Included in the Income Tax Act 2007 is an anti-avoidance rule (that has applied from 1 April 2000) broadly aimed at individuals who seek to circumvent the top personal tax rate by interposing a company, trust or partnership between themselves and the party engaging their services in order to have their income taxed at a lower rate. Many people may have heard of situations where a person has resigned from their job but subsequently returns to do a similar role in a contracting capacity; its these sorts of arrangements which were at least partly in mind when the PSIA rules were designed, however they have always captured more than this.

Its relevance has increased with the (re)introduction of a top tax rate of 39 percent on income over $180,000 per annum from 1 April 2021, as this may provide an incentive to structure personal services contracting arrangements to reduce the tax liability.

Broadly, individuals may see an incentive to form and interpose a company between themselves and the party contracting their services which is taxed at a lower tax rate and then only draws enough salary from the company not to trigger the top tax rate. The buyer of the services deals with the associated entity, which derives the income arising, but it is the working person who actually provides the services.

Where certain criteria are met, the interposed associated entity must attribute an amount to the working person. Attribution to the working person may be required when the services are acquired and provided by different persons as noted above, and the following criteria are satisfied:

1. 80% or more of the associated entity’s total assessable income from personal services during the income year is derived from the supply of services to the buyer of the services or an associate of the buyer (this is known as the “80% one buyer rule”); and
2. 80% or more of the associated entity’s total assessable income from personal services is derived through services personally performed by the working person or a relative (this is known as the “80% one natural person supplier rule”); and
3. The working person’s net income for the income year exceeds $70,000, including any amounts available for attribution; and
4. Substantial business assets (broadly defined as total depreciable assets with a cost of more than $75,000 or 25% to the entity's total income from services) are not a necessary part of the business structure used to derive the associated entity’s assessable income.

There is concern that the current rules apply too narrowly and shouldn’t just apply to “employment like” situations. It’s felt the existing criteria are not effectively supporting the integrity of the 39% tax rate. The Discussion Document also references the “Penny & Hooper” case (which did not involve the PSIA rules) where two surgeons changed from being sole traders to incorporated companies and formed trusts and ultimately were found to have committed tax avoidance by paying themselves artificially low salaries. The Discussion Document notes it is resource-intensive for Inland Revenue to apply the general tax avoidance law and specific “black letter” rules are preferable.

Consequently, it is proposed to:

• Remove the 80% one buyer rule;
• Lower the threshold for the 80% one natural person supplier rule to 50% (i.e. the rule moves from largely being limited to sole traders to including businesses that have an employee); and
• Increase the substantial business asset threshold to either $150,000 or $200,000 (or 25% of income from personal services, if lower). Any passenger or luxury vehicles will not count toward the asset threshold.

The net income of $70,000 test is not proposed to change as the Government is still concerned that some individuals may be seeking to avoid the 33% personal tax rate which applies at $70,000.

New Zealand is a country of small businesses. Of the over 500,000 businesses in New Zealand, 71 percent have zero employees, and an additional 18% have 1-5 employees. It’s assumed that many of these businesses will be operating as companies due to the non-tax benefits associated with limited liability.