number. Current legislation increases this rate from its present level of 33 percent to 45 percent on 1 April. The bill aligns the non-declaration rate with the top personal tax rate of 39 percent, which will reduce compliance costs for banks and individual taxpayers.
Raising the top personal rate also necessitates a corresponding change in the fringe benefit tax rate. Currently set at 49 percent, the rate will increase to 64 percent, to equate with the top personal tax rate of 39 percent. This is to prevent people from using fringe benefits -- such as low-interest loans -- to avoid the higher income tax rate.
The Government realises that increasing this rate will increase the over-taxation of fringe benefits provided to employees who are on low tax rates. This is a long-standing problem. We are looking at ways of lowering the tax rate on fringe benefits provided to lower-income employees. Obviously, solutions will need to avoid imposing significant compliance costs on employers. If viable solutions can be developed in time we hope to introduce legislation early next year, with possible effect from 1 April, when the change in the top personal tax rate comes into effect.
We're fully aware that opening a gap between the top personal tax rate and other tax rates creates opportunities and incentives for so-called "tax planning" to avoid the higher tax rate. At present, there are "planning" opportunities in the areas of superannuation contribution withholding tax, the use of trusts, and personal service companies. These have been much discussed in the media of late.
The Government will be looking closely at limiting opportunities to exploit the law in this way. We will not stand by and allow salaries of high-income earners to be paid via a dodgy superannuation scheme at a 33 percent tax rate. We shall look at ensuring that the 33 percent rate of superannuation contribution withholding tax is restricted to genuine employer superannuation contributions.
Similarly, we will also look at restricting opportunities to avoid tax by interposing trusts or companies.
The issues are complex, and consultation will be necessary, so these measures are not included in this bill. However, in the meantime, my advice to anyone considering aggressive measures to avoid the policy intent of this bill is: don't waste your time and money.
In conclusion, Mr Speaker, this bill implements the policy the Government went into the election with, and the country endorsed. I commend it to the House.