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Tax-avoidance legislation to target high-incomes

Tax-avoidance legislation to target high-income employees

Employees who circumvent the top tax rate by using a company, trust or partnership as a "front" for employment are the target of anti-avoidance legislation announced today by the Government.

The new provisions will come into effect with the new 39 cent top personal tax rate from the income year beginning 1April.

"The measure is aimed at high-income employees who try to use a company or other entities as a shelter for what would otherwise be considered employment income," Revenue Minister Michael Cullen said.

"For example, someone with a salary of $120,000 might set up a company which is contracted to his or her employer. Tax on the income would be paid at the company rate of 33 percent, rather than at 39 percent.

"The employee might then choose to receive $60,000 in salary from the 'company', be taxed on that income at 33 percent, and distribute the remainder to an associated person, such as a spouse, who has no other income. The tax paid on the spouse's portion of the income would be 33 percent or lower," Dr Cullen said.

"Blatant schemes of this sort are likely to be subject to existing anti-avoidance law and therefore ineffective. The proposed legislation puts it beyond doubt that they do not work.

"The new legislation will ignore the company, trust or similar entity in certain circumstances and will tax the employee as if he or she had received the income directly.

"There will be clear criteria for when the new rule applies, and they will define the circumstances when a company, trust or partnership is just a 'front' for an employment relationship.

"The legislation will be introduced in May, and is expected to be passed in September. Once enacted, it will take effect from 1 April this year.

"Discussions with some tax practitioners have indicated that this should not cause problems of uncertainty for taxpayers. However, it will be for the select committee that considers the bill to decide if this is a real problem.

"Today's announcement should not come as a surprise because I've been mentioning the need for it for the last three months. I have always made it clear that this Government will not tolerate tax avoidance.

"The measure announced today complements the bill introduced into Parliament this week to counter the use of employer contributions to superannuation schemes to avoid the 39 percent tax rate," Dr Cullen said.

Attachment (SEE PREVIOUS STORY): Detailed rule upon which the legislation will be based.

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