How to pay 10% tax on $100,000

March 23rd, 2010 at 4:03 pm by David Farrar

Bill English has pointed out how the current system allows well off people to in fact pay less than low income workers. This is one reason why we should have a flatter system, with less loopholes.

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.

Three easy steps:

  1. 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.
  2. Qualifying for Working for Families on this reduced salary with two dependent children, they would receive an extra entitlement of almost $8500 a year.
  3. 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.

So what you then have as tax is:

  1. $52,000 @ 30c = $15,600
  2. $14,000 @ 12.5c = $1,750
  3. $14,000 @ 21c = $2,940
  4. WFF credit of -$10,726  (on $28k income)

That means a net tax bill of $9,564 on $100,000 or a 9.5% effective tax rate.

If National disallows offsets for property tax losses then the high income earner paying 9.5% effective tax will end up paying $15,990 tax, or 16%.

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90 Responses to “How to pay 10% tax on $100,000”

  1. Adolf Fiinkensein (2,681 comments) says:

    And not nearly before time.

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  2. KiwiGreg (3,129 comments) says:

    Have to be self employed to even start to make this work. Recent (albeit TRA) cases say that even this may not work.

    $100k a year is not “well off”. Not here and probably not aynwhere.

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  3. OliverI (125 comments) says:

    and getting the accountant to set it up for you is deductible as well :D

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  4. Razork (374 comments) says:

    The top tax rate better be reduced to compensate or there will be war!

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  5. KiwiGreg (3,129 comments) says:

    “That means a net tax bill of $9,564 on $100,000 or a 9.5% effective tax rate.”

    Note that because of step “3″ of your example the “real” income is only $80k which pumps the rate to 12%.

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  6. aardvark (417 comments) says:

    And you all thought that the Labour government was anti-rich and pro-tax didn’t you :-)

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  7. Pete George (21,828 comments) says:

    The top tax rate better be reduced to compensate or there will be war!

    Why? That’s a separate issue. There should be war on those rorting the system. If they have geared their finances based on ripping other taxpayers off then they deserve to have to rearrange their affairs.

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  8. Brian Smaller (3,915 comments) says:

    Yeahright. And if you work and pay PAYE then this doesn’t work. Unless you are self-employed it is bull. But that same self employed person also doesn’t get paid holidays, sick days or anything like that. More Labour-lite. Get rid of WFF and most of that problem highlighted by English is solved.

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  9. Razork (374 comments) says:

    Pete george, how is it ripping of the other taxpayers when its perfectly legal?

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  10. george (398 comments) says:

    Bill English talks about a 10% tax rate on $100,000 as if that would be a bad thing. He is only raising this issue in Parliament in order to RAISE the total tax people have to pay. So much for this being a centre-right or even centre Government. It’s a tax-raising Government.

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  11. KiwiGreg (3,129 comments) says:

    Just worked out “Hot” is sposed to be “How” D’oh!

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  12. RKBee (1,344 comments) says:

    Well that does it then.. the National government have cut of both ends of the benefit system rich and poor..
    Now the piggy in the middle has know where to turn..

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  13. Nicholas O'Kane (168 comments) says:

    Unbelievable.

    A person on 50 000 has to pay about 20% tax on his income (around $10 000), while someone on $100 000 has to pay 9.5% ($9500). How unjust

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  14. Ryan Sproull (6,661 comments) says:

    $100k a year is not “well off”. Not here and probably not aynwhere.

    At what income would you consider someone to be well off?

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  15. KiwiGreg (3,129 comments) says:

    “At what income would you consider someone to be well off?”

    In NZ, well off would be ~$5m of assets and income to match (call it $500k). Just my view.

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  16. Lucia Maria (1,994 comments) says:

    And I thought that the headline meant that we had entered an alternate universe and the the tax rate was about to be dropped!

    I agree with KiwiGreg, $100K is not “well off”, especially if only one parent is working. Besides, we really ought to be talking in nett incomes anyway, since there is little difference in someone earning $100k on paper and the amount of money they actually get to live on in comparison to those on thousands less that get generous handouts.

    Let’s start at $400K before we even start using an amount of money earned in a year in the same sentence as “well off”.

    I’d like to see Bill survive on $100k with no benefits or tax breaks and no reliance on his wife’s salary.

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  17. kowtow (6,720 comments) says:

    RKBee@ 437pm
    What’s new? The western world over it’s the middle classes that do all the carrying,the reviled bourgoisie.Not rich enough to be in on the dodge and noy poor enough to be carried by the state.

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  18. bchapman (649 comments) says:

    The deal can’t be that good. If the investment property is losing $20K, that means they must be paying $30K in interest to the bank each year.

    When house prices were increasing, yes it makes sense- but not any more.

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  19. Ed Snack (1,539 comments) says:

    A good % Bullshit David. As others have stated, have to be both self employed and even then it’s not a given. The original earnings are then corralled in the company, you can use it for business expenses (which you can anyway), but if you draw the money you pay tax at the relevant rate on it. So you don’t have automatic access to the money, you do become cash poorer. The IRD looks reasonably hard as these sort of arrangements, you would of course use an accountant, but they’re not cheap and even if deductible, that’s only 38% off your income.

    WFF, yes, you get a benefit and unlike depreciation there’s no clawback. Note: LAQC losses are however excluded when calculating your WFF payout, you can’t get any additional WFF payout by using an LAQC. You would, as noted above, have to be not drawing any of the extra money from the company though, or it would be both taxable and would count against your WFF.

    For your step 3 you need a house or building (not the whole property, land doesn’t get depreciated) of around $660K (suggesting a $1M plus at least property). Then presumably you rent it to a third party at breakeven on other expenses to generate a $20K tax loss that you LAQC into your own income. That’s a deferral, not a permanent tax deduction, unless of course you make a loss on sale.You could of course own 2 houses I suppose, but in all that you would need something like $500-700K (minimum) of capital to make the investment cash neutral, or you will be paying out real money to get your tax loss, which kind of defeats the purpose doesn’t it ?

    All in all, sounds a bit unlikely, although of course possible. I wonder which 2 or 3 couples in NZ Bill is down on to make an example.

    And what distinguishes this sort of behaviour from those who make (apparently legal) but enormously profitable housing payouts as an MP. One law for me and another for thee again is it ? I would have thought that Bill would keep an embarrassed silence when it came to talking about profiting from housing “rorts”.

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  20. Pete George (21,828 comments) says:

    how is it ripping of the other taxpayers when its perfectly legal?

    Using loopholes may be technically legal but it avoids paying a fair share of tax. The “if I can get away with it I should do it” mentality is as bad a problem amongst income earners as it is with some beneficiaries, and with criminals.

    And if you exploit a loophole and that loophole is closed then don’t expect any sympathy.

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  21. Viking2 (10,736 comments) says:

    Now why pick on property owners, why not pick on those that buy cars, boats, tractors ,cranes, trucks, they all qualify for ownership and the offsetting costs and interest cost deductions. Indeed few large commercial vehicles are owned by the income producer but via an arrangement of ownership such as another company (laqc) or Trust etc., Done for asset protection.

    LAQC’s and property is not the problem they are visible signs of the problem which remains the tax rates of the various entities.
    Even Bernard Hickey has finally got it. I think! ??? Maybe, not really sure.
    http://www.interest.co.nz/ratesblog/index.php/2010/03/22/have-your-say-should-the-govt-ring-fence-rental-property-losses-from-laqcs/

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  22. Jeff83 (765 comments) says:

    Viking – if done wrong there is a theoritical FBT liability on most of those. The fact that they dont pay it doesnt mean it doesnt exist.

    Have to be self employed to even start to make this work. Recent (albeit TRA) cases say that even this may not work.

    Indeed, however the case concerned, involving dentists or surgeons, forget which, is being appealed. Funny thing is though government has announced plans to legislate if they lose. Part of this has to do however with them changing their structure from being sole traders to company paying a salary at a beneficial rate. The IRD is arguing they need to pay a “market rate”

    Kind of interesting.

    Anyway the key thing that has always been true wage earners get screwed vs. self employed.

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  23. gazzmaniac (2,270 comments) says:

    Again, it’s only $80k income David, not $100k. If you look at the figures, you have to have a ~$400k mortgage with rent of $400 per week to have that much of a shortfall. No person is that stupid to go into such a bad investment, and no bank would lend on those figures (a house worth half a mil renting for $400 a week?).

    On too of their company’s $15600 tax bill, they also have to pay ACC and other assorted taxes and levies. I don’t really blame them for minimising their tax, when it’s too high to start with. Personally, they also have rates, car registration (no doubt for at least two vehicles) and countless other charges to pay. On top of that they also have GST to pay on what income they actually get to keep and live off. Their total yearly tax bill will be in the order of $30-40k.

    Also are we going to ringfence losses from other investments, not just housing? You can’t single out one sector to be treated worse by the tax system than the rest.

    Come on, give us some decent examples, not bullshit propaganda that anyone can see through.

    As an aside, if the average house price in the main centres is in the order of $350-400k, a person or family has to be earning around $130k per year to make it affordable. $100k per year is not well off when this is considered.

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  24. burt (7,091 comments) says:

    $100K is mega rich, just ask Dr. Cullen… Bloody hell, we have such low wages in NZ and no wonder when people earning hundreds of thousands plus as many tax payer perks as they can justify by cunning use of trusts etc are not publically laughed at when they call $100K rich.

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  25. Grendel (875 comments) says:

    I don’t mind closing the WFF loophole, it galls me when my accountant with 3 of property earning 250K a year gets WFF for his 2 kids due to his taxable losses.

    but thats not the actual issue, get rid of WFF, its the bigger rort.

    as someone who is self employed, i am not impressed with Billy telling me that having business expenses and so not taking all my turn over as income is rorting the system, when i get no sick leave, no annual leave and have to pay for ACC i may not even get to use unless i pay a higher rate to get an agreed value contract.

    i am glad i did not vote for them, but wish rodney would make some noise to defend those who actually produce and pay most of the tax in this country.

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  26. stephen (4,063 comments) says:

    I’d like to see Bill survive on $100k with no benefits or tax breaks and no reliance on his wife’s salary.

    You sure you want to use the word survive there?

    :-D

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  27. RKBee (1,344 comments) says:

    ++i am glad i did not vote for them, but wish rodney would make some noise to defend those who actually produce and pay most of the tax in this country.++

    Yes! the 10% of the 3 odd Million who don’t pay there share…

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  28. Grendel (875 comments) says:

    No; the 10% who pay 75% of the tax. whats fair about that?

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  29. burt (7,091 comments) says:

    Grendel

    They are rich pricks, they earn more than a beneficiary and they must be punished…. Well that’s what Cullen taught us.

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  30. Ed Snack (1,539 comments) says:

    I want to re-iterate, LAQC losses are excluded when WFF payments are calculated, or at least they were when I was running an LAQC. It is quite specific on the form, the comments here lead me to believe that few have both LAQC’s AND might qualify for WFF.

    Note too, depreciation ONLY applies on buildings, at a maximum of 3%, plus fixtures and fittings at a much higher rate, but they don’t add up to much and really do depreciate. Most houses rented for a long period do depreciate markedly, and require significant renovation, so why deny the reality of depreciation ? Further, our tax law already taxes profits on the sale of buildings if purchased with the intent to make a “capital” profit. Is this applied properly ?

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  31. ZenTiger (421 comments) says:

    It would be interesting to see how real the fictitious example is. Because what Bill is saying is that a family man on 100K pays 27,500 in tax, and if the mother stays at home to look after the children, they get saddled with a big tax bill whilst those on smaller salaries get top ups. The net difference is probably trivial. I hope Bill’s aim is not to punish this group of people on 100K even further – he needs to make sure when he fires his guns he only hits genuine targets. The middle class working stiff is getting a little tired for paying taxes for the rich and the poor and the government spending sprees that accompany centrist parties.

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  32. Cactus Kate (538 comments) says:

    The welfare for families calculator asks you to declare family income which includes PAYE and business income – business income defined as:

    How much will your family earn before tax from 1 April 2008 to 31 March 2009? Check the help text to ensure you include all your income.

    “Business income
    Include all income from self employment, business, partnership, overseas, shareholder-employee salary or a Maori Authority”.

    So the bludgers actually earn $100,000 (based on the crude example here with no deductions allowed) because the beneficial owner of the company (even though owned through another company) is the family in question as the natural people owning the company in the structure. Therefore a look-through must surely apply to count the $100k as family income.

    My IRD computer spits out (if using the in work credit and 2 kids under 12)

    “Based on your current family circumstances, you are not entitled to weekly payments because your family income is over $89000.00″.

    Perhaps Bill English’s staff have a more generous interpretation than I do…..else if my interpretation is not generous enough perhaps there is a tightening of the welfare for families rules that could easily be made to treat such enterprises the same way you would a PAYE earner.

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  33. Cactus Kate (538 comments) says:

    Even knocking the $20k off the income with the tax losses gets just $40 a week.

    “From the details you have entered your weekly payment has been estimated as $40.00
    Your weekly payment has been estimated using In-work tax credit. In-work tax credit replaced child tax credit on 1 April 2006″.

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  34. Gooner (995 comments) says:

    Oh gawd, here we go again. Are you well off if you’re earning $100K. I apologise in advance for the profanity but this stuff drives me nuts.

    It’s simple so pay close attention.

    IT’S FUCKING IRRELEVANT HOW MUCH YOU EARN!!!!!!!!!! DO YOU HEAR THAT – IT’S IRRELEVANT!!!!!!!!!!

    WHAT IS RELEVANT IS HOW MUCH DEBT YOU HAVE OR HOW MUCH YOUR EXPENSES ARE.

    Okay?

    Can’t you all just focus on costs, because it’s costs/spending/debt etc that determines if you are well off, not income.

    It doesn’t matter what your income is – it could be $20 million per year, but you could be geared up to the max – all of it – so you are not well off – you are insolvent. But if you told someone on Kiwiblog that you earned $20million per annum they would call you a rich prick.

    You’re not!!!!!!!!!!!!!!!!!!!!!!!

    Do I make myself clear?

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  35. bruceh (101 comments) says:

    The systemic rort is keeping the WFF going.

    WFF is a bigger Cullen revenge than buy back of KiwiRail – Natty’s are stuck with WFF because they only do tinkering changes acceptable to their target voter groups.

    Meanwhile the WFF rort helps lock in NZ’s journey to bottom of OECD tables

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  36. burt (7,091 comments) says:

    What we are seeing here is the beginning of the repairs in the tax base required after 9 years of Cullen plucking the goose with the least amount of hissing. Hit the upper middle earners hard cause they look like rich pricks to low earners. It’s time the anomalies of convenience were removed.

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  37. mattyroo (885 comments) says:

    Gooner… Good Point, finally, someone who “gets it”!

    Like I tried to explain on the mining post earlier today, the difference between revenue and profit is what matters, but as always in NZ, it went straight through to the keeper.

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  38. Offshore_Kiwi (557 comments) says:

    Why does Karori Bill think that a 10% tax rate is a bad thing? If the rate was 10% (for personal incomes, companies and trusts), I suspect New Zealand would be a lot more productive, with a lot more industry, instead of the third-world backwater it is today (thanks very fucking much Helen and Mike). Also, why does he think $100K is a high income (or even an adequate one, for that matter)? Given the average price of an average house (especially in Auckland), $100K is a piddling amount…using Gooner’s definition, pretty much everyone I know is dirt poor because they earn shit and are leveraged up to the eyeballs (and believe me, nobody I know owns anything other than an average house).

    He is, as others have noted, simply picking on upper-middle income earners because they are such an easy target.

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  39. Dirty Rat (504 comments) says:

    Even then he got it wrong.

    For WFF to be claimed, the Company should have Trustee Shareholders ( WFF is also calculated on your income if a shareholder to a level).

    He also misses that a company has a 30% liabilty on the remaining 52k (trust 33%)

    btw, cost of setting up is not deductible

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  40. Dirty Rat (504 comments) says:

    he also has forgotten the most basic of rules regarding Shareholders Salaries, in that they are done at Market Rates. So by having a Salary of $100,000 as a wage earner doing the same job would equate to a Market Salary of $100,000 through a company.

    The IRD would be pissing themselves at Double Dipton promotion of Tax Avoidance.

    We are waitng for a result of a case usng this very principal.

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  41. francis (712 comments) says:

    I dunno. Even at 10% I’d struggle with my modest 6-figure PAYE income. I want to pay ONLY GST, but I just can’t bring myself to vote ACT, lol. So I guess I’ll have to get to a larger income rather than whinge about rates. I figure a mid-6-figures would be ok. Marginal, but ok. Since I seem stuck in the salary pool mindset.

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  42. Tassman (238 comments) says:

    And that’s what the Tax system is all about. Sustaining a class system by redistributing wealth according to a status quo. When you stop paying tax, the whole capitalist system based upon it collapses. Most of your tax are redirected to business, to yourself, then to your professional funding or by some other crafty project, while the deprived beneficiaries gets a marginal percentage of it.

    Human dont need an economy to survive successfully and to achieve happiness. In fact far better than the material rubbish accumulated on the earth by so-called economy. The material economy itself is locked on a way course to destruction.

    Now it’s not too late to get out of it and save the earth!!!!!!!!!!!!!!!!!!! Go find somethng else to boss around……

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  43. BlairM (2,266 comments) says:

    What’s wrong with avoiding tax? Good on anybody who does it. Karori Bill should be careful of criticizing given how he has structured his affairs in the past for maximum perk advantage.

    All this could be solved by having a tax-free threshold, a flat single rate above that, and income splitting for those with dependents. So much simpler.

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  44. Viking2 (10,736 comments) says:

    Stress levels increasing in family-owned businesses
    4:00 AM Tuesday Mar 23, 2010

    Stress levels for many business owners climbed during the past year, with the impact thought to be particularly hard on smaller, family-owned businesses.

    An international survey of 7400 business owners across 36 economies found that 44 per cent of New Zealand business owners said their stress levels had increased from a year ago, compared with a global average of 56 per cent.

    China topped the poll at 76 per cent, with Sweden at a more relaxed 23 per cent.

    Peter Sherwin, a partner of Grant Thornton, said the figures for this country masked a growing problem among small, family-owned businesses.

    “Pressure on cash flow is the major problem affecting New Zealand businesses at 19 per cent, with heavy workload at 16 per cent being the next most important stress factor,” he said.

    “Where these pressures really mount is when the owners are also husband and wife or living together. There is just no escape for them. They take home their work problems and over time the pressure becomes too great.

    “In many instances family-owned businesses are financed through banks with security against their family home. So when a business starts to under-perform, the pressure on an owner mounts, as not only do they worry about food on the table but also a roof over their family heads.”

    Its past time Bill & John woke up and realised that they had 9, yep that’s right, a whole 9 years in opposition thinking?? about this stuff and two even longer years continuing the policies that caused it all.

    This govt. ain’t decisive its one of appeasement. Paper over the problems until it becomes the noisiest one of the day.
    Lack of fundamental principle which is why we must vote Act at the next election. Get over your fears and base your vote on principle instead of a smiley guy who is a gambler with our lives. Any trader is by definition a gambler!
    And of course gamblers have a multitude of other “issues” don’t they?

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  45. Murray (8,835 comments) says:

    Have you got anything on how to save $20,000 on an income of under $12,000?

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  46. KiwiGreg (3,129 comments) says:

    @ jeff83 for completeness I was referring to a recent TRA case (dear old Justice Barber, now well into his 70s) that was exactly on point of Bill’s example (business to company; company had orchard tax losses, shareholder got taxed on full “income”). Cant recall the number (I dont do tax anymore) but I am also familiar with the Chch case you are referencing (optometrists IIRC).

    The most you can “save” by diverting income into a company is the delta between the maximum marginal rate and the corporate rate (8% at present).

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  47. Dirty Rat (504 comments) says:

    Blairm

    “What is wrong with avoiding tax” ?

    Simple, it’s not allowed.

    Minimising is.

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  48. Dirty Rat (504 comments) says:

    KiwiGreg

    this one ?

    Note that MacKenzie was not specialised in this field, we all ended up laughing knowing full well that it would be appealed. Even Barber recognised this ” oh jeeez!!! ” would have been his reaction.

    TRA Case Z24
    Judge Barber upheld the Commissioner’s argument that the payment of a commercially unrealistic salary to a self employed anaesthetist operating through a company amounted to tax avoidance.

    Facts
    The taxpayer, an anaesthetist, worked part-time in the public sector and part-time in private practice.

    In 2002 the taxpayer and her husband incorporated a company, ‘W Ltd’. The company’s business encompassed the anaesthetist services to private patients, the husband’s quality assurance business and an avocado orchard.

    W Ltd owned no equipment; a family trust owned the equipment and rented it to W Ltd. The Commissioner argued that the rent was artificially high.

    The salary of the taxpayer and her husband were set at the end of each year when the company’s profitability was known. Losses from the avocado orchard meant that W Ltd barely made a profit and the salary paid to the anaesthetist was nil or very low in the years in dispute.

    Judge’s findings
    Judge Barber saw this case as straightforward – in his view on advice the disputant entered into an artificial, contrived, and uncommercial arrangement as regards the salary she earned from the private practice and this amounted to tax avoidance.

    He agreed with the Commissioner that the artificial use of the structures to reduce the tax paid on income generated from the disputant’s personal exertions, while retaining full control over and benefit from that income, amounted to tax avoidance.

    In his view it was neither credible nor commercially acceptable for an experienced anaesthetist to work for a company for virtually nothing. He found that the only reason she would agree to such a low income was that an associated entity and trust still controlled the practice income and such income was still available to her and her family.

    Again, Judge Barber did not refer to Justice MacKenzie’s findings in the Penny and Hooper cases.

    Court of Appeal – Penny and Hooper
    The Court of Appeal heard the appeal in the Penny and Hooper cases in early February and has not yet released its decision.

    The taxpayers (both orthopaedic surgeons who restructured their private practices into companies and were paid a below market salary) had won the cases at the High Court. The Commissioner appealed the cases on the basis that the High Court judge, Justice Mackenzie, did not correctly apply the Supreme Court decisions in Ben Nevis .

    The Commissioner argues that the majority in Ben Nevis did not review the scheme and purpose of the specific provisions to establish whether the arrangement frustrated the Income Tax Act. Rather, in the Commissioner’s view, the majority analysed the use of the specific provisions in respect of commerciality, contrivance and artificiality. Mackenzie J, by contrast, endorsed a scheme and purpose approach.

    Given the differing approaches to Ben Nevis in the High Court and the TRA , and the settlement between the Commissioner and the four banks ( ANZ National , ASB , BNZ and Westpac ) involved in the structured finance transactions, we await the Court of Appeal decision in the Penny and Hooper cases with great interest

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  49. kevin_mcm (152 comments) says:

    let’s assume here that the $100k is nett of expenses – ie the net profit. Assume also the business is owned by a family trust so is not automatically part of the individuals income.

    So the company pays $48k in income which is taxed. That leaves $52k of profit in the company which is taxed at 30%. Then when that is distributed as a dividend the recipient (the trust) gets imputation credits so would be about neutral (I don’t have the tax tables with me).

    So, on the $100k of income total tax (before LAQC and WFF offsets) is around $30k. Take off the tax benefit of $20k loss = say $7k and WFF of $8.5k = net tax of about $14.5k on $80k nett = 18%.

    Maybe it’s time I had some more children!

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  50. Camryn (549 comments) says:

    Francis – Vote Act. You can do it.

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  51. KiwiGreg (3,129 comments) says:

    @ dirty rat – yep thats both of them.

    There’s also another TRA case where they assess a guy on the loans he took out from the company, but that has a peculiar set of facts (and a taxpayer the IRD just wanted to “get”).

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  52. Tassman (238 comments) says:

    Mr. Key is a sign!
    The beginning of the end

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  53. Dirty Rat (504 comments) says:

    Kevin

    Dont forget that paying the Dividend will attract 3% RWT (cashflow)presuming Company is not a QC , If a QC, then the Imputation Credits can be used up without attracting RWT , however, those dividends must be passed onto the beneficiaries, so extra care is needed…

    Kiwigreg

    Not familiar with the loans case, but sounds meaty,

    FBT and regular payments with an overdrawn current account ?

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  54. KiwiGreg (3,129 comments) says:

    “Kiwigreg

    Not familiar with the loans case, but sounds meaty,

    FBT and regular payments with an overdrawn current account ?”

    It’s recent, Barber was the judge. Basically the guy lived off current accounts and they assessed the debit balance as income (the did give him credit for the loans he repaid even tho Barber said they didnt have to). I think it stands on its own as it was a property developer who, like I said, the department just wanted to get and the TRA aided and abetted. I understand it is being appealed.

    Of course the problem with appealing any business or tax case in NZ is you end up in the Supreme Court with a bunch of left wing “equity and fairness” judges.

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  55. Offshore_Kiwi (557 comments) says:

    Viking2 (March 24th, 2010 at 7:06 am )

    “appeasement” is exactly what Big Bruv has been alluding to by calling our illustrious PM “Neville Key”. Key is the Neville Chamberlain of our time. He deals with the Apartheid Party knowing it is opposed to the principles of democracy and “one man, one vote”. He deals with the Watermelons knowing they represent the lunatic left in all its worst forms. He will do a deal with anyone to remain where he is, even if it means selling the New Zealand economy completely down the river (i.e. ETS).

    To my mind, anyone who does not structure his affairs to pay the MINIMUM tax payable is doing himself and his government a disservice. Governments of both flavours in New Zealand are so addicted to tax ‘n’ spend policies that sensible propositions, like (properly) reducing government spending, reducing welfare and promoting personal responsibility are completely foreign to them.

    And Tassman, are you on fucking crack? “deprived beneficiaries”? The whole concept of the welfare system was supposed to be a safety net. Certainly not a lifestyle choice as it has become for some, and certainly not a mechanism to enslave the entire population which WFF is. If you’re on the dole and you want more money, get off your arse and get a job FFS. Deprived beneficiaries. I bet you’re a fucking Green voter, aren’t you?

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  56. Murray (8,835 comments) says:

    Tassman is a shill!

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  57. Dirty Rat (504 comments) says:

    Kiwigreg

    This one ?

    TRA Case Z23
    Judge Barber upheld the Commissioner’s assessment that a taxpayer’s substantial and regular drawings from the current accounts of various trusts and corporate entities under his control amounted to tax avoidance. He also upheld the Commissioner’s imposition of a 100% penalty for an abusive tax position.

    Facts
    Over a 12 year period the taxpayer, a property developer, made a series of current account drawings totalling about $5 million from various trusts and corporate entities with which he was associated. Over that period the taxpayer paid total income tax of $27,000 of which $8,000 was refunded to him.

    The current account drawings the taxpayer made were classified as loans. The associated entities were required to seek external funding rather than bring to an end a loan made to the taxpayer. When the taxpayer repaid the loans, the payments were made from non-taxable distributions received from the taxpayer’s associated entities.

    The taxpayer argued that there was a “roll over” of profits from one development (that was making a profit) to another (which was in start up and incurring significant expenditure). Eventually, there would be a substantial tax bill to pay. In the meantime, however, a failed project intervened and no tax was paid.

    He also argued that the assessments were outside the four year time-bar period in which the Commissioner can amend assessments.

    Judge’s findings
    The judge found that the loans were substitutes for income. He recognised that taxpayers operate a current account in associated entities for various reasons. However, he found that the regularity with which the drawings were made and the reliance placed upon the funds meant the amounts met the characteristics of income for the taxpayer.

    The judge considered that, in any commercial transaction, a person expects to be rewarded for his or her services or personal exertion. The failure to pay the taxpayer any reward for his services was contrived and artificial in his view.

    The judge rejected the taxpayer’s defence that he would eventually have a substantial tax liability. He emphasised that the definition of tax avoidance includes “directly or indirectly postponing any liability to tax”.

    He found that the time bar was ineffective as the income was omitted from the taxpayer’s returns. To obtain the protection of the time bar, the taxpayer needed to mention the loans in his tax returns.

    The judge also found that:

    each income year can be viewed as a separate arrangement as, in each income year, the disputant would be required to decide what drawings to take and how these would be dealt with; and
    it could not have been within Parliament’s purpose that the disputant avoid paying income tax on his personal exertion.
    Judge Barber does not refer to Justice MacKenzie’s findings in the Penny and Hooper cases

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  58. KiwiGreg (3,129 comments) says:

    Yup

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  59. richgraham (28 comments) says:

    kevin_mcm – you’re getting close !
    One of the immediate effects of implementing WFF with its very generous provisions was to strongly encourgae people to have more children, because with a low taxable income, you get paid a significant amount of money for each child under 18 by WFF. That is the explanation for those large families you sometimes read about in the newpapers where both parents are described as beneficiaries of one sort or another. The problem is that these are exactly the wrong sort of people to have more children. However, we do have a serious demographic problem caused by a lack of children, so this result can be counted overrall as one good outcome from the WFF scheme. (probably the only one).
    The main intention of Clark’s government in implementing WFF was to expand the beneficiary class and so hopefully recruit them as Labour/left voters – didn’t work out too well in the 2008 elections.
    Anyway, I know Labour supporters who practise the taxable-income reducing behaviour attacked by Bill English (and all lefties) and feel quite OK about it !
    WFF should be dumped, it is a ghastly outcome of socialist power-mongering.

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  60. Dirty Rat (504 comments) says:

    One can assume that losses will be calculated when the loan is paid back.

    One way to fuck yourself if Company goes into Liquidation

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  61. KiwiGreg (3,129 comments) says:

    @ rat – all moot my understanding is department is bankrupting him personally

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  62. rouppe (852 comments) says:

    I think the penny is beginning to drop, but not quite yet.

    I just skimmed these comments but most seem to still be harping on about losses from property. This is largely irrelevant in the example given by DF.

    By far the major contribution to avoiding tax is sheltering the income from the self employed person in other (company) entities so that it is not all attributed to the individual. This behaviour allowed the family to get to a point where they could claim WFF. The tax losses were cream on top.

    By far the biggest improvement in the tax base is to unwind the structuring of business activity by small self-employed businesses to hold income in other entities including family trusts. Incredible amounts of money is spent by companies and trusts for electronics, vehicles and travel that should have come out of tax-paid individual earnings.

    Stopping depreciation I think is not the answer. Attributing income of artificial structures to the individuals that control it would be more effective. You’d get a big slice from Brian Tamaki at the same time

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  63. Scott (1,614 comments) says:

    I cannot help agreeing with richgraham. It seemed to me that Labour was intent on redistributing income in its desire for “social justice” and in the name of “equality”. Now there was another consequence, unintended or not, that Labour created many more entitlements through working for families. This meant that even relatively well off families earning $100,000 a year were now entitled to state assistance. Those people then had a vested interest in labour returning to power, thereby continuing the working families benefit system, as opposed to electing National, who philosophically would naturally be opposed to it.

    Unfortunately once these entitlements are in place then they are hard to get rid of. National in the election campaign had to promise not to get rid of working for families. They were duly elected but now have to face the mass of new entitlements that Labour has put in place, while somehow trying to balance the books. Labour seems intent on making us a centre-left country, with lots of government entitlements and handouts, and therefore lots of people who are beholden to the government for income and therefore naturally going to be Labour voters. That appears to be the strategy. In other words to tilt the playing field in their favour at election time in perpetuity.

    It is going to take a bold government to do something about the ever-increasing welfare state. I have often argued that it is neither kind or compassionate to encourage people to be on welfare, and to stay on welfare, often over generations. Welfare dependency appears to me to be an increasing disease in New Zealand society today.

    What we need in my view is the government taking major steps to encouraging self-reliance, strong families and community responsibility. If that means stepping back from encouraging the growth of the welfare state amongst the middle class through changes in our tax system , then so be it.

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  64. KiwiGreg (3,129 comments) says:

    “as opposed to electing National, who philosophically would naturally be opposed to it.”

    No evidence of any opposition to this is there? As far as I can see the Nats are going to entrench it.

    “It is going to take a bold government ”

    Yup, shame we dont have one

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  65. bchapman (649 comments) says:

    Scott,
    John Howard did exactly the same thing in Australia. The Private Health Insurance Rebate was essentially a handout to private health insurance companies via middle class welfare which Rudd is having all sorts of difficulty getting rid of. The first home buyers grant similarly merely added $15,000 to the price of land at the urban fringe- main beneficiaries were property developers. So I wouldn’t just attribute these tactics to the left.

    Whe governments try to remove these ridiculous subsidies which actually hurt the market, listen to the beneficiaries (or those who think they benefit squeal). If you meet the swinging voter/target demographic you will always be looked after.

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  66. Dirty Rat (504 comments) says:

    Kiwigreg

    On the face it. it looks like that guy wasnt paying FBT on the loans he was taking from the Trusts, and even if Companies, there would be a deemed Dividend ( tax to be paid by company, although this year it will get worse).

    Either way, its looks like he was stupid.

    FBT, Deemed Dividends or Shareholders Salaries.

    Take your pick

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  67. rouppe (852 comments) says:

    Which all goes back to IRD being a soft-cock useless waste of space when it comes to doing some real work examining the circumstances of those sucking the teat

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  68. Dirty Rat (504 comments) says:

    like that guy ?

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  69. rouppe (852 comments) says:

    Like that guy shown to be paying $10,000 on $100,000 income, of which he managed to shelter $52,000 in companies/trusts, claim WFF then rub salt into the wound by using losses on his properties to further reduce his assessed income.

    I own rental properties too and that example fills me with disgust. I’m paying tax over and above what I pay in PAYE as a salaried employee (because my rentals make a profit), and am perfectly fine with that. I’m pissed off that I’m being hit with the hammer (depreciation rules etc) being used to crack nuts like that when if IRD got their asses out of their padded chairs and did proper assessments there would be such a perceived problem

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  70. OECD rank 22 kiwi (2,787 comments) says:

    ˙ɯǝɥʇ ɟo ɥʇoq ǝsɐǝɹɔuı ʇou `ƃuıpuǝds puɐ xɐʇ ǝɔnpǝɹ oʇ spǝǝu ʇı ˙ǝɔɐɟ ʇnoqɐ ssɐ sı ʇuǝɯuɹǝʌoƃ ʇuǝɹɹnɔ ǝɥʇ

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  71. burt (7,091 comments) says:

    Well said rouppe, but please remember priority one: The changes must be popular – we have an election looming and nothing else is more important than that….. Sad f##k’s should just dish out the medicine popular or not – the economy badly needs it.

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  72. burt (7,091 comments) says:

    Dish out the medicine… Put the lime in da coconut and drink all down…. I said DOCTOR…..

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  73. Dirty Rat (504 comments) says:

    rouppe

    1. What part of Depreciation hits you like a hammer

    2. The guy that pays $10,000 in tax is a story made up by Double Dipton

    3. The IRD do assessments based on what is presented to them, when they smell a rat they put the assessment under review.

    Are you suggesting that the IRD do all forms of Tax Accounting ?

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  74. burt (7,091 comments) says:

    rouppe

    Perhaps if the IRD were not so busy making popularity changes and implementing vote winning policies they could actually focus more energy and resources on the compliance issues you highlight.

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  75. rouppe (852 comments) says:

    Dirty Rat

    1. There is a perceived problem with building depreciation and residential landlords. The hammer is that removing the depreciation allowance is going to hit the perceived problem, but also every other building owner from the corner dairy to Bob Jones. If a rule change to depreciation gets targeted towards residential landlords alone, that will just create another distortion and in a few years we’ll be having the same discussion about something else.

    2. Bullshit. I know several people that do this albeit at a much less scurrilous scale. At least none of the ones I know claim WFF.

    3. Given IRD’s access to almost everything it would take 10 minutes to find out who the directors and ownership structure of the employing company and the consequent trading trust for which the same person will be the beneficiary. Circular arrangements such as these should be a red flag. I stand by the statement that IRD are almost encouraging this problem.

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  76. burt (7,091 comments) says:

    rouppe

    There are other issues that effect your 10mins… separation of the valid cases from the devious and as my tax advisor told me late 1999…. many structures will achieve what you want to achieve but I suggest you pick the one most commonly used by the Iwi. Theory being if you structure your affairs in the same way as the group that the politicians are too scared to upset you will be left alone. Sad but true.

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  77. Dirty Rat (504 comments) says:

    1. Depreciation is a timing issue, thats all

    2. Bill English threw in an example where someone was recieving WFF.

    3. Two seconds can tell you who is the shareholders are from the Companies Office, and in order to obtain an IRD number for a company, the Shareholders and Directors are already known. Theres no secrets.

    The tax returns will show income from Trusts for an individual anyway, so theres no drama.

    And if a trust is shown to be set up primarily as a Tax vehicle then the IRD will deem it as a sham trust.

    I really dont see what the problem is here

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  78. Dirty Rat (504 comments) says:

    There we go rrupe
    Set your company up as a Maori Authority

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  79. burt (7,091 comments) says:

    Dirty Rat

    Unless rouppe qualifies for race based tax reduction all he can do is structure it the same way.

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  80. rouppe (852 comments) says:

    Dirty Rat

    I really dont see what the problem is here

    Well apart from poor grammar this whole post is about someone who’s activities generate $100,000 income, but then shelters more than half in a shell company. That’s one thing. What makes it so disgusting is that this person then sees fit to claim WFF.

    If you don’t see that as a problem then your moniker is well chosen

    I can’t structure myself any way let alone akin to a Maori Authority because my main income is salary. I am not self employed. I’ve already told my accountant that I’m not prepared to buy the paint required for our family home under the name of the LAQC so that I can claim it as that would be dishonest. I’m not interested in that shit

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  81. KiwiGreg (3,129 comments) says:

    “I’ve already told my accountant that I’m not prepared to buy the paint required for our family home under the name of the LAQC so that I can claim it as that would be dishonest.”

    You have your family house in a LAQC and you think someone structuring onto WFF is bent?

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  82. Dirty Rat (504 comments) says:

    I don’t see it as a problem because it is legal, unethical maybe, but nontheless you don’t go to court for it.

    whereas

    If you prefer Tax Avoidance you go to court

    if you prefer Tax Evasion you go to jail

    if you like Tax Dodgers then you form the Association of Consumers and Taxdodgers.

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  83. rouppe (852 comments) says:

    KiwiGreg

    Don’t be a moron. Of course the family home isn’t in the LAQC. We need to paint the family home. It was suggested to me that buying the paint under the auspices of the LAQC (but then giving it to the painter to paint our family home) would allow me to claim it as a deduction which goes against my personal income. Or even more directly having the painter invoice the LAQC.

    Many many people do stuff like this. I refuse to.

    Dirty Rat

    Avoiding tax is not illegal. Evading tax is.

    Structuring your affairs for the primary or sole purpose of avoiding tax is illegal as it is tax evasion. IRD would uncover masses of these structures which serve no purpose other than to shelter income and thus avoid tax. But they won’t. Lazy lazy lazy

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  84. KiwiGreg (3,129 comments) says:

    @ rouppe I assumed from what you posted that the house was connected to the LAQC, as what you describe @2.16pm is evasion, pure and simple. You posted as if you had taken a moral stand “not to avoid” but you didnt. It’s a bit like claiming the moral high ground for not robbing banks.

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  85. Dirty Rat (504 comments) says:

    rouppe
    Tax Avoidance gets you in court.

    It is not a criminal offence, but a civil one, you still get penalties for it.

    and if you know of these millions of these illegal structures, I suggest you dob them in, as you have a moral obligation

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  86. infused (616 comments) says:

    There are quite a few ways which are very border line so that you pay no tax on an income on $1k a week.

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  87. Dean Papa (623 comments) says:

    “Bill English has pointed out how the current tax system allows well off people to in fact pay less tax than low income workers.”

    You can’t really blame people for taking advantage of existing loopholes. It’s only human nature to rort the system for as much as you can get -Bill of all people should know that.

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  88. rouppe (852 comments) says:

    KiwiGreg:
    Then you didn’t read properly, and just picked out the words LACQ and house and went into a frenzy

    Dirty Rat
    Tax avoidance does not get you in court. Thousands of people and companies do it every day, with all manner of items that are ‘business expenses’. They are legitimate activities to reduce tax liability.

    If you guys can stay off the Red Bull and concentrate for a moment, this whole discussion is based on the assertion that not enough tax is being collected and that residential landlords are the sole cause.

    I assert that the deductions and expenses claimed are available to all business owners, not just residential landlords. Because of these deductions, many self employed people set up companies and trusts, the only directors, shareholders and beneficiaries of which are the family themselves.

    These structures are shallow. Even if they serve a useful purpose, they also allow the individual to be paid a ‘salary’ well below market value. Being paid $48,000 on the dot is as obvious as being paid $70,000 on the dot. If the company’s only employee is also the director, and that business brings in $100,000 it is a pretty long bow to draw to say that the employee is only worth a $48,000 salary. This then has the individual’s affairs structured for the sole purpose of avoiding tax, and thus (according to my information) is tax evasion.

    However IRD have not bothered to scratch below the surface of many of these structures, and thus the use and abuse of them has been proliferated due to IRD’s tardiness.

    The basis of the last months worth of newsprint and blog space has been how selfish and greedy residential landlords are. What I’m trying to get across here is that I believe a much bigger problem that ought to draw the attention of compliance bodies is the proliferation of skilled tradespeople, professionals and business owners who seem to be getting paid relative peanuts.

    If a few of them started getting reassessed and delivered a tax penalty to recover tax that should have been paid, I’ll bet you will see a rush of tax money flood in.

    Remember contractors such as courier drivers were focussed upon a few years ago and IRD suddenly decided that if more than half your income came from one source then you were effectively an employee and all of the income generated by any intermediary company was assessed against the individual. If something similar were to happen to shallow, circular, tax entity structures I’m sure a ton of extra tax revenue would be discovered

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  89. Dirty Rat (504 comments) says:

    rouppr

    Your Tax knowledge is almost as bad as Cactus Kate’s

    Tax Avoidance Does get you in Court. On Internet Explorer, go to “file” >”edit” >”find on this page” and type in “Barber”

    Your last paragraph refers to the Attribution Rules, and its a little bit more than 50%, and also relates to Income over (now) $70,000. It also relies on whether its a Contract for Services, or a Contract of Services, which is an employment issue, as the Hurricanes Rugby Franchise found out.

    Tis very very basic

    Don’t let your emotions get in the way of facts.

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  90. rouppe (852 comments) says:

    Dirty Rat

    I notice you make a comment on my first para. We’ll just have to disagree on that as I know there is a definite distinction between the two in the mind of IRD.

    I notice you comment on my last para and essentially do not disagree with what I have said.

    Finally I notice that you have not commented on the remaining six para, so I assume you have no argument with those points.

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