Trusts face clampdown in Labour's tax strategy

Finance Minister Bill English said that figure was very optimistic. Photo / Mark Mitchell

Labour would target hundreds of millions of dollars worth of income rich people shelter in trusts as a key part of its "tax switch" package unveiled this week.

The party believes it can raise $300 million a year in additional tax with new anti-avoidance measures, a forecast greeted sceptically in a number of quarters, including the Beehive.

Finance Minister Bill English said that figure was very optimistic. National had already pursued "the low-hanging fruit", he said, by giving the Inland Revenue Department money to enforce tax rules on property investment which were expected to return $800 million a year.

With that done, "there isn't a whole lot of easy revenue gains left there", Mr English said.

But Labour finance spokesman David Cunliffe said there were two ways to address tax avoidance.

One was to police the existing boundary of the law more strictly and the second was to change the boundary of the law. "We're going to do both. The National Party is not doing the latter."

Labour's anti-avoidance measures would include a serious push against the "trust law boundary", building on the Law Commission's recent review of trust law.

Critics have argued Labour's plan to reintroduce a top tax rate of 39 per cent opens up a gap between that rate and the trust rate which would fuel a fresh wave of tax avoidance.

Mr English said the sharp increase in the use of trusts early last decade coincided with former Labour Finance Minister Michael Cullen's introduction of a 39c top rate while the tax rate for trusts was kept at 33 per cent.

But the potential to use trusts as tax shelters was curbed when the top personal and trust rates were
aligned.

Nevertheless, the Government's Tax Working Group estimated that income-sheltering using trusts cost the taxman about $300 million in
2007.

Mr Cunliffe said Labour would look at trust law to ensure that "people who are currently legally able to hide income in trust structures will increasingly be unable to do so".

However, the use of trusts would appeal only to those who were hit with Labour's top rate of 39c in the dollar.

Labour estimates that would be only the top 2 per cent of taxpayers.

Mr Cunliffe pointed to the $5.5 billion in outstanding tax, the $450 million worth of back tax that was caught up in only three cases at present before the courts and the recent $2.2 billion settlement between the Crown and the main banks.

"In the light of those numbers alone, a $200 million to $300 million per annum recovery is hardly an exaggeration."