Editorial: New tax rules designed to end the rorts

Opinion

They may sound a little moralistic, but Budget measures to improve our "tax integrity" are financially and politically important. Tax integrity is a term known to bureaucrats, accountants and academics.

It is something more than integrating the tax system to provide consistency and certainty between types of tax payments and deductions.

It should also be a virtue, an expectation that those involved in tax transactions will behave with integrity when facing a choice of doing what is right or what they think they can get away with. Too often, people will take advantage of the state and their fellow taxpayers.

Examples provided in the Budget documents include so-called "phoenix" arrangements where a transaction between two associated parties, often in the property sector, sees one claiming a GST refund and the other being wound up before it has to pay GST.

To improve tax integrity, the Government is changing tax rules and funding the Inland Revenue Department an extra $120 million to root out the exploitation of loopholes and the twin evils of tax evasion and avoidance.

Speculators who do not pay tax on their property-trading gains are clearly in the department's sights. It has long been argued that the IRD has the authority to crack down on such tax-free housing capital gains but has failed to do so, implicitly giving the nod to property booms.

The drive for improved tax integrity is also focusing on the black economy, those, "operating outside the tax system". It is timely for IRD to target under-the-table businesses.

The increase in GST to 15 per cent from October is likely to increase consumer demand for tradespeople, servicemen and suppliers to run two sets of prices.

As it happens, cash jobs are among the transactions showing the least integrity of all: commonly the tradesman will agree to deduct the 12.5 per cent GST but seldom his or her income tax component of, say, 33 per cent as well, which is also not being paid to the state. The Government is being doubly short-changed and the customer is not getting a fair share of the unpaid tax.

Finance Minister Bill English expects the improved audit and compliance activity to track down $120 million more in this tax year alone, rising to $205 million taken annually by 2013.

On another front, the Government is blocking a ruse for well-off families to reduce taxable income levels to a point where they qualify for Working for Families welfare payments. About 9700 use investment losses, including those from rental properties, to set their taxable income low and take state handouts.

The Budget will make them add their losses back on to taxable income to record "true economic incomes". Similarly families are distributing money through a trust or trust-owned business so their personal incomes appear low enough to qualify for Working for Families.

The unscrupulous are exacerbating the vast cost of this social assistance programme. Measures to stop the rich taking welfare should yield $25 million a year more in four years' time.

Revenue Minister Peter Dunne believes the overall campaign for tax integrity will leave the Government's books $745 million better off by 2013.

"When people do not pay their share, everyone else suffers because there is less money for health, education and other essential services," he says.

Politically, a Budget providing healthy income tax cuts for those on high incomes requires a counterbalance. Ensuring the wealthy are held to the same standards of integrity as they demand of those on low incomes or in the welfare system is one way of providing it. Those rorting the system need to be stopped.