Article: Property Investment

Tax Avoidance And Taxing Changes with Frank NewmanTax Avoidance And Taxing Changes with Frank Newman

The leaking of millions of highly sensitive documents from a legal firm specialising in global tax minimisation has renewed the controversy regarding tax havens. The release of the “Paradise Papers” follows the leak of similar papers last year from a Panama based legal firm (the “Panama Papers”).

The media is of course having a field day sensationalising the business activities of high profile individuals and corporations, but the reality is the practice of minimising the amount of tax one should pay is as old as tax itself.  The most active parties in the industry are governments, who offer tax advantages to wealthy individuals and businesses, in return for clipping the ticket on a fraction of the money.

Unlike the release of the Panama Papers last year which focused on concealing wealth, the issues arising from the Paradise Papers are more about morality and fairness. There is no question about the legality of companies like Apple shifting money into low tax jurisdictions to minimise their tax payments - the debate is whether it’s right that they should do so.

In an age where brand and image is everything, the real damage to companies and individuals is condemnation in the court of public opinion, to the extent that loyal consumers and fans become less so.

The damage generally is the instability that arises when a population at large think those who are better off than them are avoiding tax, when they can’t. The mantra from the critics - socialist politicians in particular - is that people and companies should pay their fair share of tax. That debate leads nowhere as long as “fairness” is a matter of opinion not definition.

Some say a single flat rate of tax is fair. Others say our “progressive” income tax system is “fair” because those who earn more should pay more - not only in total but also more on the last dollar they earn (their marginal tax rate).

The fact is that in New Zealand the top 10 percent of households pay 37 percent of all income tax. In other words they pay 3.7 times their “proportionate” share.

At the other end of the scale, the 20 percent of households with the lowest incomes pay just 2 percent of income tax - a tenth of their proportionate share. When Government transfers – benefits, superannuation, and Working for Families – are included in the equation, the ‘net’ tax story becomes even more noteworthy. While the 30 percent of households with the lowest incomes pay $1.7 billion in income tax, they receive a total of $10.6 billion in income support.

Is that fair? At what point is it fair and not fair? That’s a detail politicians conveniently avoid, especially when they are talking about taxing high income earners more.

Although the new coalition government has only just been sworn in, the new ministers have been quick to announced new policy initiatives.

The new Finance Minister Grant Robertson has released the first of a two-part review of the Reserve Bank mandate, by adding employment to the inflationary mandate. Details of the second part are not yet known. On the face of it, expanding the mandate to include employment is unlikely to have a material effect, given the unemployment rate is at historical lows and there is little the Reserve Bank could do via monetary policy to transition hard core unemployable people into work - that will require reform of the welfare system.

The more interesting questions relate to what changes may lie ahead. On the subject of rental properties, during the election campaign Labour’s housing spokesperson and now Minister of Housing Phil Twyford said,

“A Labour-led Government will set tough minimum standards to make all rental properties warm and dry in its first 100 days… Labour will

• require all rentals to be warm, dry, and healthy to live in.
• help families with cost of heating with a $700 Winter Energy Payment for beneficiary families.
• boost families’ incomes with the Best Start payment, increased Working for Families, and a boost to the Accommodation Supplement
• help landlords and homeowners with $2,000 grants for insulation and heating.
• address the housing shortage that’s driving up rents by stopping the state house sell-off and building new state houses for families in need along with KiwiBuild starter home for first homebuyers.
• close tax loopholes used by speculators who drive up housing costs and ban overseas speculators altogether.”

KiwiSaver has not been talked about but I expect there will be changes to the scheme next year. This is likely to include increasing the employer subsidy, which is currently 3%, and quite possibly, the scheme may become compulsory. The effect would be to pass the cost of people’s retirement savings from central government onto employers.

Frank Newman is the principal of Newman Property Consultancy. He is the author of numerous books on investment matters. For questions or comment about this article contact .(JavaScript must be enabled to view this email address)

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