Tax collectors ordered to 'go hard'

Prime Minister John Key

High-earning professionals are in the gun as Inland Revenue steps up its compliance work following recent wins.

Taxpayers who use a combination of company and trust structures to minimise their tax are the focus of the activity, and tax practitioners are advising those who believe they may be caught to make a voluntary disclosure to the IRD.

The move is part of a broader effort by Inland Revenue to get the most out of the existing tax base but within the current legislative framework.

The government is promising no new major changes to the existing tax law but is ordering the IRD to step up its compliance work using the current rules.

Prime Minister John Key last week said the government would be “tightening up tax loopholes and tax avoidance”.

It is understood the IRD’s tax compliance staff have been specifically told to “go hard”.

Medical specialists, lawyers and other high-earning professionals who use a mix of company and trust structures are the main target.

“I think this was inevitable – the only surprise is how long it has taken,” Grant Thornton tax director Greg Thompson said.

“But the nervousness has been about what’s next and how far will they go?”

The rule of thumb the IRD is using is 80% – that is, if a high- earning professional who is using some combination of company and trust structure but is still declaring their own income at 80% or more of the total income, is probably going to be left alone.

Anyone declaring lower than 80% of their income and moving the rest into lower-taxed structures without good commercial reasons, is being targeted.

The IRD is encouraging taxpayers in this category to make a voluntary disclosure and promising that, if they do so, they will not face penalty payments, although taxpayers will still face use-of-money interest for the unpaid tax.

Between 50 and 100 have already come forward, Inland Revenue’s group tax counsel, Graham Tubb said. He did not have any idea of how much extra revenue the IRD was likely to gather from the stepped up activity.

The 80% rule does not mean anyone declaring a lower percentage as personal income should automatically put their hands up, New Zealand Institute of Chartered Accountants tax director Craig Macalister said.

“You should not just rush off and make a voluntary disclosure: what the Supreme Court actually said in Penny and Hooper was that [the taxpayers] were still deriving the benefit from earnings they were paying a lower rate of tax on, through other structures – basically, they were receiving the benefit of a much higher rate of salary than they were declaring.

“If you’re doing that, the chances are you should be seriously thinking about making a voluntary disclosure.

“But if you are making extra investment in your company, or if you had a bad year, it’s a different story.

“And it doesn’t have to be market value salary, which is another thing people get hung up on. What the Supreme Court was really saying was don’t set up a salary having regard to the tax benefits. If there are non-tax reasons for doing so, it will probably be seen as appropriate.”

Ernst and Young tax director Jo Doolan – who has been a frequent critic of the IRD in the past – said the taxman’s approach on this was not unreasonable, in principle, although some case managers were being more reasonable than others.

“It does seem to depend on which case manager you get. But if people feel they are being treated unfairly, if they feel they can justify paying themselves a lower rate because the money was needed in their company, they should really be elevating the argument further up the chain in the IRD.

“But if they have done something wrong, then the offer of a two-year voluntary disclosure is quite generous.”

“This has been coming for a while,” PriceWaterhouse Coopers tax partner Geof Nightingale said.

“It doesn’t take a genius to work out that, if there’s a $1 billion or more shortfalll in the tax take, the IRD is going to be told to do its best to plug that gap.” 

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35 Comments & Questions

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Racketeering by Prince John and his cronies.
Since they screwed Hubbard they cant claim any moral authority any longer. And their approach in this matter will bear out the fact that they have abandoned notions of justice in their shortsighted greed for money and power and their abuso of the rule of law.
.

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Cant hide behind Simon Powers now.

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Excellent! Go hard! Seek all the dodgers out and screw them right royally.

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Why are "trusts" allowed, makes tax dodging legal. WHY?

John Morrison

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John,

Trusts pay tax on income, same as any other entity - they pay a flat rate of 33% on all income.

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Thanks Rob,
But tell me, why then do people have "trusts"?
Are they wanting to control things after they are dead??

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A trust is simply where somebody manages your assets for you on your behalf, and they take on certain legal responsibilities and liabilities in doing so.

If you invest in KiwiSaver or any managed fund, you are usually doing so through a trust, whether you realise it or not.

Trusts have been part of common law since at least the middle ages - there is a tale they were first invoked during the Crusades as a way for knights to protect their assets while they were off fighting the infidel, though I'm not sure about how true that is.

People can set up a trust and then leave their assets to that trust, which is then managed by trustees on behalf of the beneficiaries. This happens a lot in the charitable sector, and in families, too, especially where there's a family business involved.

Obviously they can be abused. Since the top personal and trust rates were aligned at 33% a couple of years back, the tax advantage is now gone.

The main rort now is people getting around insolvency by shoving assets into a trust and pleading poverty.

Certain prominent directors of failed finance companies have tried this on recently.

Although property and insolvency law changes a few years back make it a bit easier for the Official Assignee to claw back assets shoved away in this manner, it is still quite difficult.

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Good explanation - thanks

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A potential tax dodge is always available and encouraged when top personal rates, corporate rates and trust rates are on different tax rates. This was most poignant when the previous government implemented the 39% rate for personal income over $60K.

For those that blatantly restructured their business structures to reduce their personal tax yes they should be a target, but these broad based 80% guidelines that ignore market value salary seems unncessarily aggressive.

Eliminate the problem in the first place by aligning the top rates.

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I agree with that.
Why not a fixed rate on all dollars earned? say 20 cents? Still means that a person earning half of what I earn pays half the tax I pay! And a person earning twice what I earn pays twice the tax I pay!

Seems fair to me. Can somebody please tell me, why not?

John Morrison

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Totally Agree John.
Why not make company tax at say 20% of total turnover - on every dollar - no fudging accounts then!

But probbaly the bigger rort is the Unions - how is it possible McCarten and Unite Union can rack up over $150K in unpaid taxes... and still be allowed out on the streets and not locked up in jail for deliberate theft to the NZ tax payers? What about all the other Unions? When will the IRD get out their microscope, rubber gloves and breathing apperatus and delve into that fetid bunch?

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Must be a lot of unpaid tax in Maori Treaty settlements.Wonder is tax paid on the investments further too,or are so called tax on that type of investment put in the too hard files.

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Prob'ly part of the settlement agreement! :-)

John Morrison

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Penny Hooper General Discussion

This is a historical issue. The Trust tax rate now aligns with individuals at 33% and has done for several years. Therefore the loophole is closed. (The loophole was you could declare a dividend into a Trust and then distribute it effectively at the 33% tax rate of the Trust, not the incumbent 39% rate of individuals on the day. Now the individual rate is 33% and alignment of the rates has occurred, there is no angle.

So we are talking about 6% of taxable earnings that have been streamed to a trust for a fixed period above what is considered "market value earnings".

In some situations, the Trusts of some of the professionals may be allocating income to spouses and beneficiaries, so the gap could be higher in those situations.

Worked Example

Say a professional earns $300k and employs no staff . They have paid a salary to themselves of $60k and streamed $290k to their Trust at 33%. Market value income IRD want to see attributed is 80% of $300k, $240k. They are up for tax of 6% on $180k ($240k-$60k) for each year they did it. However tax periods after 4 years are arguably time barred and IRD are capped on how far they can go back.

So this wont be the money spinner that some think it will. It will be litigious and hard work fro IRD because Penny Hooper was an extreme case, arguably ridiculous that the tax professionals tried to defend it at COA.

Many professionals employ revenue earning staff that are owned by the company/Trust arrangement. This is a totally different situation to a dentist streaming personal services income to a Trust where clearly they did the work. If IRD try to say an accountant with 5 staff for example earnt the revenue of the 5 employees working for clients....I think that this is very different to a dentist drilling teeth with personal exertion and there are lots of accountants (who want a tax case named after themselves) who will have an appetite to litigate this if pressed. Just my view.

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What about going after the thousands of people who constantly renovate their home and sell it every 5 years never paying the capital gains that they are legally required to pay.

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On what legislative grounds are they subject to tax on there sale of there residential home as the limbs relating to land sales of the Income Tax Act 2007 are the law....

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why are they been ordered to go hard now.
they should have been going all out in the first place.
if the law is there then enforce it.

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Ooops

Sorry I meant to say streamed $240k to the Trust above. Not $290k.

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Dunno in Canada this would mean 700 people chasing 2.5 to 3 million non-filer/non-registrants out of a population of 36 million. Of course predicted revenue is enough to generate general interest in ramping up. Still there is going to need to be a vast man-up.

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A primary limb under the new avoidance guidelines issued by IRD is that 'parliamentary intention' must be looked at, to see if any arrangement is in line with that or not.

It's clear on what the 'parliamentary intention' was on legislating a lower corporate tax rate. Quoting Bill English:

<quote>""Cutting the company tax rate will make New Zealand more competitive and increase incentives for businesses to reinvest earnings back into jobs and growth," Mr English says.</quote>

That sentiment reads widely, whether the professional invests the tax saving in his own business, or other businesses, restaurants, builders (kitchen carpentry, building whole sale, etc) for a new home, or holiday home, change the car, whatever, the tax saving is being used to create private sector jobs and growth (unlike if the extra tax was paid to government to destroy jobs and growth by being used to grow the wealth destroying welfare state). Further, this government believes in limited government, according to their manifesto, thus realises money to government, extorted from the business sector, also makes our economy far less competitive. Thus Penny and Hooper style tax savings are in line with English's stated aim behind the corporate tax cuts of keeping NZ competitive.

So, under IRD's new guidelines, Penny and Hooper were following Bill English's (wise and prudent) intentions behind the tax cuts, so would win their case if it could be appealed again. IRD are foul of their own rulings. But then what would IRD worry about destroying the economy that pays their wages?

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Right on**
4,300,000 population
1,300,000 paying TAX
If it wasnt for GST
NZ would be a real cot case
My soulder are broud BUT i cant support everyone
So we just orginse our affairs LEGALLY
so we dont pay to much TAX

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Hi All
Is it this right
NZ Maori Trusts Only pay 19 %?
NZ suckers pay 33%

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bottom line - if it wasnt for the rich there be no jobs - by attacking the rich govt will simple push them into retirement or off shore

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What about " trading hours" which is quite common black market earner between some trades/business etc. Electrician does 40 hours for a plumbing mate who does 40 hours for builder mate who does 40 hours for electrician etc No money chnages hands, therefore no tax paid (also no ACC support or income to suuport a loan).

What about residential or commercial Property investors who live on "loans" against those properties. As property values increase (as in some areas), they remortgage, increase rents to pay for increased mortgage (good now), but part of mortgage used used for next years personal expenses?

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If you sock it to the rich and they find it just becomes to hard they will just walk away and say see you later.

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the answer is obvious - have a flat tax rate!

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Yes, But it should not be called "flat", because it "flat" it ain't.
It is an income tax, each dollar, wherever or whoever in NZ earns it is taxed the same amount.
Why not???

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Hey anon your comment"If you sock it to the rich and they find it just becomes to hard they will just walk away and say see you later.

What you are efectively saying is if you find the going tough you stop going..mate if all of NZ think like you then no one would be left ..what do I know Iam just a worker and an immigrant paid tax all my life to put bread on the table but you dont see me complain do you.

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There is no answer to the boneheaded dribble that "the rich will just walk away".
As long as our tax rates are roughly in line, or better, than elsewhere.
They won't, simple as that.
They did not get "rich" "walking away" and they know they won't stay rich "walking away"
Cheers
John Morrison.

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In reply to Anon above regarding Maori Trusts the rate applying to Maori Authorities is now 17.5% which includes certain trusts (it was 19.5% in recent years).

In reply to the people calling for a flat tax if I recall correctly the flat 20 cent tax cost Sir Roger Douglas his Finance Minister role back in the Lange days and part of the reason for this was that a flat tax is a regressive tax in that it favours the rich over the poor which is a less fair situation (ignoring the rich person's slush fund that is called working for families) than a progressive scale. Although John M above does point out that a person earning half the income would pay half the tax that he does in proportion to the after tax income Richie Rich is much better off than if they were taxed on a progressive scale. I could be mistaken on that but that is why I don't think a flat tax is particularly fair to lower income earners (similar to GST).

In my view the Government made a huge mistake reducing the corporate tax rate to 28 cents in the last budget. It was totally unexpected by everyone and would have reduced the "penny and hooper" effect noted above although as Matthew points out there is still a differential available if you distribute trust income to beneficiaries.

My last point is I think the IRD is, and will continue to be sensible in applying the Penny and Hooper decision. Matthew makes an excellent point above in that Penny and Hooper were too greedy and it was an extreme case (and not the only one). Whilst I do have a view that the P&H situation was within Parliaments contemplation as at the same time they raised the tax rates they introduced the personal attribution rules which dealt with certain types of contract arrangements (i.e. basically when you earnt 80% of your income from one person) and could have dealt with the P&H situation at the same time but "chose" not to I think most situations where a company is interposed between a person will not be caught by P&H and there is always the cost vs benefit angle to consider. However, those taking the p*ss should be worried and rightly so too!

Just my two cents...

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Thanks for your "2 cents worth".

I cannot see how a "flat" rate does "favour the rich over the poor", if GST is included in calculating the amount of tax a person pays and that total amount is used to calculate the "percentage of income" a person pays in taxes? I believe the "poor" lose and the "rich" win?
Also,
I am too cynical to believe our lawmakers would move on anything that didn't protect the "rich" from paying less per dollar income than the poor. And that is the reason Douglas couldn't get the "flat" tax of the ground. Yet GST went through with embarrassing speed!!
I value your opinion.
John Morrison

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So are we going to hear any announcements about WINZ "going hard" on the rorts from the other side of the ledger?

The ones paying into the system and getting nothing back but rubber gloves and hassle from IRD and the loafers, moochers and parasites (incl. ACC laywers), lie back, laugh and cheer their bovver boys on.

This country is not quite totally messed up morally, but it is fast heading that way. Income tax was only introduced as a temporary measure for the war effort ... how did that turn out? Criminalising professionals for taking due care not to over-pay taxes into a corrupt system is sign they have lost the moral argument and their only resort now is the violence of jail threats, asset confiscation etc to achieve their nefarious ends. Wake up NZ, the looters are now firmly in charge, not the producers.

Let's have "the conversation" about the necessity and moral basis of any income tax at all. Or about the necessity of a State that consumes over 45% of GDP. Let's have THAT debate before we fiddle around with distractions like compulsory kiwisaver (another angle ripe for govt. rort).

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10.31am has got it in one. Yes, let's have that conversation: there are certainly immoral looters in this scenario, but they were never Penny and Hooper who I bet are paying more tax than 99% of their envy ridden protractors (who probably are mainly beneficiaries living off the doctors all their lives).

And why have 'we' allowed self-serving politicians to give basically all the powers of the KGB and Stasi to IRD to invade the privacy and lives of those very people that pay their wages. What an affront. In fact, criminal.

Many of us are 'over' this second hander society that has been forcibly voted on us by the tyranny of the majority.

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In reply to Anon (John M) - I can't work the reply button!

I think the argument is along the lines (and I am no expert and have not looked at the issue for a long time) that the person who earns $20k down at the factory should pay no tax but under a flat tax they pay 20%. Mr Penny (to take a random name) earns $600k a year and pays the same rate when Mr Penny should be paying more so that the factory worker pays no tax. In theory a flat tax should work but I think because of this it has a determental effect on the poor. Again, this is from memory and just to show you how old that memory is I remember going to a meeting when the then MP Peter Neilson tried to defend the flat tax proposal that cost Sir Roger his job at the time with a flash diagram. In hindsight I wished I had kept it.

If you are interested I found this on the web - I haven't checked out all the links but there may be some useful information here:

http://www.nytimes.com/2011/11/06/business/flat-tax-doesnt-solve-inequal...

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What about the professionals that use their trusts to lower their salaries for child support payments? EG salary set at 70k means they get assessed at a much lower rate than a non self employed individual on 120k. I think its completely fair that the government has asked for a fair and reasonable market salary to be taken in to account.

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