Introducing a tax rate higher than company and trust
rates would encourage people to divert income into trusts and
companies, Deloitte Dunedin taxation partner Peter Truman said
While the ability to divert income arising from business
activities where the individual was instrumental in earning
that income was now more difficult following Inland Revenue's
success in the Penny and Hooper case, there was still
flexibility to structure investments that earned passive
There could be good family and commercial reasons why shares
in a company should be owned by a trust. Dividends received
from that company that were retained in the trust were then
taxed at 33%.
''Higher marginal tax rates also increase the motivation of
people to enter into transactions that may reduce their
For example, if a rental property is purchased that is
negatively geared, the tax losses generated will save more
tax and therefore increase the incentives to undertake the
investment,'' Mr Truman said.
Finance Minister Bill English yesterday released a statement
headed ''More progressive tax system since 2010 changes''.
In it he said lower-income households were paying a smaller
proportion of net income tax than they did in 2008,
indicating the tax system had become more progressive since
the Government's tax changes in 2008.
''This should contribute to improvements in income equality
in New Zealand, contrary to the Opposition's completely false
claims lower-income households are disadvantaged by the tax
Households earning less than $60,000 a year, which were about
half of all households, were generally expected to pay less
in percentage terms towards total net tax in 2013-14 than
they were paying in 2008-09, he said.
Conversely, households earning more than $150,000 a year -
the top 12% of households by income - were generally expected
to pay more of the total net tax than they were paying in
Only 6% of individual taxpayers earned more than $100,000 a
year, yet they they paid 37% of total income tax.
In the 2010-11 year, those taxpayers paid 29% of total income
tax. Mr English said those figures raised questions about
Opposition calls for the top tax rate to be increased.
''They need to explain to New Zealanders why that should
happen when higher-income households are already paying a
larger share of total net tax since the Government's tax
changes three years ago.
''At any particular time, a large number of households
effectively don't pay tax,'' he said.
The income tax paid by those households was exceeded by the
amount they received from welfare benefits, Working for
Families, paid parental leave and accommodation subsidies.
All those were appropriate for those families genuinely in
need, Mr English said.
Mr Truman said higher income tax rates increased the
motivation to split incomes.
Where there were other family members on lower marginal tax
rates, there was an incentive to allocate income to those
other family members to access lower tax rates.
''While Inland Revenue has various measures at its disposal
to counter tax-motivated transactions, they do not have the
resources to identify them all.''
Increasing the top marginal tax rate would increase the tax
collected but it would come at the expense of the tax system
losing some of its efficiency because of the increased
incentive of people to navigate their way around the rules,