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Crack-down promised on dodgy trusts/incorporations

The promotion of schemes for high earners to incorporate themselves in order to avoid the new 39 cent income tax step is "unethical and foolish," Finance and Revenue Minister Michael Cullen said today.

Dr Cullen gave further detail of the Government's planned anti-avoidance measures in a speech to the Auckland Public Practice Special Interest Group of the Institute of Chartered Accountants.

He said the Government did not intend to "go overboard legislatively" and would take a pragmatic approach, accepting there would always be some slippage but seeking to limit it.

Provisions to prevent people from dodging the tax by substituting a portion of their salaries for employer contributions to superannuation funds which can be drawn on at any time like a bank account will go to the Cabinet next week.

"If approved, they will be included in a bill for introduction later this month.

"We are also looking at ways to curb the inappropriate use of companies, trusts and partnerships. In the simplest form of the scheme, employees incorporate themselves in an attempt to have that part of their income which should be taxed at 39 cents instead taxed at the 33 cent company rate.

"Legislation explicitly targeted at the diversion of income from personal services is expected to be in a bill to be introduced in May.

"Tax avoidance has been around for as long as tax, regardless of what the top personal tax rate is. We do not seek perfection," he said.

"Inland Revenue estimates that at least $55 million in tax went unpaid in the 1998-1999 year because of tax minimisation schemes featuring such provisions as limited recourse funding, the depreciation of so-called "fixed life" intangible property and stakes in loss attributing qualifying companies.

"These mechanisms are used to enable individuals to obtain tax deductions significantly larger than the money they invested.

"I emphasise that this is tax avoidance that has been taking place when the top personal tax rate was 33 percent, and is not the result of the increase to a 39 cent rate."

"We also plan to take action on the recommendations arising from the Wine Box inquiries.

"We are cracking down on tax avoidance to help fund our social programme and to build public cnfidence in the tax system," Dr Cullen said.

Contact: Patricia Herbert [press secretary] 471-9412 or 025-270-9013 or David Carrigan [tax adviser] 471-9728

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