I had lunch with a very successful friend of mine a couple of days ago and he casually mentined that his accountant had asked him if he wanted to structure his affairs so that he could claim working for families. This friend, who has worked incredibly hard and taken a number of risks over the years - and has deservedly reaped the rewards - said no, however, his accountant told him that many of his other weathly clients were claiming working for families.
Like my friend, I find it obscene that some individuals would go to such lengths to rip the system off to such an extent. This is a fundamental breach of the whole philosophy behind Working for Families – and a betrayal of the principle of an equitible society. There will always be those who structure their financial affairs to avoid tax, but then to have the audacity to claim working for families is a real slap in the face to ordinary hard working kiwis who are struggling in these difficult times.
There was a story in the Dom Post by Vernon Small (21 Aug 2009) that highlighted the fact that 35 families with a household income of more than $150,000 are pocketing Working for Families cash. I suspect there are more. The story went on to say that the IRD had identified more than 9700 households who were claiming Working for Families, having restructured their financial affairs to obtain eligibility. Vernon’s figures showed that in total these people receive $59m in assistance, an average of $6223 each a year. As Labour’s Revenue spokesperson, I will do whatever I can to change the law in this area to ensure that this loop hole is closed as soon as possible.
Labour’s Working for Families has lifted thousands of children out of poverty and it has always been my view that it is the most effective income-redistribution policy ever, with more than 370,000 families receiving help through the scheme. About 80% of these families have an income of less than $59,000 a year. It is these had working New Zealanders that the scheme was designed to help, not those who are earning the big bucks with the smart accountants. The IRD is on to this outrage and they will receive my full, total and proactive support.
LOL
I never thought I’d see a title like this from the Labour Party. Man people like that just give WFFs a bad name 
Is this your first post?
They don’t necessarily give WFF a bad name, but they certainly don’t do themselves any credit, as it just reinforces the (incorrect) stereotype pushed by a few that the wealthy are parasites.
Fourth or fifth post. Only on tax to date and only when something to say.
If you take tax off people, and subsequently have to construct elaborate and costly schemes to return it, schemes that invite abuse, why not just let them keep the tax in the first place?
Lindsay WFF just involves taking less tax off people who have kids and lower incomes. Even back in the 1960s there were M1, M2, M3 tax scales that were based on the income levels and number of kids. It is part of a long term recognition that employers pay on the basis of skills and job done and the state has a role in boosting income to cover a bit of the extra costs of kids.
And Stuart families gaining benefits or not paying the appropriate levels of tax as a result of tax minimising schemes, especially trusts is a long term problem. The student allowance system has been dogged by high income high wealth families whose affairs have been arranged to avoid tax.
I think we all agree that tax is necessary in order to maintain the type of society that we want to live in. WFF recognises that the costs and sacrifices necessary to successfully raise a healthy family are high – and for those on lower incomes, can be prohibitive, hence the hand up to those who need it most in our society. That’s fair isn’t it..?
Whats the issue behind not just implementing a tax free threshold?
Agree with Trevor (as always..) around the problems of hiding income to minimise tax – especially through trusts. Not against trusts per se, but understand the need for a complete review of trust law is overdue (and I think is actually on the law commission’s agenda).
Yes, I know that historically earners were taxed according to the size of their family. The more children they had, the less tax they paid. That is what I asked. Why not just let them keep the tax in the first place?
Honestly, I think the problem is with the law, not the manipulators. If those who drafted the law didn’t foresee that it would be manipulated this way, then that was a mistake they made in the drafting.
One can assume that people will follow the rules given, and will do what is within the rules to:
1. arrange their affairs to pay the least tax possible
2. arrange their affairs to obtain the most benefit possible
There are lots of other areas in government where tax breaks are given for acting a certain way, and people will always arrange trusts, companies, and partnerships in such a way that they pay the least tax. A tax break is also a tangible benefit, so there really is no difference.
This doesn’t surprise me in the least. Just get National to fix the law, or campaign hard to do so if they won’t. I can see them doing it as a budget-balancing measure. Or, they might see it as a tax cut for their rich friends who are doing this and leave it alone. Then it becomes a 2011 issue.
Post #1
In fact, it is technically illegal to structure one’s financial position primarily to minimise exposure to tax. However, the burden of proof falls upon Inland Revenue to demonstrate the primary intent of the defendant, therefore it is usually impossible to obtain judgement.
Trusts set up with tax exposure minimisation in mind usually claim their primary purpose is one of a more legitimate purpose, i.e. funding the kids education, separating the family’s assets from the individuals etc. However, it is not hard to imagine how such checks and balances can be overcome even with familial separation requirements on establishment.
Trusts have a lengthy history in common law, and have a positive role to play in the financial establishment. More stringent regulation on their establishment, and operation would be welcome, however. I’d be interested to see what the caucus can come up with.
Please show me that statute. So if I choose a partnership rather than a corporation as a way of reducing my tax burden and tell IRD that that is my purpose, I get punished?
Does anyone go after elderly people for buying expensive cars to shelter cash and make themselves eligible for nursing home benefits?
I don’t believe either of these are true. If arranging affairs to reduce tax exposure were illegal, accountants would be a a criminal enabling profession. And I don’t believe that. You play by the rules, and you should be safe.
If it is not that way, it is wrong.
Post #2 Please excuse me for not continuing further in this discussion tonight. My comments have been limited to 2 per day by Trevor. Catch up with you tomorrow!
Sorry, I should have been clearer, I specifically meant trusts in that regard.
As for the statute: Income Tax Act 2007 s.GB5 1(c) states:
…Arrangements involving trust beneficiaries … it is considered avoidance … … when “a purpose or effect of a change [in affairs] is to defeat the intent and application of a continuity provision.
This has been going on since WFF started. Where have you been?
perhaps you could also fix the loophole that means that couples on a student allowance who earn $100 more than the earnings threshold for abatement get docked $200 off their allowance – meaning they get less net income, but also a potential reduction in WFF payments. You had years to fix that loophole too, when you were in Govt……
This makes me very angry. When we had our child we were entitled to WFF, we felt very unsure of this as we are in a financially stable position and had budgeted for teh cost we would face. We agree totally with the need for WFF, but felt nervous about taking it as we had never had any type of benefit before, and didnt realy beleive that we needed it. When our combined incomes increased to just over the threshold, we were actually slightly worse off, but feltmore comfortable about not receiving it. What type of person re adjusts there finances to take benefit of moeny that it intended for people who are struggling, this is what i would call a true benefit bludger. These are the type of people that screw our country.
@ Andrew Straw post one, why would you assume that people will adjust there financial affairs to receive something that was not meant for them? Dishonest people would do this, and dont come back saying i am being Naive.
@Stuart Nash, can you please give me a simple explanation as to why business can claim GST back on most business purchases?
Hilarious, a welfare sysytem open up to abuse? who ever heard of that. When you start a discriminatory tax regime, expect people to try and game it. for by it’s very nature, if it discriminates agains a certain part of the population, then the part of the population it is trying to help has flexible membership conditions.
Err, doesn’t this show how badly structured the whole tax system is? I mean by giving a means tested benefit to middle class families you are creating high marginal rates and encouraging this sort of activity.
Many countries, like Canada, give all taxpayers excemptions for each dependent child or spouse. The amounts aren’t trivial and come straight off the total taxable income before tax is calculated.
NZ doesn’t do this and uses WFF instead.
In so far as it is targeted at people who actually need it, WFF is better.
In our paper recently, a selfemployed couple with kids, whose accountant had advised them on how to arrange their financial affairs to minimise tax and, who knows, to qualify for WFF, now reduced to asking for community assistance after an accident prevented the main earner from working and ACC compensation, based of course on his declared taxable income, is insufficient to support the family (in the manner they are accustomed to, apparently). Great advice, that.
and dont come back saying i am being Naive
But, you are being naive.
WFF can easily be obtained, if you have children younger than 18. Go on the IRD website and use their calculator to find out how much you can get in WFF, for a given taxable income. So, if you have 2 teenage children eg. use the calculator to find out what your maximum taxable income can be to get the approx. $7000 per annum WFF available for each child. Then go and arrange your financial affairs so as to reduce your taxable income to the level, and bingo ! you get about $14000 cash from the IRD. Now this wonderful scheme was set up by, yes ! the Labour government ! This is why the birth rate has gone up for NZers, this is why you read about the low-grade types having 9-10 children – guess what ethnic groups they are you lovely liberals ! unfortunately this vote-gathering policy did not achieve its actual aim – to get the bulk of the population enrolled as voters to vote for Labour and so ensure the glorious reign of the last Labour government would continue.
You may complain about people arranging their affairs to get WFF Mr Nash (I know some who are firm Labour supporters) but this is what you and your mates did, it’s you who created this.
Will you apologise for this please and support the current impetus to change the tax system to remove such absurdities as WFF ? I’ll bet you won’t.
So a few can ‘arrange their affairs’ to collect ’some’ WFF payments. You have to go to the WINZ office as a couple and provide all the documentation and have an interview so that would stop quite a few.
Gee Ive just been waiting at the lights for pedestrian phase and a driver went through on red. Lets shut all the traffic lights because a few abuse the system! I think not.
WFF has its place for me, but you guys were far to generous in the levels of the bribes to middle and upper income earners. How almost 2.5x the average full time wage still enables families to claim WFF is way beyond me. And if you cannot survive on over $120k p.a. what were Lab thinking on adding additional welfare payments to this group. This on top of tax cuts given by both Lab & Nat, after giving such benefits to very clued up people then you wonder why it has been grossly abused !!!
Come on how how much money do you think it takes to live on?
And I thought the nats were looking after the rich Long live wefare to the rick !!
GWW said “You have to go to the WINZ office as a couple and provide all the documentation and have an interview so that would stop quite a few.”
No you don’t. If you’re self-employed, just complete the forms online and wait for the cheque in the mail (if you want to be paid WFF retrospectively).
Otherwise, apply online, estimate your taxable income for the forth-coming year, and get paid weekly.
Herodotus have you looked at how many children have need to to that ?
Key had to have that detail explained to him by English to show it was necessary
http://www.ird.govt.nz/calculators/tool-name/tools-w/ir271-worksheet-wfftc-tables-2010.html?id=righttabs
Remember too its a ‘family income’ so its needs two breadwinners
I understand a large family =6 children. But still
GWW why does it need 2 breadwinners. I know that on the tables cease at $125k!!
Single income with the current tax position I was aware of situations whereby families where above the threashold, yet a double income family receiving WFF had a greater disposable income of some $3k. Another issue I have as the IRD (Tax system) views individuals yet welfare system views gross family income, and that can be manipulated as we can see.
When you increased the top tax rate, and then subsequently reduced the corporate tax rate, people structured their affairs such that their direct incomes were taxed at the corporate (trust) rate of 30%, and not the top rate of 33%.
Given this, its not like you couldn’t have foreseen this welfare for families issue. Why are you so shocked?
Oh – and “thieves” is usually reserved for people who have broken the law. In this case, I doubt these people have.
You need two breadwinners to get the large salary. ie two people working one $40K the other $55K gives you $95K and say 3 children.
Perhaps you are unrealistic about what it costs to raise a family . People on the above arent exactly creaming it.
GWW – there are no politicians who seem to care or know how much does it cost?
According to the household survey from 2 years ago the average household spent about $950/week.
So for this case $95k with 3 16-18 year olds you are entitled to $55/week FTC and In work $60/week and after tax of $95-20=$75k + benefits
Single income same family structure
$95-27.6= $67.4k
Both get the same WFF, why does it cost less for 1 earner in a family to live than 2?
And$75k I believe is adequate to live on for a family let alone with the $115/wk addons.
Just because it’s legal doesn’t mean to say that it’s right. Purposefully setting up your affairs to avoid paying tax is immoral at the very least. Personally, I’d call it theft.
There’s a solution to tax loopholes (well, some of them). Have it so that businesses and trusts (legal persons) are taxed the same as everyone else on income (profit), ie the progressive taxation is applied to them as well, but have it so that dividends are tax deductible. Dividends should then come under the persons income (We’d have to get rid of any special tax rates).
Actually, it’s a tax system that’s been created to serve the rich (ie, so they don’t pay any tax) over the last few centuries. We really do need to go over the whole shebang with a fine tooth comb.
a friend of mine at university has a full student allowance, so do her brother and sister even though their dad is a director of a large listed company and they live on paratai drive. rich people have been able to put everything in trusts and avoid paying tax and getting benefits for years
Policy Parrott should possibly have looked at section GB 44 which is the part of the Income Tax Act 2007 that specifically cancels out any Working For Families payment that the Commissioner of Taxes considers would have arisen had the (dodgy) arrangement not occurred. The Tax Dept has the arms in its arsenal but seems very timid about using them. I think that is because various Commissioners have sought higher salaries because thay have been able to reduce staff members in their Dep’t. But the politicians have not realised how denuding the Tax Dep’t staff has so weakened the Dept’s position.
Declaration of Interest; I have never ever been a public servant in either central or local government.
@Draco
I guess the codeword for financially sinful is “avoid tax.” That term in itself means nothing to me. Everyone who salary sacrifices for greater Kiwisaver benefits is also a criminal using that reasoning.
I’m sorry to disagree, but playing by the rules to “avoid” tax should be considered neither illegal nor immoral. It is certainly not theft. If you believe (as many libertarians do) that taxation is theft, perhaps you are avoiding theft.
How about an analogy. I get to the top of the hill on Stuart Street in Roslyn, and I know there is a speed camera towards the bottom of the hill. Using your reasoning, my stepping on the brakes (arranging my velocity affairs) is an illegal/immoral act because I am attempting not to break the law.
This reasoning is absurd in the driving scenario and it is absurd in the tax scenario.
@Waterboy
“why would you assume that people will adjust there financial affairs to receive something that was not meant for them? Dishonest people would do this, and dont come back saying i am being Naive.”
I won’t say you are naive. I will say you are wrong.
Waterboy, I expect you to make an online payment to IRD for all the taxes you have not paid based on the choices you made. For every bottle of $100 wine you considered but did not purchase, I expect you to pay $12.50. Pony up.
The fact is that people are arranging their affairs all the time to avoid tax and get benefits. Government creates those programmes for people to use them. When Labour gave its tax cuts, did you say, “Oh, it is theft to take this,” and give it back, or did you just not notice because it was added to your paychecks quietly? Quiet theft, I guess. Tax cuts are essentially benefits.
So really what you must mean is that if someone has to *work* to get a benefit or tax cut, that is what is illegal and immoral.
Those programs are not taboo. You are meant to use them. And have you considered that (as someone else mentioned) Labour was warned from the beginning that these programs would be used this way, that there was an intention behind not doing anything to fix it?
Did you refuse your Kiwisaver $1,000 when you signed up because you chose to enroll in the programme? You arranged your affairs and got a benefit. Did you go to university? Did you ask for an allowance or loan? You arranged your affairs (by enrolling) and asked for benefits to support your choice.
Government dangles apples out there for different programmes all the time, and you are meant to grab and eat them if you can make yourself eligible.
Everyone who ever gets anything from the government must be a bludger. When I ride down the road or use the health system, I must be a bludger. And the more net worth I have, the more of bludger I am. How can it be fair that poor people and rich people both get access to the same roads and hospitals? Perhaps it is because the rules make it so.
Again, the rules are there. People following them are not bludgers or thieves. I like rules because they make it clear what you can and cannot do.
You cannot say something is “meant” to be for some group of people, then set up rules that expand that class to allow other people to participate. That’s like naming a road “short people only road” and then allowing even tall people to drive on it in the road code.
The estate tax in the USA expired on January 1 and is absent for one year by law. Was that “meant” to happen? Should people not take advantage of it? Heck, on December 31, some people may even commit suicide to avoid millions of dollars in taxes. In a country as big as the USA, it is fairly certain that that will happen; more so in Oregon where it is legal. Congress’ inaction left that rule in place, and we must allow people to follow those rules to their benefit.
Otherwise, we have an arbitrary and capricious government that nobody can depend on in making their life plans.
@Draco
Yes, go over all the rules and make them do what you want them to do. If you leave loopholes in place, you are inviting people to use them, especially when what they are doing is so public that it ends up on the Labour Party blog.
Post #2 Jan18
Andrew, you are missing the point of both the original post and of Waterboy’s comment. All the examples of “legitimate tax avoidance” you cite are in fact lifestyle choices (apart from some legislative mishaps in the US). There is nothing underhand or deceitful in choosing to buy or not to buy an item and thereby pay or not pay the GST. There is nothing underhand in choosing to attend a tertiary education establishment and in taking a student loan or other benefit as allowed by law (and with the proviso that when you apply for such benefits, you are honest and open about your income and savings).
This post is about the act of deliberately arranging your affairs to gain a benefit where, without those deliberate acts, you would not qualify for that benefit. When I decide on a purchase, I do not need an expensive tax lawyer to help me justify that choice or make it look less immoral or deceitful than it actually is.
This is the real point of this topic. You may agree or not that arranging your affairs is legal or illegal (the joy of loopholes), but I am in no doubt that for someone on a very high income (and originally we were talking about individuals earning at least six figure I suspect) to essentially adjust what they “appear” to earn (whilst earning a much higher sum) to gain access to a financial benefit is immoral, end of story!
It is fraudulent (even if not legally so). I find it difficult to understand why you are struggling to grasp this concept, unless of course you are of the opinion that we shouldn’t live in a society where those less fortunate should be supported by the state, and all benefits and tax mechanisms are there to be abused for personal profit, in which case, we are talking a different language to you Andrew (but I can recommend some good social responsibility literacy training if you would like).
@ Andrew Straw, Im a Kiwi bloke, i dont consider buying $100.00 bottles of wine, I drink beer! If you consider buying $100.00 bottles of wine then you and i will never see the others point of view anyway.
You put it whatever way you like, but if you see something meant for those worse off than you and still decide to take it it is morally wrong, I didnt go to universtity so no student loan, the $1000.00 for kiwi saver was meant for everyone who enrolled. If you have an income of higher than the threshold, and then re-adjust your figures so you fit into the criteria and have not had any loss in actual income it is Wrong.
“It is fraudulent (even if not legally so). I find it difficult to understand why you are struggling to grasp this concept”
Clearly you are not a lawyer. It is irrelevent whether you think that someones actions are not in the philosopy of WFF or immoral but whether they are legally acceptable. The proposition you make has nothing to do with the application of the law.
“Legislative mishaps.” That is my whole point. People take advantage of those, and we can’t blame them when they do. The law allows people to hide income and apply for WFF. I agree that the law was not intended for them; the legislative history is probably pretty clear who it was for. But they are not thieves in using the loophole. Someone was just legislatively asleep at the wheel when WFF was created. The solution is not castigating the manipulators (that is the best term for them), but changing the law. If National won’t do it, make it into a campaign issue. National is sure to remind everyone who created the problem, but that does not let them off the hook wrt fixing it.
Post #2 Jan18 (the first post 2 was actually post 1)
this sounds like its a problem with accountants and their profit motive
Thanks for the feedback and comments. As someone correctly pointed out, if people are operating within the law, then they are not ‘thieves’. People who are perceived to have ripped the system off are only judged in the court of public opinion and not in a court of law if they have acted within the law. What I am signalling – and I think many agree with – is that Labour will work to close the loop holes that currently exist within the tax system, thereby ensuring that only those who are genuinely eligible (and you know what I mean…) receive the WFF hand ups. Why wasn’t WFF structured as a series of tax codes? It is a question I asked Dr Cullen himself, and he talked about the cost of doing this, but again, it is perhaps something worth reinvestigating. Will post again tomorrow sometime about another issue that I would like your comments on re likely tax policy and Labour’s response.
I agree with Lindsay and it is this type of issue that forced Labour out in the last election. We have to rethink this cradle to the grave expectation as we are tiny country and just can not afford it. User pays in some shape or form is inevitible and in all honesty, fair. We have to balance our obligation as a society to look after those that can not look after themselves, especially those that are bringing up our future adults with a bit of personal responsibility. I personally think by taking money off people that you then give back less costs is a have and very much indicative of a nanny state. And it just leaves those who never get to see that money again with their noses very much out of joint. So Stuart – Yes by all means assist working families, but I would say do it taxing them less in the first place and perhaps by keeping up things like increased paid parental leave (say up to a year), the free 20 hours ECE and childcare subsidies. Family assistance itself should be wiped. As for Trevor – I’m surprised you have time to blog….shouldn’t you be out training for Karapoti?!
Hmmm, WFF is being abused….to regurgitate Blips comment….Stuart, where have you been?!!!The WFF package was launched in 2004 and has been abused from the start. Your reference to the fact that 80% of families are receiving less than $59000 is a little flawed to say the least. Where do you get your stats from? MSD? Where does MSD get them from? IRD? Where does IRD get them from…..that’s right, people’s accountants!!!!! Anyone who has had anything to do with WFF, knows how easy it is to tweak it to your advantage. Yes if proven it would clearly be a case of tax avoidance and a breach of the Tax Administration Act, but this can be incredibly difficult to prove? Stuart – this is more than just a little loop hole, this is how people are legally able to do their accounts. There is a lot of clever accounting going on out there and lets face it, no system can ever be fool or fraud proof. If people can find legitimate ways to claim various expenses and reduce their income for the purposes of IRD and Child Support then there is little MSD can do about it as this is the money that they are claiming to live off. How can you possibly prove otherwise? BUT taxing people less to begin with, well then that would probably solve half the problems!
Man if I were rich I wouldn’t begrudge the poor some of my taxes! I’d just be grateful to be rich! It’s better than having beggars on the street and there will always be people who can’t look after themselves.
When reading this post and comments I can’t help but think of the politics that lead to WFF.
Month after month of the right and their poddle media blaming Labour for not helping lower and middle range families with children. Labour came up with WWF, the right vilified it from woah to go, but as soon as election politics kicked it did a 180 and accepted it.
Dead rats, Double Dipton.
AJ any comment on why single income families have been singled out and can be inferred that they can live on less money than those with double incomes. Nice to see that labour values stay at home parents !!!
At Andrew: the hiding of income for the purposes of claiming WFF and thus potential tax avoidance, would relate primarily to how people set up their business AND personal affairs. This issue has much wider consequences than WFF and to limit it to that is naive. Setting yourself up as a company can mean that your taxable income for the purposes of all things legal is sometimes a third of what you really earn. The rest is retained by the ‘company’ as capital. Partnerships have a very low risk of fraud when it comes to WFF and possible tax avoidance as the income is split purely based on either the default 50/50 or in respect of what each partner does. For most people a partnership is that between spouses or a group of 3 or less. There is just no real financial benefit to set yourself up as a partnership for the purposes of fraud as the portion of income you get affects everything including ACC who will only pay 80% of your share of the earnings, not what the partnership receives in total. Stuart – I am all for tightening loopholes as it means that in the long term, it is less cost on people like me. However, this is not something you can expect to accomplish in one term and I suspect you will have wealthy NZ fighting you all the way. It gets the same reaction as capital tax on houses!
You make an interesting point, there.
If someone shields money in a corporation, if that person goes on ACC, they have that much less income for the benefit, right?
It would be justice if such a person were injured and needed ACC, but got a tiny income benefit because of their manipulations.
And let’s be clear, setting up a corporation instead of a partnership is not fraud. Fraud is a crime. Doing that and using that corporate form and its benefits is called *choice* and *planning*. Don’t want people to be able to use that? Change the law and force everyone to use LLCs or S Corps. You cannot blame someone for using a tool that the law provides.
But that was my whole point, wasn’t it? If you want to change the law to fix these loopholes, be my guest. I am more likely to vote for you if you promise to do that. But don’t attack people for getting benefits within the rules as written. If the law were not intended to be used that way, it would not be written that way. You are either attacking the intention or the competence of those who wrote the law.
Everyone knows these games can be played. It is public knowledge. Why isn’t everyone up in arms about it and demanding change? Why doesn’t National get pummeled with questions about this every single day?
My husband is using the same loophole to get out of paying child support – makes it a little more personal. And ‘Yes’ I will attack him “for getting benefits within the rules as written” – it’s dispicable and there’s absolutely nothing I can do about it.