Key attacks rich people who claim welfare

John Key has taken aim at wealthy New Zealanders who he believes are 'rorting' the welfare system. Photo / Mark Mitchell

Prime Minister John Key says wealthy people who are legally manipulating their financial affairs to ensure they benefit from Working for Families are "rorting the system" in a way that is unfair on other taxpayers.

A Treasury paper for the Tax Working Group says 9700 families with investment properties also receive Working for Families tax credits - and many were boosting their entitlements by offsetting their incomes against rental losses on their properties.

The paper also said there was growing evidence high-earners were using other ways to "shelter" their incomes to ensure they maximised what they could get from Working for Families.

They included sheltering income in trusts or setting up a trading company owned by a trust because money received as a trust beneficiary did not count as "income" for the purposes of Working for Families, for which eligibility is determined only by taxable income.

Yesterday, Prime Minister John Key said such manipulation of the tax system was clearly "rorting the system" - albeit legally - and unfair on other taxpayers. "If someone is using tax structuring as a way to receive Working for Families when they are, in fact, very well off, they're really taking taxpayers' money off the rest of New Zealand. I don't think that's fair and if we can find a way through that, it would be my preference."

Mr Key said the Government would wait to see whether the Tax Working Group could come up with a way of eliminating or reducing the scope for such activities.

The Tax Working Group was established by the Government to consider ways to ensure New Zealand's tax system was efficient and fair. It is expected to report back later this year.

Labour leader Phil Goff said if there were loopholes and the scheme was being exploited through the use of trusts, they should be fixed.

He did not believe the problem was brought to the attention of Labour when it was in government and believed the scheme was otherwise sound, describing it as "one of the best policies Labour introduced".

Finance Minister Bill English said there were issues of fairness and complexity because the different tax rates and the test for Working for Families meant people put a lot of effort into arranging their affairs to avoid higher taxes.

He said despite incomes rising, the IRD had noted fewer people than expected were paying the top personal tax rate and there had been a big increase in the number of entities such as trusts.

Yesterday, neither Mr English nor Mr Key would rule out Government consideration of an increase to GST or introduction of a capital gains tax - both of which are other proposals that have gone to the Tax Working Group.

* For their own benefit

Ways the rich can arrange things to help get Working for Families:

Set up a trading company owned by a trust. The income as a trust beneficiary is not taken into account for Working for Families.

Offset income with rental losses from investment properties.

Maximise fringe benefits, rather than taxable wages.

Invest in cash PIEs instead of normal bank account.