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Loophole-closing tax move catches blue collar contractors instead

Friday 31st March 2000

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Tax Net
By Ray Lilley

Doctors, accountants and company directors may be able to find ways to slip through the government's loophole-closing clamp, announced yesterday on the eve of April's tax hikes.

But the manoeuvre will slam so-called "blue collar" workers, such as owner-driver couriers and forestry contractors and other solo contractors, the type of workers not intended to be targeted by the left-leaning government.

The broad-brush change has clamped down on the use of companies, trusts and partnerships by individuals seeking to avoid or minimise the effects of the new 39c tax rate, which comes into effect tomorrow.

"In government minds they are sure they're targeting white collar people but the rules are so broad a lot of others are being classified as tax avoiders," Deloitte tax partner Greg Cole said.

High-earner self-employed taxpayers will be treated as employees for tax purposes and company or trust income will be treated as the personal income of the individual.

Doctors and accountants who have incorporated to limit liabilities are meant to be hit as well as company directors and personal service providers who are paid through a company rather than receiving the income personally.

The draft rules are intended to identify when a company, trust or partnership is just a "front" for an employment relationship.

But Rudd Watts & Stone tax partner Bill Patterson said company directors, doctors and accountants may not be affected.

Company directors could slip through because they earn less than 80% of their income from a single provider, as do doctors and accountants.

Doctors could also slip through because when setting up a company they sell their own business to themselves.

But courier drivers and forestry contractors will be among those caught, unless their vans and chainsaws are what the exemption calls "significant equipment."

The tax fraternity has been anxious to find out whether the changes will apply to current contracts or only future ones. There is still some confusion over this key point but Finance Minister Michael Cullen's office said it applied to all contracts in existence on April 1 "which come within the criteria."

The changes introduce six months of uncertainty for business and for high-earning taxpayers, with the new measures not expected to become law before September but backdated to April 1. "This casts the tax net wider than it's ever been cast before," Mr Cole said.

Dr Cullen described the measures as "aimed at high-income employees who try to use a company or other entities as a shelter."

But Institute of Directors chief executive David Newman said an unfortunate pattern was beginning to emerge of the government perceiving companies as being operated in bad faith.

Tax specialists said the effect on company directors would be unpopular.

"A lot of fees are paid to companies who employ directors in other capacities and require them to sit on boards," PricewaterhouseCoopers tax specialist John Shewan said.

In those cases the fees were part of company income, not personal earnings, yet the law would classify them as personal income for tax purposes, he said.

The changes mean that three times in just three months Dr Cullen has imposed fresh tax increases, after Labour's election "credit card" promise of no more new taxes for three years.

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