IRD opens the books: How much tax do NZ’s wealthiest pay?

Today, IRD will open the books on about 400 of the wealthiest New Zealanders and answer a question people here and overseas have been asking for decades: do they pay their fair share of tax?

In 2020, an early attempt at this research suggested they did not and that many of New Zealand’s wealthiest were paying effective tax rates below statutory tax rates.

Today’s research, which looks into the tax affairs of people worth more than $50 million (or $20m if they control a significant asset like a company), is expected to confirm this suspicion.

Revenue Minister David Parker will not use the occasion to announce any new taxes to fix the disparity. That, it seems, is for another day - and possibly another government.

An announcement today, or in the coming weeks, of Parker’s tax principles legislation, which would force the Government to own up to the unfairness of the tax system every time it taxes people, is more likely.

New Zealand’s tax system is meant to be progressive, which means the more people earn, the more they are taxed as a proportion of their income.

However, not all income is taxed equally - and some income, like most capital gains, is not taxed at all.

An early attempt by IRD and Treasury at working out how much tax was paid by the wealthy reckoned that the wealthiest Kiwis paid an effective tax rate of 12 per cent on their income, and 42 per cent of those wealthy Kiwis paid less than 10 per cent of their income in tax.

Someone earning a median income of $55,000-$60,000 will find themselves paying an effective tax rate of 16-18 per cent on their income - and 15 per cent more in GST whenever they try to spend what’s left over.

Those calculations were based on unreliable data like the NBR rich list. Today’s release by IRD and Treasury will be far more robust.

The tax data of the 400 or so individuals will be anonymised, meaning it will not be possible to dial up specific rich people to see how much tax they pay. What IRD will be able to do, however, is draw some general conclusions about the tax affairs of the wealthy and how they compare with the more boring tax affairs of ordinary people.

Deloitte tax partner Robyn Walker said the outcome of the report was “quite obvious from even before the report was commissioned”.

“At the end of the day, there’s no denying that people that have a lot of capital have capital gains, which are not subject to tax,” Walker said.

“So it’s not going to surprise that there’s an effective tax rate that’s below the marginal tax rate,” she said.

Walker said the more interesting question would be how this compares to the effective tax rates paid by ordinary Kiwis.

Revenue Minister David Parker will unveil research into tax paid by the wealthy. Photo / Mark Mitchell

The Government is releasing a simultaneous report from Treasury which will look at the amount of tax paid by ordinary people, not just through income tax, but in areas like GST. The report is designed to be compared with the IRD report.

Tax consultant Terry Baucher said the IRD report will likely show a “mismatch” between wealthy people’s total incomes and their rate of taxation.

“It appears that there’s an extensive amount of economic income which isn’t being taxed,” he said.

“If you look at the growth in the economic value of a person - the high, high-net-worth individuals - and then compare that with what we know has been declared in income, you’d be looking at an extreme mismatch,” Baucher said.

Walker said the difficulty with using a new tax to fix the problem is that the current system, for all its flaws, had a useful simplicity.

“One of the great things about the New Zealand tax system is that it’s relatively straightforward.

“When you get to wanting to tax something different or unusual - you’re looking at diminishing returns in terms of the layers, layers of complexity and compliance,” Walker said.

“One of the criticisms of capital gains tax is that it is really complex, and it’s not a predictable source of income either,” she said.

The impending release of IRD’s research has piqued the interest of people wanting to argue the opposite. OliverShaw tax advisers commissioned Sapere to report on the level of tax paid by wealthy people.

That report argued the wealthy were in fact paying their fair share of tax, particularly if you factored in that people on lower incomes were likely to get benefits in the form of Working for Families tax credits.

Baucher said there were other taxes New Zealand did not have, which also tended to give the wealthy an easier tax ride here than elsewhere.

One example is the lack of a death duty or inheritance tax, which was done away with in the early 1990s.

Baucher said he was concerned that the current tax regime entrenched the inequality between rich and poor.

“The concern I would have is that accidents of birth are going to make potentially greater and greater impact for people,” he said.