Well-off families rort system

BY VERNON SMALL

More than 9700 families receiving Working for Families credits own rental properties and are using losses on them to boost the amount they get from the taxpayer.

Other recipients of the scheme, introduced to help struggling families, are using trading companies, sheltered within trusts, to pocket tax credits even though they are earning well over $70,000, a high-powered review of the tax system has found.

The warnings, contained in Treasury advice to the Tax Working Group, throw doubt on the design of the previous Labour government's flagship tax credit scheme.

It says the rise in the top rate to 39 per cent in 1999 (since lowered to 38 per cent) and the introduction of Working for Families, which is calculated on taxable income and not total income, provided incentives to shelter or split income.

There has been an "obvious spike" in the number of taxpayers clustered around the previous top tax threshold of $60,000, indicating that trusts, companies and other savings vehicles were being used to shelter income from higher tax.

"There is also growing evidence that taxpayers that are not part of the target income group are receiving WFF tax credits by either reducing their `income' as defined for WFF purposes and/or converting income into forms that are not treated as `income' for WFF tax credit purposes."

There was also an incentive to maximise fringe benefits, such as using an employer's credit card. "This risk is particularly high with closely-held companies."

The group suggests income, not taxable income, could be the best way to assess the need for assistance.

A common way to rort the system was to set up a trading company within a trust. The company's income would be taxed but substantial amounts could be distributed from the trust and would not be taken into account for calculating Working for Families.

In one example, a couple with two dependent children set up a family trust to own a construction company.

The husband drew a salary of just $27,303, or $525.06 a week, in 2007 as managing director of the company. But he also drew $67,000 in recent years from the trust, as well as other advances to him and his wife.

The company earned taxable income of more than $770,000 and paid $139,000 in tax-paid dividends to the trust. But the family was able to qualify for $10,348 in Working for Families assistance in 2007.

The group has modelled five "fiscally neutral" options to address the problem, including dumping Working for Families and dropping the top tax rate to 23 per cent (or to 30 per cent with a universal payment per child of $2000), or targeting assistance more tightly to low and middle income earners.

It has also considered the effects of increasing GST to 15 per cent, 17.5 per cent or 20 per cent. The group will present its final report to the Government in December.

POLITICIANS BACK WORKING FOR FAMILIES

The Working for Families scheme was an important support tool but people were taking advantage of loopholes and must be stopped, politicians said today.

Prime Minister John Key said the fact that some families were structuring their affairs to limit tax liabilities and maximise allowances was well known.

He was happy that changes be made to close any loopholes as long as it did not change the integrity of the system.

"I think we can be pretty sure that they are rorting the system. The question is what happens next and what alternatives there are," he said today.

"I don't think it (Working for Families) is fatally flawed, but right from the get-go we have always been of the view that it is subject to these kind of abuses.".

"If the tax working group can come up with a way of eliminating or reducing them that would be beneficial for everybody."

Labour leader Phil Goff said Working for Families had "helped lift tens of thousands of children out of poverty".

"It's one of the best policies that Labour introduced.

"If there are loopholes then certainly they should be closed," he told reporters today.

Mr Key said the Government would take some convincing to implement some of the review's proposals.

"I am not a huge fan of doing that (raising GST) or a capital gains tax but let's let them do their work and see where they come back."

Mr English said the Government was not ruling anything out but would make its own decisions based on "the best advice".

Raising GST "obviously" has a bigger impact on low income earners, he said.

"It may well be we just leave the tax system as it is, that's one possibility."

Mr Goff said he would "worry" about the impact an increase in GST would have on families "that are already struggling to make ends meet".

Council of Trade Unions economist Bill Rosenberg said an increase in GST would "hit low income families and workers hard".

- with NZPA

 

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