Tax avoidance

The Herald reports:

Two-thirds of New Zealand’s richest people are not paying the top personal tax rate, with increasingly complex overseas schemes and bank accounts being used to evade the taxman.

Inland Revenue has found that 107 out of 161 “high-wealth individuals” who own or control more than $50 million worth of assets declared their personal income in the last financial year was less than $70,000 – the starting point for the top tax bracket of 33 cents in the dollar.

The multimillionaires used a variety of 6,800 tax-planning devices – such as companies, trusts and overseas bank accounts – to avoid paying tax. One had a network of 197 entities.

I doubt many, if any, avoided paying tax. What they avoided was paying the top personal tax rate of 33%. If you run your affairs through a company, then the tax rate is 28%. However if you take income from your company at greater than $70,000 then you will still pay the 33% rate.

The way you stop this happening is by having the top personal tax rate the same as the company rate at 28%.

Labour’s revenue spokesman, David Cunliffe, said it appeared the problem here was worsening.

Actually what would worsen it massively is Labour’s plan to increase the top tax rate to 39%. That will encourage even greater avoidance.

“I am astounded and appalled. The legitimate tax system requires that everyone pays their fair share.

“If people want to [avoid tax] then it will require the Government to be much stricter and crack down on avoidance opportunities. Why should people who are the most privileged sector of society use their position to avoid paying a fair share of tax?

“That is morally wrong and should be illegal.”

What a fascinating position. Is Labour proposing to make it compulsory for people to pay as much tax as possible? That it is illegal to arrange your affairs in a way that avoids the top tax rate?

Maybe Mr Cunliffe proposes that family trusts be made illegal as they can be used to avoid tax. However I note on the register of pecuniary interests he has declared the Bozzie Family Trust. Is he saying what he has done is morally wrong and should be illegal? What explicitly does he propose to change?

Figures supplied to the Weekend Herald show that the IRD has collected more than $600 million in extra tax since a unit was set up in 2003 to investigate high-wealth individuals.

Other cases still under investigation total $212 million, and a further $112 million is disputed.

Inland Revenue has also identified 500 people it believes may have given themselves artificially low salaries to avoid paying the top personal rate.

The law allows you to arrange your affairs in a way that may mean you pay less tax. But the arrangements can not be “artificial”. So if you are a surgeon earning $500,000 a year into your company and the company pays you only $50,000 a year – the courts have ruled this is artificial and won’t be allowed.