Govt plans to thwart tax dodgers

By BRIAN FALLOW

WELLINGTON - The Government will legislate to counter the use of service companies, trusts and partnerships to avoid the new top rate of income tax.

From tomorrow, personal income over $60,000 a year will attract a tax rate of 39c in the dollar.

"The measure is aimed at high-income employees who try to use a company or other entities as a shelter for what would otherwise be considered employment income," said Revenue Minister Michael Cullen.

"For example, someone with a salary of $120,000 might set up a company which is contracted to his or her employer. Tax on the income would be paid at the company rate of 33 per cent, rather than at 39 per cent.

"The employee might then choose to receive $60,000 in salary from the 'company,' be taxed on that income at 33 per cent, and distribute the remainder to an associated person, such as a spouse, who has no other income.

"The tax paid on the spouse's portion of the income would be 33 per cent or lower," Dr Cullen said.

"Blatant schemes of this sort are likely to be subject to existing anti-avoidance law and therefore ineffective. The proposed legislation puts it beyond doubt that they do not work."

If the company, trust or partnership received at least 80 per cent of its income from one source, and earned at least 80 per cent of its fee income from services provided by one person, then its income would be attributed to that person and taxed at his or her marginal rate.

Dr Cullen said the legislation to be introduced in May was expected to be passed in September, but if enacted it would apply from tomorrow.

Opposition revenue spokeswoman Annabel Young criticised the retrospectivity of the moves and the uncertainty that engendered. "It's law-making by press release."

Deloittes tax partner Thomas Pippos said there had been an influx of people incorporating ahead of the tax increase.

"It has been in vogue because it is just so easy to do. Now we've got a strong indication that a lot of these things may be able to be voided, but a bunch of them are still probably okay because the rules are quite narrow."

Depending on the final form of the test, people could structure their way around it, he said.

But PricewaterhouseCoopers tax partner John Shewan said: "I don't think it will be easy to structure around for those who are predominantly providing services to one purchaser. "It will encourage some consultants and others to widen their client base so that they don't cross the 80 per cent threshold. But it won't impact on the typical plumber or panelbeater with a range of clients."

Mr Pippos said the measures were arguably unnecessary in that the cases caught by them would probably be caught by the existing general anti-avoidance rule, or were only necessary because of Inland Revenue's hesitancy about applying the general rule.

An adviser from Dr Cullen's office said the measures were a buttress to the anti-avoidance rule.