How to pay 10% tax on $100,000

Bill English has pointed out how the current tax system allows well off people to in fact pay less tax than low income workers. This is one reason why we should have a flatter system, with less loopholes.

Mr English highlighted in Parliament how the current system can allow a household earning $100,000 a year, with two dependent children, to reduce the tax they pay from $27,500 a year to less than $10,000 a year.

Three easy steps:

1. Forming a company owned by another entity (on the current 30 per cent company tax rate), paying themselves a $48,000 salary and reducing their tax bill by $3000.
2. Qualifying for Working for Families on this reduced salary with two dependent children, they would receive an extra entitlement of almost $8500 a year.
3. Using an interest in a leveraged property investment producing, say, tax losses of $20,000 a year, their personal taxable income is further reduced to $28,000.

So what you then have as tax is:

1. $52,000 @ 30c = $15,600
2. $14,000 @ 12.5c = $1,750
3. $14,000 @ 21c = $2,940
4. WFF credit of -$10,726  (on $28k income)

That means a net tax bill of $9,564 on $100,000 or a 9.5% effective tax rate.

If National disallows offsets for property tax losses then the high income earner paying 9.5% effective tax will end up paying $15,990 tax, or 16%.