IRD information release reveals trends

Photo / File

The IRD recently released information regarding income distributions of New Zealand individual taxpayers from 2007 to 2015 which makes for some interesting reading around trends.

These estimates provide a good insight into how New Zealanders pay tax, and since 2007 there has been:

• 247,000 more people are filing tax returns

• $44 billion increase in taxable incomes in 2015 compared to 2007

• $4b more in personal tax collected

• 17,000 fewer people are paying no tax at all

• Double the number of people now earning more than $150,000 a year.

The number of taxpayers has risen by 247,000 (7.4 per cent) to 3,614,000 since 2007, and the total amount of personal tax collected rose $4 billion (16.1 per cent) from $25b in 2007 to more than $29b in 2015.

It is interesting to note this overall amount of tax has increased after the effect of the income tax cuts the National-led government put into place.

Startlingly, the amount of overall taxable income in 2015 was almost $150b, up from $106b in 2007; an increase of 41.1 per cent.

There are many other good indicators from the IRD data of growing incomes and an economy in good shape.

For instance, the number of people paying no tax at all has fallen to just less than 100,000 in 2015 from 117,000 in 2007.

Also the number of people earning more than $150,000 a year, has more than doubled to more than 84,000.

Individuals earning $150,000 or more (2.3 per cent of all taxpayers) have contributed 21.4 per cent of all the personal income tax collected, and on average each paid $74,000 of income tax.

However, the average tax rate dropped from 35.8 per cent in 2007 to 29.4 per cent in 2015 which reflects the reduction in the top individual tax rate from 39 per cent to 33 per cent.

Spikes of higher numbers of taxpayers receive around $16,000 and $21,000 of taxable income, and these correspond with the amounts of welfare and superannuation payments received by those taxpayers.

There are other spikes at the change of tax thresholds, particularly at the $70,000 threshold where the personal income tax rate changes from 30 per cent to 33 per cent.

Interestingly, the number of people in 2015 earning between $69,000 and $70,000 was 6870 more than those earning between $70,000 and $71,000, so the spike only relates to a small number of people.

However, this spike is easily explained, as trusts often distribute income to beneficiaries so the beneficiaries' income is about $70,000.

This is because the trust tax rate and the highest individual tax rate are both 33 per cent; so there may be little point in distributing any further income if the beneficiary does not require any further income.

There is no tax avoidance in these circumstances as the same amount of tax will be collected irrespective of whether further income is distributed due to the 33 per cent common tax rate.

Having said that, I believe once the tax rates were aligned at 33 per cent, trustees are more inclined to distribute more of a trust's income to beneficiaries and this is another reason why the individual's amount of taxable income has increased so much.

Overall the information provided by the IRD is encouraging with incomes rising, and consequently the income tax collected is rising as well.