Based on the hype, you could be forgiven for thinking that the findings of the Inland Revenue’s High-Wealth Individuals (HWI) Research Project and the Treasury research simply distilled down to two numbers – 8.9% and 22%. Do these results actually mean that the wealthiest New Zealanders pay lower levels of tax?

Behind the headlines, the reports provide a lot more useful contextual data to help inform future decision making. 

Inland Revenue gathered information on 311 wealthy families in New Zealand to help “fill in gaps in New Zealand’s understanding of the taxation and income of the wealthiest New Zealanders”. It found the effective tax rate (tax paid divided by various measures of economic income) of those families varied “considerably” depending on how their income was earned between 2015 to 2021. The median effective tax rate paid by the survey group was 8.9%, compared to an effective tax rate of 22% for a person earning $80,000 a year, with no other income. The calculation includes all income when realised and unrealised capital gains are taken into account.

The Treasury’s study, using a decade of data that cut off in 2018 doesn’t include tax from companies and trusts owned or controlled by the individuals. Excluding Government paid benefits and including GST paid, this analysis showed that a middle wealth New Zealander had an effective tax rate of 20%. The comparable median for the families in the dataset for Inland Revenue’s HWI Project is 9.4%. 

“No-one in the general population would feel that happy about paying tax on an unrealised basis on the accretion in value of their home, for argument’s sake.”

According to CA ANZ NZ Tax Leader John Cuthbertson FCA, there were no real surprises with key findings:

• Where the base measure of income aligned to taxable income – the effective tax rate (30%) was close to the statutory rate – exhibiting broad compliance
• The effective tax rate varied significantly across the research group dependent on sources of economic income
• The effective tax rate was much lower (8.9%) when capital appreciation of assets (financial portfolio, property, and business interests) were brought in, 
• The high wealth group derived only 17% of their “income” from directly taxable sources – 7% personal taxable income and 10% attributed trustee income
• Bulk of the high wealth group’s economic income comprised of unrealised capital gains, with the 2021 year being a significant outlier

In his interview with the National Business Review, Cuthbertson said: “When you look at economic income, it is a very broad concept, and it's not what we are taxed on now… No-one in the general population would feel that happy about paying tax on an unrealised basis on the accretion in value of their home, for argument’s sake.”

So where to from here?

This was the first research of its type with a focus on economic income. It is likely to be a catalyst for change, providing a useful foundation of data to inform future policy direction. When considering whether to broaden or vary the tax base it is key that a holistic approach is adopted, considering the level of taxation revenue required and the sustainability of the tax base. 

There needs to be broad consultation on who should bear the tax burden and whether that overall allocation is appropriate. The level of progressivity desired and whether it is realistically achievable needs to be considered. 

Significant change is unlikely in the immediate term given political manoeuvring and expediencies in an election year. This is not a bad thing – any fundamental changes to the tax system should be well thought through and provide a long-term coherent tax base solution. 

Taxpayers and business desire certainty and our tax base is too important to New Zealand as the primary revenue raiser for the government of the day to apply a short term suboptimal and often politicised lens.