1. CRAIG FOSS (National—Tukituki) Link to this
to the Minister of Finance
What measures will the Government consider to improve the fairness and integrity of the tax system?
Hon BILL ENGLISH (Minister of Finance) Link to this
The Tax Working Group advised the Government that New Zealand could raise revenue with a mix of taxes that better promotes economic growth, but the system also needs to be fair and have integrity. This is apparently not the case at present. The changes made by the previous Government have led to highly uneven tax rates, both between different types of activity and between taxpayers with similar economic incomes. The Government would like to correct that situation.
The following structuring is fairly typical: self-employed people earning $100,000 a year would nominally pay about $27,000 in income tax. If instead they form a company, perhaps notionally owned by another entity, and pay themselves a salary of $48,000, then their total tax bill falls by $3,000. If they have dependent children, this then makes them eligible to receive a Working for Families payment. In this example, that figure could amount to $8,500 per year. So, in this example of self-employed people earning $100,000, tax structuring would have lowered their tax liability by around $11,000, which is a drop of 40 percent relative to the taxes that are supposed to apply to that level of income and that would apply to someone who earns a wage or salary of that amount.
If the taxpayer in question owns a property investment financed by borrowing that produces taxable losses of $20,000, this further lowers his or her personal taxable income to just $28,000. At that point, tax paid on an income of $100,000 has fallen to below $10,000. In other words, the person’s effective tax rate is actually less than 10 percent, or about one-third of the statutory tax rate. That is without counting any tax-free gains that the person may have made on the housing investment.
In that situation, the taxpayer would simply be behaving in a way that was implied by the tax structure that the previous Government put in place. But that system lacks fairness and integrity because of the way income is defined and because different tax rates have proliferated. These examples are not uncommon. The Tax Working Group found that there are 10,000 households reporting investment losses while also claiming Working for Families credits. The Government is keen to make the taxation system fairer by closing this type of loophole, so people pay the actual amount of tax that is the statutory tax rate.
David GarrettDoes he believe that New Zealanders’ view of the fairness and integrity of the taxation system depends on Government spending tax money fairly and with integrity; if so, will he call in the Auditor-General to investigate the misappropriation by Mr Paul Morgan and his mates at Tekau Plus of money meant for Māori business, but which instead ended up in Mr Paul Morgan’s pocket?
Of course, taxpayers’ perception of whether paying their taxes is worthwhile is very much dependent on how well that money is spent. That is why the Government has been going through a large-scale, value-for-money exercise right across the State sector to ensure that the around $60 billion of taxes that we collect is spent wisely. In respect of the allegations the member has made, it is my understanding those are being looked into.