NZ To Close Tax Loopholes

by Mary Swire, Tax-News.com, Hong Kong

24 March 2010

New Zealand’s Finance Minister, Bill English, will attempt in the forthcoming budget to make the tax system fairer by closing certain loopholes to ensure that taxable income more accurately reflects true economic income.

"In reviewing the Tax Working Group's recommendations, the government acknowledges the system needs to be fair and have integrity," English said. "This is most apparently not the case at present, where highly uneven tax rates apply between taxpayers with similar incomes."

He highlighted in parliament recently how the current system can allow a household earning NZD100,000 (USD70,500) a year, with two dependent children, to reduce the tax they pay from NZD27,500 a year to less than NZD10,000 a year.

He pointed out that a self-employed person earning NZD100,000 a year would normally pay income tax of more than NZD27,500 a year and be on the top marginal tax rate of 38%.

However, in certain situations, the current system allows them to significantly reduce their tax bill by, for example, forming a company owned by another entity (on the current 30% company tax rate), paying themselves a NZD48,000 salary and reducing their tax bill by NZD3,000.

Qualifying for Working for Families tax credits on this reduced salary with two dependent children, would mean receiving an extra entitlement of almost NZD8,500 a year. Using an interest in a leveraged property investment, producing, say, tax losses of AUD20,000 a year, would reduce their personal taxable income further to NZD28,000, English noted.

"At this point, the total tax paid on income of NZD100,000 has fallen below NZD10,000," he said. "In other words, the effective income tax rate is less than 10%, lower than the lowest personal income tax rate.”

He disclosed that the above example is not uncommon. “The Tax Working Group found that 10,000 households were reporting investment losses while also claiming Working for Families credits. We are aware of tax advisers actively marketing schemes similar to this.”

His opinion was that the "current system lacks fairness and integrity because of the way income is defined and because different tax rates have proliferated.”

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