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Slowly Sinking Tabloid Loses Marbles

by Whaleoil on August 27, 2012

It is a bit rich a Fairfax publication calling the “super-rich” “tax dodgers” based on their income tax while looking at their net wealth.

Inland Revenue has found only half of wealthy individuals worth more than $50 million each are paying the top personal tax rate, despite Government moves to combat tax avoidance.

Actually it is hilarious.  Danya Levy and her panty waisting editor Mr Kemeys have rocks in their heads.

Let us use a crude application of income v assets in interpreting just who is “dodging” tax.

Fairfax made an A$2. 7 billion loss last year.

It has net assets of A$2,042,677,000

How much tax has it paid?  Go on, have a looskie at their accounts.  Tax dodging? How about a company that has billions in net assets and pays how much in company tax?

Doh.

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  • johnbronkhorst

    “worth” is NOT income….”worth” is all the things they own!! If you want to tax “worth” then ALL lotto winnings should be subject to TAX at 28%.

    • Neil

      I got that bit….

  • CJA

    Looking at that comment from Fairfax above I would argue that it’s not that well researched. Some of those “rich individuals” will be paying more tax than most on the basis if the majority of their assets and income are sitting in trusts and companies they will be paying a significant amount of tax through those entities. Trust tax rate is a flat 33% and companies is 28%. It may even out perhaps in the end but these individuals will still be paying a significant amount of tax.

    • Sarrs

      It constantly astounds me how many people think trusts and companies pay no tax at all. Clients who come into the firm I work in say ‘I need to set up a trust so I don’t have to pay tax’. They also don’t realise that they have to pay tax on the income in the company or the trust before they can distribute it, either as a dividend from a company or an income distribution from a trust. The only entities in this country that have no legal tax obligation are charities and some income for incorporated societies who fall under s CW46 of the Income Tax Act.

      • Neil

        OK let me display more of my ignorance – why then are so many more financially better off using this technique if you gave no tax advantage?

        • Callum

          Trusts and companies are for asset protection more than anything, there are some potential tax advantages if you are willing to lie and cheat but that is the case with anything tax related. It is also very useful for isolating different business enterprises.

          • Neil

            So does that mean they’re more for protection against seizure if the company goes under – or a person is declared bankrupt than avoidance of tax obligation…..?

          • CJA

            More of a case of limiting your own personal liability e.g. if a company goes under they can’t take away your personal assets (unless there has been reckless trading etc by directors) or in most cases you have no personal assets because they are in trusts therefore you are fully protected. This is a simplistic case and there may be cases where they can take your assets where the trust is a sham. Can’t cover it all but if you get the general idea.

          • Callum

            Most business venture are inherently risky, a company structure restricts your exposure to the assets invested. Banks etc will normally require personal guarantees but if it does go bad you tend not to lose your home. The area poorly policed is director responsibilities, where people knowingly continue trading when they shouldn’t. It is an area that needs to have consequences.
            Trusts make passing assets on and sucession planning a lot easier. Previously with the higher tax rates there where more tax incentives but not to the extent some people believe.

          • JimboBug

            No need for a trust to protect your assets from your company going bust … the company structure limits your liability to the equity you have invested (your shares). Only relevant if your company is doing dodgy stuff and they come after you as a director.

            Mostly trusts are there to protect family assets … so keeping assets in the family in case of divorce etc (so if your daughter, who owns a bunch of shares in your company, divorces then your ex-son-in-law could take 50% of her shares … but through a trust he has no rights to them as they aren’t owned by the daughter but by the trust).

        • Bunswalla

          I have a trust for two main reasons – to protect my personal and family assets from creditors if the balloon goes up, and to make it easy to control the distribution of wealth to the beneficiaries (my children). The third reason is largely redundant now – trusts paid a lower top tax rate than personal income, so it made sense to put my company shares into the trust and declare a dividend than to pay myself a high salary and have a top tax rate of 39%. That benefit has largely gone now for two reasons – the top tax rates have become much closer (they may even be the same – someone will correct me on this) and also IRD look askance at methods such as this to avoid tax. You have to pay a fair market rate for the job but as I said it doesn’t matter much now whether you pay or the trust pays.

  • Fooman

    I think you’ve gone about this the wrong way Cameron.

    Lets see, if you have 50 mill in assets, you would wanting at least 5% return these days. But half of these hard working people are reporting less than $70k in taxable income. That is, what, a rate of return of no more than 0.14% on their net assets, and that is on the lower bound of $50 million.

    What this does suggest is that 50% of the wealthiest people in NZ have crap accountants, lawyers, or poor financial advice leading them down the wrong path. Surely they want to have the highest income possible, to enjoy the fruits of their hard earned labours (an average of approximately $500 per hour, spread over a 45 year career as a hard worker, not taking holidays, working a solid 2000 hours a year – the rate would be higher, of course for those who have accumulated such wealth in a shorter time frame).

    They should rationalise their assets (as per the National Government and their asset sale policy), stick the resultant proceeds in the bank, or bonds, or even as venture capital, and at rates between 3% to 5% get 30 to 50 times in income compared to what they are getting now, and enjoy incomes of one or two million dollars per year. So what if they might pay an additional $300k to $600k p.a. in tax – they would have an additional 630k to 1.2 million in the hand. rather than the measly 70k they seem to be earning at the moment, with all those poor investments they appear to have at the moment.

    Unless, of course, there is another explaination for half of the most absolute wealthy people in the land reporting only slightly more than the median household income in taxable income?

    Cheers,
    FM

    • Callum

      Very simple answer to that, do they directly own those assets? If they are held in trusts or companies then those entities pay the tax. You also have to factor in long term investments that may not be realised for a number of years.
      You can’t compare estimated assets from the rich list to actual direct ownership or tax paid.

      • Fooman

        But surely, if they have beneficial income from a trust, they pay tax on that income – IRD seems to think they should (i.e. beneficial income counts as taxable income). Once again, it points to poor financial management by the trustees in not extracting a viable return from that capital.

        Companies do pay tax (at a lower rate), and any dividends do come with tax credits, so the individual is not double taxed. Again, points to poor performance by the companies if they are not returning sufficient (taxed) income to the shareholder(s).

        And certainly long term investments are a valid reason for low levels of taxable income. That income, when it does come in, will be taxed at the full rate, including any capital gains that may have occurred, amirite? But it is concerning that, if this is the case for the meagre taxable incomes reported by half of the very wealthy, that they have all this capital tied up in long term investments (more than 95% it appears) – surely there should be a reasonable spread of risk, and consistent roll-over of investment income that should appear in the tax figures of those individuals?

        I mean, why tie up valuable capital in non-performing structures –
        surely purely sentimental reasons are not a valid commercial
        imperative? Once again, the National government is showing the way with
        the asset sales – the performance of the SOE’s are not good enough to
        maintain the level of investment, and needs to be invested somewhere else. But certainly given the tax figures of high-wealth individuals, it looks like trusts and companies are a much worse investment given the lack of taxable returns!

        Cheers,
        FM

        • Sarrs

          Trusts and Companies themselves are not the investment, the assets owned by those entities are. If they were to be set up as sole traders or partnerships they would still get the same return. See Callum’s comment above – these structures are for asset protection and entity separation. That actually allows better tracking of financial performance than if a person threw all of their assets together and ran three or four or five different businesses from one entity. When they are separated it is easier to ascertain which assets are performing well and which are not.

          A tax ‘structure’ – like a company or a trust can’t be considered to be performing poorly or well based solely on judgement of the structure, not the assets and the management therein.

          Consider this – an operation set up as a partnership or sole trader. All income is automatically distributed and the individuals pay the income tax in their own name – up to the highest possible income tax rate. Why would a business that is making significant profits use this structure? The shareholders will pay themselves an annual salary and pay tax on that, while the company pays the tax on the rest – thus minimising the exposure to taxation in that financial year. All this really does is delay the payment of income tax – it still gets paid eventually. Our tax law allows for this and, as the highest individual tax rate is the same as the trust tax rate and also the same as the the tax on dividends distributed from a company, the advantages are a. asset protection, b. asset separation, and c. control over the timing of when income tax is paid.

          • In Vino Veritas

            Quite right Sarrs. What we see from the likes of the Greens and the Labour party is just a political stunt – “paying their fair share”. I had to laugh in the weekend when Norman claimed that “middle NZ” was paying most of the tax. I guess it depends on whom he thinks is “middle”, since WFF means that a great chunk of the real “middle” are net beneficiarys.

        • Callum

          Any income retained in a trust is taxed as trustees income and will not show in an individuals tax return, only that distributed to a beneficiary will be taxed as beneficiary income. Just because someone has an interest in a trust or even is the founder of the trust the assets are not theirs, they belong to the trust and must be dealt with in accordance with the trust deed. So many of the high wealth individuals you speak of may be considered to control a trust when adding up their net worth but for tax purposes the return from those assets are taxed as trust income not as income of the individual.

          • Callum

            I will add to my comment re trusts, those who take on the role of trustee but do not act in the best interest of the trust and all beneficiaries need to be open to more exposure in the same way that reckless directors need to be held responsible for their actions. This in an area very poorly enforced at the moment, the benefits of trust and company structures come with matching responsiblility for which there must ultimately be consequences for not complying with.

    • Patrick

      Reporting an artificially low income is great if your intention is to profit from the Labour welfare known as Working for Families. Just ask any farmer, builder, plumber etc with kids. Set up a company/trust, pay yourself minimum wage, wander down the dole office & sign up for WFF, build up the assets in the company/trust & sit back & laugh at the dumb taxpayer – & the wankers in the Labour Party that invented this stupidity. Messers Cullen, Mallard, Clark etc.
      Next time you look at your pay packet & wonder why 50% has been extracted before you received it – thank your friends in the Labour Party that designed a welfare scheme that was designed with the sole intention of getting them re-elected & hooking the middle class on welfare so they would become Labour voters for life.
      Labour are a disgrace & their stupid welfare policies are a blight on NZ.

  • CJA

    They’re having a bit of a debate on the above over at The Standard (or is it the Stranded?). I have made few comments and it amazes me how logic goes out the window there and you cannot have a logical debate. I guess it was what I should have expected.

    • Callum

      I’m surprised you were allowed to post logic, I thought they had banned that.

      • CJA

        Spilt my coffee over that comment. Nice!

    • Sarrs

      You’re braver than me! The lunacy and outright lies they tell over there sickens and frustrates me. I always like to remember that you can’t reason a person out of a position they didn’t reason themselves into in the first place.

    • In Vino Veritas

      CJA, facts are always in short supply and the provision of them always gets Prentice wound up to the point that he hands out a ban. Or if you ask him to expand and or justify comments he makes, whammo, ban. Or you get blamed for the rabid pack descending on you and turning the thread into a bloodbath.

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