Bill English explains how 10,000 households are rorting the tax system

Finance Minister Bill English has spoken in parliament about how as many as 10,000 households on high incomes have been able to significantly reduce their taxable incomes and how the government's budget on May 20 aims to remove the loopholes to make the system fairer. He explained how a household earning NZ$100,000 a year could legitimately reduce their tax from NZ$27,500 a year to less than NZ$10,000 by claiming losses on investments and Working for Families payments. Here's his full comments below:

The current tax system is unfair and inequitable for many hard-working New Zealand families and the Government will address this in the Budget, Finance Minister Bill English said today. Mr English highlighted in Parliament how the current system can 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. “In reviewing the Tax Working Group’s recommendations, the Government acknowledges the system needs to be fair and have integrity,” he said. “This is most apparently not the case at present, where highly uneven tax rates apply between taxpayers with similar incomes.” 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 per cent. 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 per cent company tax rate), paying themselves a $48,000 salary and reducing their tax bill by $3000. Qualifying for Working for Families on this reduced salary with two dependent children, they would receive an extra entitlement of almost $8500 a year. Using an interest in a leveraged property investment producing, say, 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,” Mr English said. “In other words, the effective income tax rate is less than 10 per cent – or lower than the lowest personal income tax rate. “The 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. “The current system lacks fairness and integrity because of the way income is defined and because different tax rates have proliferated. “In the Budget, the Government will make the tax system fairer by closing this type of loophole. We will make sure that taxable income more accurately reflects true economic income – and that the system is fairer to all taxpayers.”