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Taxation Bill Introduces Equity Measures

Legislation introduced into Parliament yesterday contains two key measures for making the progressive tax system more equitable.

The first is to make restrictive covenant and exit inducement payments taxable so they cannot be used to replace taxable income such as salary and wages. The other will tax certain distributions of trust beneficiary income to children under 16 at the trustee rate of 33%, rather than the minor's marginal tax rate, which can be as low as 19.5%.

"Both measures are intended to introduce greater equity into paying tax," Revenue Minister Michael Cullen said. " Most ordinary New Zealanders cannot get around paying lower taxes by arranging a restrictive covenant with their employer, or putting income-earning assets into a trust that distributes the income to their young children. Instead they pay their full tax bill."

"Restrictive covenant payments compensate people for restricting their activities to endorsing a single product, for example, or working for a single employer. They are commonplace in some industries, and are likely to receive greater use as a way of avoiding the top 39% tax rate. Exit inducement payments are used to encourage people to give up a position or activity. Both types of payment can be for millions of dollars. They are employment-related, and it is clearly unfair that they are not taxed."

"The minor beneficiary legislation will reduce the tax advantage gained by using a trust. It will apply only if the beneficiary income is derived from property settled on a trust by a minor's relative or guardian, or someone associated with the relative or guardian."

"It is estimated that in 1998 about 3,500 children under six shared $27 million in beneficiary income from various business activities. Again, it is unfair that this income should be taxed at a lower rate than their parents' rate."

"The legislation spells out a number of exceptions to ensure that taxing beneficiary income of minors at 33% is not unjust. For example, it will not apply to income from property for which the settlor was ordered by a court to pay damages or compensation to the child," Dr Cullen said.

Detailed information on these and other matters in the bill can be found in the commentary on the Taxation (Beneficiary Income of Minors, Services-related Payments and Remedial Matters) Bill. It is available on the web site of the Policy Advice Division of Inland Revenue at www.taxpolicy.ird.govt.nz.


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