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Wealthy families not paying fair tax - English

There are 10,000 wealthy families claiming Working for Families credits while also getting tax breaks for losses on investment properties, Finance Minister Bill English says.In Parliament yesterday Mr English talked about how the Government was going to c

NZPA
Wed, 24 Mar 2010

There are 10,000 wealthy families claiming Working for Families credits while also getting tax breaks for losses on investment properties, Finance Minister Bill English says.

In Parliament yesterday Mr English talked about how the Government was going to crack down on high income earners who manipulate the system to pay little tax.

This morning he told Radio New Zealand that Inland Revenue had identified 10,000 families who managed to get the Working for Families credits to support their children while at the same time getting tax benefits from showing a loss on an investment property.

"So the fact they have got these losses is probably related to having borrowed a lot of money to buy a house and that flows through to their personal taxation. It not only reverses their tax bill but it enables them to get Working for Families," he said.

While he did not have figures for how much those families were costing he said it was just one example of the kind of behaviour going on.

"You could estimate hundreds of millions from people who are in a whole lot of other ways taking the opportunity to reduce their effective tax rate.

"We are not relying on some big windfall...but we need to bring some more integrity to a system that allows particular groups of taxpayers to essentially choose their tax rates and make themselves eligible for student allowance and Working for Families pretty much at their choice."

Mr English said it was hard for families on less money to see those better off get support payments.

"If you have people who are getting a normal wage and salary, who don't have the opportunity to pay less tax, and if, for instance, their child is at university with the children of someone else and those children are getting student allowances when the parents appear to be in a pretty good situation, that just undermines people's general faith in the system."

The Government is planning changes for the next budget following a review by the Tax Working Group.

In Parliament yesterday Mr English detailed how people could reduce their tax.

He outlined how the current system could allow a household earning $100,000 a year, with two dependent children, to reduce the tax they pay from $27,500 a year to less than $10,000 a year.

Mr English said a self-employed person earning $100,000 a year would normally pay income tax of more than $27,500 a year on the top marginal tax rate of 38 percent.

But, in certain situations, the current system allowed them to significantly reduce their tax bill by, for example:

* Forming a company owned by another entity (on the current 30 percent company tax rate), paying themselves a $48,000 salary and reducing their tax bill by $3000;

* This lower salary meant the person could qualify for Working for Families and would receive an extra entitlement of almost $8500 a year;

* If the same person had a rental property bought with a mortgage making tax losses of $20,000 a year, their personal taxable income is further reduced to $28,000.

"At this point, the total tax paid, on income of $100,000, has fallen below $10,000. In other words, the effective income tax rate is less than 10 percent - or lower than the lowest personal income tax rate," Mr English said.

Mr English said the system needed to be made fair and have integrity.

Today he said changes would focus on what income people had to count for taxable purposes.

NZPA
Wed, 24 Mar 2010
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Wealthy families not paying fair tax - English
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