IRD wants information from the ultra wealthy and will check answers against their spouse. Photo / 123RF
Inland Revenue has started writing to hundreds of New Zealanders it believes have a net worth of at least $20 million indicating it wants details of exactly what they own, and warned it will check the answers against those of their spouse.
As part of the High-Wealth Individuals Research Project, a broad project which is attempting to research how much the ultra wealthy Kiwis pay in tax as a share of their "economic wealth", Inland Revenue will require "about 400" people to provide detailed information of their assets.
After several weeks of consultation with tax agents, Inland Revenue began telling the agents which of their clients had been captured by the project on Tuesday and began writing to the individuals on Wednesday.
The letter warned the individuals that in November it will ask them to provide details of their partner and any dependent children.
In January they will be asked to provide the "various entities and business undertakings" they or their children are involved in. "We will ask your partner for the same information," Inland Revenue writes, in documents seen by the Herald.
In May 2022 the individual partners will be asked for "further financial information to help us calculate the measures of income for our analysis," Inland Revenue wrote, without giving details of what that might include.
Information being reviewed would cover the period from 2016 to 2021. While IRD said using a lengthy period "provides more consistency by smoothing annual volatility" one tax expert said the period was one in which interest rates had "collapsed", pushing up asset prices in a way which would exceed historical averages.
The project aims to improve information the Government holds about the "effective tax rates relative to economic measures of income", especially of the wealthy.
Tax experts say the project is driven by Revenue Minister David Parker's "passion for understanding wealth inequality" as well as gaps in the information currently available.
While Inland Revenue has good information about how much tax New Zealanders pay on their income, the Tax Working Group acknowledged in its 2019 report that it knows relatively little about wealth accumulation.
Using a broad definition, economic income is the maximum amount that can be consumed in a given period while keeping real wealth unchanged (the Hicks-Simon-Haig definition of income).
Earlier this year, the Government released Treasury and IRD research claiming that some very wealthy New Zealanders may pay an effective tax rate below even the lowest wage earners, because most of their wealth is tied up in assets that tend to appreciate in value rather than generate taxable income.
Until December, Inland Revenue would have had no way to gather the information, with the high-wealth project making use of a new clause in the Tax Administration Act rushed through under urgency in December.
While Inland Revenue has long had powers to require individuals and companies to provide detailed information, it could previously only do so for the purposes of calculating tax liability.
The high-wealth project explicitly says the information will not be used for calculating or reassessing tax liability.
In December, Labour rushed through changes to the Tax Administration Act which gave effect to its promise to raise the top tax rate to 39c in the dollar for income over $180,000.
But the changes, passed with no consultation, also gave the IRD power to gather information for "a purpose relating to the development of policy for the improvement or reform of the tax system". The entire legislative process was completed in just 24 hours and came into effect a few days later.
Geof Nightingale, a partner at PwC specialising in tax policy, said while the changes to tax rates were campaigned on during the election period, the new research powers had been a surprise to everyone aside from IRD officials.
While he supported in principle IRD having the powers, he had a real concern about the process being used.
"They're actually undertaking a very intrusive exercise on a bunch of New Zealanders, using a power that's never been consulted on," Nightingale said, adding that there was no need for the Government to rush the powers through Parliament.
"They could have put that power through a normal consultative process and refined what it meant and how it should be used," Nightingale said. Doing so would have given the Government "more moral authority" to use the powers, he said.
Even with the changes there are claims that the IRD's attempts may be tested in court. The law change gave the powers for the improvement of the tax system or policy, while IRD has been clear that the high-wealth project will make no policy recommendations, but might feed into future discussions.
One wealthy person targeted as part of the project, who spoke on the condition of anonymity, said they had engaged a Queen's Counsel to seek more information from IRD's requests and may seek a judicial review.
An alternative to testing the powers in court would be to ignore the request for information from the IRD entirely, the person said, claiming it would cost more to comply with the request than it would to pay the fine. "There's no teeth to this, and it appears to just be a $15,000 fine, which is, frankly, just a night on the town."
The person described the request as a "gross intrusion into my privacy" given there was no policy or tax collection purpose. "It is simply a misguided fishing expedition driven by envy."
While IRD has said the information is simply for research and the material being gathered would be destroyed, the mere fact that partners were being told their spouse was believed to be worth more than $20m could come as a surprise.
"Some partners might turn around and say 'I didn't know he was worth so much'," Mike Shaw, a tax adviser at OliverShaw said.
Shaw said the concept of economic income was "vague" and it was not clear whether IRD had worked out exactly what information it would be requested. OliverShaw was not aware of any international precedent for such a project.
Jacinda Ardern ruled out instigating a capital gains tax while she is Prime Minister, while Parker has said the high-wealth project is not aimed at any specific tax reform.
But the project is due to be released publicly in July 2023, several months before the likely date for the next general election. One agent said IRD officials were "cognisant" of the risk the report could ultimately be used for political reasons.
"I think it's pretty clear that they're eyeing people up for a shake down," Act leader David Seymour said of the project. "The objective is clearly to find out how much people have and to get it."
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