Tax rate on some high income earners less than 10%: English

Tuesday 23 March 2010

Finance minister Bill English has again taken aim at property investors who offset their tax by using losses in leveraged property.

By The Landlord

The comments suggest that the government is looking ringfencing losses on property investment so they can't be used to offset personal income tax.

English claims the current tax system is unfair and inequitable and the Government will address this in the Budget.

He 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."

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.

English says that at this point, the total tax paid, on income of $100,000, has fallen below $10, 000, which is an effective income tax rate of less than 10%.

"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."

Comments from our readers

On 24 March 2010 at 9:31 am Tony McLean said:
Bite the bullet Bill and impose a tax on all capital gains (primary residence excepted - but cap it) as Oz did in 1985 and use some of the benefit to encourage productive investment, to at least halt NZ's economic decline.
On 24 March 2010 at 9:39 am Simon Walter said:
You have to hand it to them, the Nats are great at building a case for reducing the top rate of tax by focusing on the rorts in the current system. Very smart.
On 27 March 2010 at 1:01 pm danny said:
there are clearly some loopholes here, particularly around working for families entitlements,which should be addressed. Just bear in mind that property investors provide a valuable service - housing; the government cant provide all of the rental's required to house those that cant afford to own a home so somebody has to do it. Just a caution: dont make it too unappealing to own rental property.
On 1 April 2010 at 1:46 pm Jane said:
Tax losses are actually costs to operate a business, not a rort. Having spent large sums on upgrading my rental properties I resent being told that this is just a way to reduce my tax liability. Any farmer that earns $100,000 gross would not be paying anything at all in tax...let's be fair, companies can claim all sorts of expenses that salary earners can't.
On 1 April 2010 at 4:58 pm Brian said:
Bill knows all the housing tricks - "poacher turned gamekeeper" springs to mind.
On 6 April 2010 at 10:20 pm Ben said:
ok, I can't think of the logic behind this.. We are just coming out of a recession and he is suggesting making property investment less attractive? Think about the implications of this before making such a stupid decision. I feel for the low income earners on this one.. "Lets cut the tax for the high income earners and increase the discretionary tax (GST) to 15%!!". Food, electricity and fuel are necessities, we have no choice but to pay for these. Ohh, on top of that, people that can't afford to buy a house will have to pay more rent as this will rise so investors can run properties positively to claim expenses. And, a less attractive property investment market means less houses being built, so less work for builders, chippies, carpenters, plumbers, real estate agents ++ and the list go's on. John Key - What jobs have you got for these people? Ohh wait, they will then go to australia and further drop the demand for housing.. Tax's don't need to change, the top bracket is fine (I'm in it), focus your efforts on something productive.
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