Sasha Borrisenko: How IRD was empowered to research the rich

Revenue Minister David Parker concerned about the amount of tax the wealthy pay. Photo / Mark Mitchell

OPINION

After two years, Inland Revenue’s highly anticipated High Wealth Individuals Research Projects report came out swinging last week.

On IRD’s request for information from 350 richie-poo individuals and their immediate families and trusts, the 311 respondents revealed a collective wealth of $85 billion. The average wealth in net assets came to $276 million.

To qualify as a ‘high roller’, you had to have a net worth of more than $50 million between April 2015 and March 2021.

The average richie-poo paid an effective tax rate of just 8.9 per cent on their economic income - namely, income from all sources, including capital gains on investments. The addition of GST raised the tax rate to 9.5 per cent.

Comparatively, a person earning an $80,000 salary with no other income paid 22 per cent in income tax, and 30 per cent including GST, Revenue minister David Parker said in a statement last week.

In the context of GST, it showed high-wealth people earned a small portion from wages and salaries.

The report showed 67 per cent of respondents’ economic income came via trust structures or in capital gains.

“The data shows beyond doubt that the wealthiest New Zealanders pay tax on their economic income at a rate well below what most New Zealanders pay on theirs,” Parker said.

“It shows that the effective tax rate paid by middle-income New Zealanders is at least double that paid by our wealthiest citizens.”

How did we get here?

Thanks to a new clause under the Tax Administration Act in December 2020, IRD was given powers to force any person or business to come to the party. Previously richie poos - together with accounting and legal intermediaries - could refuse to do so.

Before the change, IRD could require individuals and companies to provide detailed information, but it could only do so for the purposes of calculating tax liability.

Rushed under urgency, the Introduction of Taxation (Income Tax Rate and Other Amendments) Bill was introduced on 1 December 2020, had its first and second readings on 2 December, and the Committee of the whole House and third reading stages were completed on 3 December 2020. It was a done deal by 7 December.

The legislation introduced a new top personal income tax rate of 39 per cent for income earnings more than $180,000. It also increased disclosure requirements for trusts and clarified more generally that IRD could request information solely for tax policy development purposes.

The new section said “a person must, when notified by the Commissioner in an information demand, provide any information that that Commissioner considers relevant for a purpose relating to the development of policy for the improvement or reform or the tax system”.

Urgency curtailing due process?

December 2020 is a blur for many. Sure, the pandemic gave grounds for immediate action, but the conferral of powers was made so fast in this context not even National or Act had time to give their two cents.

Traditionally parliament goes into ‘urgency’ to make progress on business additional to what would be possible under the normal rules for sitting hours and progress of business.

It means a motion can be moved without advance notice, and is not debated by the house of representatives.

In theory the minister in charge has to explain the need for urgency. In this context, the cabinet paper for legislative approval said “given tax rate changes are often in response to election commitments and passed under urgency, no external consultation has been conducted [...].”

In 2011 Victoria University of Wellington and the New Zealand Foundation conducted research and found between 1987 and 2010 the house of representatives went into urgency or extraordinary urgency 230 times. Urgency was accorded to more than 1600 bills, meaning close to half of the legislation was introduced under urgency.

Between 2009 and 2010, 70 per cent of all bills had at some stage been passed under urgency. The research prompted change, where the 51st Parliament under National went into urgency 12 times between 2014 and 2017. Between 2017 and 2020, the Labour-led coalition passed 18 motions of urgency.

Minimising the use of urgency prevents the executive misappropriating its power, and the lack of public scrutiny means unforeseen consequences aren’t properly examined.

Where to from here?

The timing of the pandemic, coupled with the legislation’s filibustering emphasis on increasing the tax rate to 39 per cent for high earners created fertile ground for what I would consider almost a brilliant plan to lift the lid on the country’s most privileged.

But seeing as the move was to create conditions to create a fairer, more transparent tax system, it’s a shame there’s almost irony in the way the legislation came to fruition.

It’s of little surprise National and Act aren’t happy campers as the dust starts to move from under carpets and into the public discourse. With the smell of political tax tennis in the air, we have no doubt entered the election arena.