Rorting for families

Many have suspected for a long time that Working for Families was the worst kind of middle-class welfare, with very high marginal tax rates and the potential for tax avoidance on a large scale.

Now we know how much of a rort many rich families are perpetrating on the Government and, by extension, regular PAYE taxpayers.

This week, Treasury slipped a virtual "How to rort the system" guide into a briefing paper for the Government-appointed Tax Working Group, which is reviewing the tax system and suggesting options for reform.

This briefing paper was a sort of eye-opening description of what is happening in middle New Zealand's finances and what richer families really think of their responsibilities to the nation.

Frankly, they despise the fact they have to pay taxes and will go all out to avoid paying their fair share. And the mugs in the Labour government set up the rules to drive a seven-seater 4WD and boat through the national budget.

Treasury detailed how 9700 families use losses on rental property to reduce their taxable income so they can then claim Working for Families.

As shown in the diagram, one family was earning more than $167,000 a year from salaries from an employer and distributions from a family trust, yet was legally able to tell the Inland Revenue Department their taxable income was just $27,303.

They then claimed more than $10,000 in Working for Family payments. Tax department insiders have described to me how there is one street on the North Shore in Auckland with views of Rangitoto where every family is claiming Working for Families.

Think about that. This family was earning almost triple the median household income, yet paid no tax.

Yet someone paying PAYE who does not have a family or has not done the same fancy footwork with family trusts is paying as much as 38 per cent tax on some of their income.

No wonder everyone wants to play this middle class sport or wants to leave the country.

Labour's decision to introduce the 39-cent tax rate was bad enough.

It unleashed an entire industry of tax-avoidance enablers in the accounting, legal and real estate professions.

We now have tens of thousands of highly intelligent and otherwise useful professionals helping hundreds of thousands avoid tax.

All it did was effectively force tax rates higher for the rest of us mugs paying PAYE and pumped up property prices as those with equity in their family homes leveraged it up to buy rental properties so they could make losses and avoid the tax.

The use of Loss Attributing Qualifying Companies exploded after 2001 and the tax losses claimed by these vehicles doubled to almost $2 billion by 2007, Inland Revenue figures show. That's 10 hospitals that weren't built.

Ironically, Labour's introduction of Working for Families from April 1, 2005 was to help solve the cash flow problems many in the property-owning middle classes had brought on themselves by borrowing too much.

Even more painfully, this injection of Government funds into suburban bank accounts fuelled a second wind in the property market as many used the payments to simply double their bets.

We are left with a big mess that this Government must clean up if it is to make housing affordable again and stop a whole generation of graduates from leaving the country. Many have already gone.

We need a much simpler, broader and more efficient tax system with a uniformly flat and low company, income and trust rate.

I'd suggest the 23 per cent rate being considering by the Tax Working Group. We need a higher GST to discourage consumption and a land tax to compensate those genuinely in need of support in the transition.

But mostly, we need to destroy Working for Families.