Have your say: LAQC owner who lived in her own 'rental' guilty of avoidance

The Dominion Post's James Weir  is reporting that the Inland Revenue Department has won its first case against the owner of a Loss Attributing Qualifying Company (LAQC) owner who lived in her own rental and claimed tax losses to reduce her personal income tax. The Taxation Review Authority has found the owner, named only as Mrs B, guilty of tax avoidance.

The IRD has just won a case involving a "Mrs B", who bought a home with a $292,000 loan through an LAQC which "rented" it back to Mrs B. She claimed losses over four years totalling almost $71,000 and as the LAQC's shareholder Mrs B set this off against her income tax. Inland Revenue said the case was a tax avoidance arrangement, but the LAQC challenged that. Taxation Review Authority Judge Barber agreed the effect of the arrangement was tax avoidance. If Mrs B was on a 39 per cent tax rate that avoidance would have amounted to more than $25,000, which must now be repaid, plus interest. There was no penalty imposed in this case. IRD's assurance manager, investigations, Richard Philp, said the case clearly showed a taxpayer could not use a LAQC in order to claim deductions for expenditure that would otherwise be of a "private or domestic nature". The case was the first "own-home LAQC" to be tested in the courts, he said.

My view There are 130,000 LAQCs in New Zealand that claimed tax losses of NZ$2.3 billion in 2008, which is triple the losses claimed in 2003 when the housing boom was started.

The Inland Revenue Department estimates that rental property investors own NZ$200 billion worth of rentals that generate losses of NZ$500 million, which are then used to reduce tax payments by around NZ$150 million. That's just the tip of the iceberg. Let's not even start to think about those people claiming Working for Families by reducing their taxable income using investment property losses. Or those farmers who deliberately gear up with debt to ensure they never make profits and have to pay tax, relying instead on capital gains to make money. Is this the best New Zealand can do? We go out of our way to lose money on investments so we can reduce our personal income taxes and make tax-free capital gains. We believe this is better than investing in companies or even our own ideas and businesses. We believe a two bedroom brick and tile rental is more exciting than an entrepreneur with a good idea or a growing company that wants to take it to the next level with a stock market float. We have become a nation that aspires to become landlords. How inspiring. Our tax system has evolved to encourage this behaviour and we have a Prime Minister who seems relaxed about this carrying on. Fair enough. He too will one day be a grandparent who watches his grandkids grow up on facebook. He will live in New Zealand with a lot other elderly people pining for their children and wondering what went wrong. What went wrong was they failed to have the foresight or courage to challenge their own political bases to restructure the New Zealand economy when they had the chance. Maybe John Key will surprise us early next year after the 2025 Taskforce and the Tax Working Group recommend the structural changes we need in the next couple of weeks. They include a flatter, broader tax system that includes property, either in the form of a land tax or capital gains tax. So far Key has appeared timid, poll-driven and lacking in courage to do the right thing for his children and mine. He has a perfect opportunity while New Zealand still has some flexibility to make this change as matter of choice, rather than at the point of an IMF gun. Key had a crisis to use to generate the political will to make change. He appears to have wasted it for the sake of popularity. No one will remember his poll results now when they look back on 2009 from their vantage points in 2040 when we have a hollowed out economy living off remittances from those living overseas. Your view? I welcome your comments and insights below.