By GRAHAME ARMSTRONG – Sunday Star Times

Finance minister Bill English has signalled the government will next year get tough with tax-dodgers by closing loopholes that allow wage earners to avoid paying their share of tax.

The IRD says the government is missing out on $300 million a year because of wage earners who squirrel away money into trust accounts to avoid paying the top income tax rate. More is lost because of earnings that are “sheltered” by a company created solely to avoid tax.

The IRD, in its latest submission to the Tax Working Group, says the problem is that New Zealand’s multitude of tax rates is encouraging bad behaviour.

It said the trust account and company tax rates were too far out of line with income tax rates. Taxpayers were placing income in a trust account, paying 33 cents for every dollar earned, rather than the top rate of 38c. Another common ploy was for individual taxpayers to “shelter” their money by creating a company so that they paid 30 cents of every dollar earned in tax rather than the top rate.

The IRD says that when the top income tax rate of 39 cents (now 38 cents) was applied to earnings of $60,000+ in 2000, a flood of taxpayers rearranged their finances to avoid the new regime.

English said large-scale “legitimate avoidance behaviour” by higher-income earners undermined the goodwill of lower-income earners.

“It’s quite telling that there has been virtually no growth in the number of people paying tax on $1 million of annual income, since the 39 cent top personal tax rate was introduced 10 years ago.

“As a country, we want families, businesses, accountants and lawyers looking at how to unlock greater income and productivity, not working out how to minimise their tax.

“We don’t want people spending their time and resources trying to avoid tax. We also don’t want IRD devoting all its time to chasing tax and compliance issues.”

The IRD also advised the working group that last year the losses claimed by people with rental properties were $575m more than the income declared from residential rentals.

This meant that the government lost a further $150m in revenue despite a doubling in the total value of all rental properties.

The Tax Working Group, with representatives from Treasury, Victoria University and Inland Revenue, has so far put forward proposals to cut income tax rates, with extra revenue collected from an increase in the GST and the imposition of a capital gains tax on property.

The group’s work will culminate in a public conference hosted by the university in December.

English said the government would consider the group’s findings in the New Year and “any changes will be signalled in Budget 2010″. “Equity and fairness” would be central to any reform.

New Zealand’s tax system was distorted, English said, not just in what was taxed but what was not taxed. “Most people would see it as unfair that speculators can reap large tax-free gains while low and middle-income workers are taxed on every dollar they earn.”

Prime Minister John Key also hinted yesterday that tax reform could also mean some tax cuts for wage earners.

While ruling out tax cuts promised before the last election, Key was reported in the the Dominion Post saying some tax relief could still form “part of the mix”. “Wholesale, unfunded tax cuts look highly unlikely and irresponsible. But making savings in one area to potentially promote tax cuts in another [is different].”