Eliminating taxing differentials

OPINION: Bill English recently indicated the Government would block perceived tax loopholes that enable some taxpayers to structure their affairs so that their earnings are received via companies or trusts with a lower marginal tax rate, writes Murray McClennan in this week's Taxing Times.

 Successive governments since 2000 have tinkered with tax rates so differentials between company (30 per cent), trust (33 per cent) and top marginal personal tax rates (38 per cent) are wide. Whether this is an issue or merely perceived to be is a matter of debate.

The IRD thinks the tax rate differential encourages higher income earners to structure their affairs to take advantage of it. There are legitimate reasons people would wish to establish family trusts or companies, such as asset protection and estate planning. Not all restructuring is done solely for tax purposes.

One way to remove any incentive to do this would be to make the top personal tax rate, the trust rate and the company rate all the same and this is certainly something that the government has indicated it wishes to do in the medium term. This would undoubtedly simplify the tax system rather than require yet more complex rules. Indeed, it is a little ironic that New Zealand had an aligned tax rate as long ago as 2000.

A high top personal tax rate has other undesirable effects – it is a major disincentive to work and it inflates wage demands of more senior staff as the salaries they expect to receive after tax are adjusted accordingly.

Australia is reviewing its own corporate tax rate and may well reduce it from 30 to 25 per cent. Although company tax is effectively only a withholding tax, assuming we continue to have an imputation system, it is likely that any change in Australia's corporate tax rate will be followed here.

» Queenstown-based Murray McClennan is a tax director at WHK Cook Adam Ward Wilson.

- © Fairfax NZ News

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