The strategy of many New Zealanders to use family trusts in order to avoid taxes has been targeted by the Law Commission.

A discussion paper was released by the commission, which brought out the way people in New Zeeland use their family trusts and the factors behind their motivation. The document has asked the reason behind the popularity of trusts and has also raised questions on the rationale of the current law.

The proportion of those using family trusts in New Zealand is one for every 18 people, which is one for 34 in Australia and one for 294 in Britain. The basic purpose of majority of them to do so is to conceal their wealth or avoid liabilities. Some others could also have been using family trusts as status symbol.

The commission told that around 237,500 Kiwis were using trusts in 2008, up from 145,900 in 2001, for avoiding taxes. But, the actual figure could be as high as 400,000.

"The establishment of many of the trusts is related to Government policies and the advantages that can be gained by transferring assets or income splitting", said Commissioner George Tanner.

As estimated by the Government's Tax Working Group, hiding income by the way of using trusts cost the taxman nearly $300 million in 2007.

The rules in the last budget permit only the higher-income families to be eligible for Working for Families.