Dividend integrity and personal services income attribution
A Government discussion document
Hon Grant Robertson
Minister of Finance
Hon David Parker
Minister of Revenue
March 2022
Chapter 7 – Proposal
- “80 percent one buyer” rule
- “80 percent one natural person supplier” rule
- Substantial business assets test
- Net income of working person test
- Questions for submitters
Summary
This chapter suggests a number of options for broadening the scope of the personal services attribution rule. If implemented, the changes suggested in this chapter would represent a shift in the focus of the rule from narrowly targeting taxpayers who are similar to employees, towards capturing a wider array of scenarios where an individual may use an associated entity as a conduit for selling their personal services to one or more customers.
“80 percent one buyer” rule
7.1 The “80 percent one buyer” rule described in the previous chapter narrowly targets the personal services attribution rule at taxpayers that are dependent on a single customer (and so are closer to employees). However, as also mentioned in that chapter, the problem is not limited to just those taxpayers that are dependent on a single customer. Example 8 illustrates how there might also be an issue when a taxpayer that performs personal services has multiple customers.
Example 8: Personal services business with multiple customers
Bill is an accountant who is the sole employee and shareholder of his company, A Plus Accounting Ltd. The company pays the 28% corporate tax rate on the income from accounting services provided to clients and pays a salary to Bill of $70,000. Any residual profits are either retained in the company or are made available to Bill as loans.
Suggested solution
7.2 In light of this issue, the Government is proposing that the 80 percent one buyer rule be removed altogether. Submissions are invited on this proposal and whether there would be any issues if it proceeds into legislation.
Example 9: Effect of removing 80 percent one buyer rule
Consider Bill in Example 8. Assuming the 80 percent one buyer rule is removed, the personal services attribution rule would apply so that the income of A Plus Accounting Ltd (the associated entity) is attributed to Bill (the working person). This is because:
- During the income year, the buyers (clients) acquire services from the associated entity (A Plus Accounting Ltd).
- The services are personally performed by the working person (Bill).
- Bill is associated with A Plus Accounting Ltd at the time the services are personally performed by Bill.
- More than 80 percent of A Plus Accounting Ltd’s income from personal services during the income year is derived from services that are performed by Bill.
- Bill’s net income for the income year – assuming the personal services attribution rule applies to attribute the income of A Plus Accounting Ltd to Bill – is more than $70,000.
- Substantial business assets are not a necessary part of the business structure that is used to derive A Plus Accounting Ltd’s total income from personal services (the only business assets of A Plus Accounting Ltd are basic office furniture and equipment, which only cost $20,000 in total, easily below 25 percent of the amount of income A Plus Accounting Ltd derives annually from personal services).
“80 percent one natural person supplier” rule
7.3 As described in the previous chapter, the “80 percent one natural person supplier” rule requires that at least 80 percent of the associated entity’s income from personal services during the income year is derived from services that are performed by the working person or a relative of theirs, or some combination thereof.
7.4 In some circumstances, this rule might potentially be seen as too restrictive. Conceivably, there may be another individual (unrelated to the working person from whose efforts most of the associated entity’s income from personal services is derived) whose labour contributes more than 20 percent of the associated entity’s income from personal services. There is a question as to whether it is correct from a policy perspective that attribution does not apply even if the associated entity’s income from personal services is mostly derived by the efforts of one person and/or a relative of theirs, simply because the entity’s income from personal services is not almost entirely derived by the person’s and/or a relative’s efforts. This is essentially a question about where the threshold for attribution should be for the level of contribution of the working person, rather than a significant change in intended scope.
Suggested solution
7.5 One possible option the Government is considering is lowering the 80 percent threshold for the test to 50 percent. In other words, the personal services attribution rule would apply if the associated entity’s income from personal services is mostly derived by the efforts of one person and/or a relative of theirs, rather than almost all the entity’s income from personal services being derived by the person’s and/or a relative’s efforts.
7.6 Submissions are invited on whether this suggestion is a sensible one, and whether there are any foreseeable problems with it.
Substantial business assets test
7.7 As outlined in the previous chapter, the threshold for the substantial business assets test is currently the lower of $75,000 or 25 percent of the associated entity’s income from personal services for the income year. This threshold has not changed since the introduction of the personal services attribution rule in 2000. There is a question as to whether the $75,000 threshold in this test should be revised upward so that it is set at a level that more accurately reflects the cost of business assets today.
Suggested solution
7.8 The Government suggests two possible options for increasing the threshold:
- Option one: The lower of $200,000 or 25 percent of the associated entity’s income from personal services for the income year, excluding the cost of passenger or luxury vehicles unless the entity’s business is a transportation business.
- Option two: The lower of $150,000 or 25 percent of the associated entity’s income from personal services for the income year, excluding the cost of passenger or luxury vehicles unless the entity’s business is a transportation business.
7.9 The suggested exclusion of passenger and luxury vehicles for the purposes of determining whether the cost of the associated entity’s depreciable property exceeds the substantial business assets threshold is in recognition of a number of factors. Namely, vehicles are not always purely business assets; they can cost substantially more than is necessary for a business purpose; and they are often more incidental rather than integral to the work performed by the working person (in that they are how the person travels to the work in a lot of cases, rather than how they do the work).
7.10 Any increase in the threshold will not affect taxpayers whose business assets cost more than 25 percent of their income. The effective threshold will therefore only be greater than $75,000 where the income from personal services for the income year is greater than $300,000. Submissions are invited on whether the suggested thresholds are appropriate, and whether there is a better option for increasing the threshold for the substantial business assets test.
Net income of working person test
7.11 For the personal services attribution rule to apply, the working person’s net income for the income year must be more than $70,000. In determining whether the $70,000 threshold is exceeded, it is first assumed that the personal services attribution rule applies to attribute the income of the associated entity to the working person.
7.12 Given the main purpose of a possible expansion of the personal services attribution rule is to ensure the integrity of the top personal tax rate of 39%, some parties may see a rationale for increasing the $70,000 threshold. However, it is noted that a five percent differential still exists between the 33% personal tax rate (which applies to each dollar of income earned between $70,001 and $180,000) and the company tax rate (currently 28%). As such, there may be a tax deferral benefit or incentive in relation to income earned between $70,001 and $180,000. Accordingly, the Government does not propose to increase the $70,000 threshold. However, feedback on this point is welcome.
Questions for submitters
- Do you agree with the proposed removal of the “80 percent one buyer” test? Why/why not?
- Do you agree with the suggested decrease in the threshold for the “80 percent one natural person supplier” test from 80 percent to 50 percent? Why/why not? Can you foresee any problems arising from the suggested change?
- Are the suggested thresholds for the substantial business assets test appropriate? Why/why not?
- Which of options one and two do you consider to be preferable? Is there another option that you think would be better than either of the thresholds suggested in this chapter?
- Do you consider the net income threshold should be increased from $70,000 per year to $180,000?