In the money: Master the tax game

By IRENE CHAPPLE

According to her housekeeper, the so-called Queen of Mean once announced: "We don't pay taxes. Only little people pay taxes."

Leona Helmsley, the fabulously wealthy widow of a New York property tycoon was right, of course.

If you want to be rich, becoming a player in the tax avoidance game is a prerequisite.

The rules are simple: discover the workings of New Zealand's tax system and find ways to avoid its thicker wedge.

There are three common ways New Zealand's white collar classes tiptoe around their tax debt. They are legal but, as pointed out by IRD director of litigation Mike Lennard, they can easily topple into illegal.

It's those with complicated business structures rather than the wage earner who sits on a tax-paid salary of $40,000 who make the most of the loopholes.

Most common is the transfer of assets into trust. A house in trust is no longer owned by the individual and will be protected from any liability should that person's business fail or be subject to legal claims.

Hence the sight of a failed businessman living it up in his Remuera house with the Mercedes in the driveway.

Earning assets can also be transferred into trust and their income will be taxed at the rate of the beneficiary. That can save a fair whack on income which might otherwise be taxed at up to 39 per cent.

Then there is frontloading the tax deductions. If you commit to a business debt, which can, for example, be repaid in 10 years' time, you can offset the debt from your income and reduce your tax.

If you walk away from the company or if it goes broke before the 10 years are up, the tax burden will, in many cases, no longer weigh you down.

And finally, there are business structures whose losses can be offset against the earnings of others, such as partnerships and Loss Attributing Qualifying Companies. Averaged out, the loss-making business lowers your tax bill on the profit-making ones.

Such tactics are legal unless the tax department finds the purpose or effect of your set-up is to avoid tax. Then, you have to pay it back with civil penalties.

If the IRD looks at the set-up and concludes it's contrived, it's likely to be called evasion of tax, which is a crime.

There are similar rules around the buying of property and shares.

If you are seen by the department as a trader of either, you will be taxed on the income you make as a result. If you own shares you - or the company - will be taxed on the dividends paid.

However, if you buy and sell a large number over the year, but are not seen as a trader, then bingo - you've got tax-free income.

And in the booming property market too, there's gold to be had. Sell some properties over the year at a nice margin and you'll enjoy a tax-free dollop of cash. But the game can become far more complicated.

If you are caught playing games with the purpose and effect of avoiding tax, says Lennard, you will be hit with heavy civil or criminal penalties.