Tax: Wealthiest Kiwis' effective tax rate less than half of middle NZ, driven by capital gains, new reports reveal

The effective tax rate paid by New Zealand's wealthiest families is less than half of that of middle-income Kiwis, new Government research has found.

This is because wealthy families "got most of their economic income from increases in the value of businesses, property and financial portfolios they own or control" - that's capital gains - rather than from a salary or other personal taxable income.

The capital gains are mostly not taxed, bringing down the effective tax rate paid by the families.

The magnitude of this reduction "shows that capital gains are a significant source of untaxed income for high-wealth families", the report says.

Revenue Minister David Parker says this means New Zealand currently taxes those who earn all their income from salaries at a "much higher rate than the very wealthy".

"Our tradies, nurses, school teachers, hospitality workers, hairdressers, cleaners, engineers and small business owners all pay much higher effective tax rates than their wealthier fellow Kiwis."

He said the research will contribute to a debate on the "fairness of our tax system, allowing future tax policy to be based on better data and more solid evidence".

However, Prime Minister Chris Hipkins says while the research would provide an "evidence base for future tax decision-making", no decisions have been made yet.

Another report released on Wednesday, this one from Treasury, has found official statistics are likely to have underestimated the share of wealth the richest Kiwis hold. One previous measure found the top 10 percent held about 59 percent of net wealth - but the new research shows it's actually roughly 67 percent.

Labour's promised no new taxes this term - outside of the already implemented 39 percent tax rate - but is yet to set out its tax policy for if it's elected for another term.

The IRD report released on Wednesday morning looked at information on the rate of tax paid by 311 of New Zealand's wealthiest families, each generally with a net worth of more than $50m. The mean estimated net worth for the families in 2021 was $276m and a median of $106m.

The researchers considered the families' entire economic income. This includes income from salary or wages, as well as from investments, KiwiSaver, businesses, property and other assets, each of which are taxed differently.

The report said the families' effective tax rate (which is the amount of tax paid divided by economic income) varied considerably depending on their economic income gained from 2015 to 2021. It found the median effective tax rate was just 8.9 percent.

The IRD also compared its results to Treasury analysis on the effective tax rates of New Zealanders more generally.

"If you subtract Govt. paid benefits away from someone’s tax, and add GST paid in, then a middle wealth New Zealander has an effective tax rate of 20.2 percent according to the Treasury research. The comparable median for the wealthiest families in New Zealand, from Inland Revenue’s research, is 9.4 percent."

The department said that, compared with the rest of the population, the wealthiest Kiwis "tend to earn more through their investments rather than from a salary or wage".

A graph is provided to demonstrate this. It shows the income of the surveyed families for the period of April 1 2015 to March 31 2021.

Tax: Wealthiest Kiwis' effective tax rate less than half of middle NZ, driven by capital gains, new reports reveal
Photo credit: IRD.

Of the total economic income, just 7 percent is personal taxable income - this is things like wages, salary, interest and dividends. Income taxed in trusts makes up 10 percent, 13 percent comes from other financial portfolio incomes and 19 percent from other property income. The largest chunk - 51 perent - comes from other business entity income.

In terms of personal taxable income, the research found that the median in the families surveyed was around 30 percent tax paid on $268,000. This compares to someone on the median wage with no other taxable income paying around 21 percent of their wages in income tax.

But as the graph shows, that's just a small part of the economic income of the wealthiest Kiwis.

"Economic income also comes from the things you buy or own increasing in value. These things can be sold to gain the cash needed to buy goods and services.

"These increases in value are mostly not taxed as part of personal taxable income. However, the report accounts for tax paid by the businesses themselves.

"Most of the capital gains made by the researched families came through increases in the value of businesses they own or control. However, economic income gained from businesses, property, and financial portfolios all had a similar impact on lowering their effective tax rate."

The research also notes that the surveyed families hold many of their assets in trusts, with 67 percent of the economic income made by the wealthiest families made in trusts.

Capital gains aren't only made by the wealthiest New Zealanders, but the top 2 percent of the richest households own 25 percent of total net worth and the top 1 percent hold more than 25 percent of all financial assets in New Zealnd.

This means the capital gains accrued by the rich families "significantly exceed the average capital gains of the general population".

In a foreword for the report, Parker said this new information shows the effective tax rate paid by middle income New Zealanders "is at least double that paid by the wealth New Zealanders".

"I believe it will provide a fundamental baseline for debate on the fairness of our tax system, allowing future tax policy to be based on better data and more solid evidence."

The research was first announced by Parker during a speech at Victoria University last year focused on "shining a light on unfairness in our tax system". At the time, he said New Zealand had "virtually no idea what rate of tax is paid by the very wealthy" and that the National Business Review's (NBR) rich list was likely a better data set than official statistics.

Parker also said there was poor data around the distribution of wealth in New Zealand, with the Household Economic Survey (HES) having "severe limitations".

The new report from Treasury also released on Wednesday finds that the HES, an official statistics, underestimated the share of wealth held by the richest Kiwis.

"We find evidence that suggests that HES may undercount top wealth in New Zealand, including a significant gap between the wealthiest 2018 HES respondent and the lowest wealth individuals in media-run surveys, such as the New Zealand National Business Review’s (NBR) Rich List."

The research showed that individuals in the top 10 percent in 2018 held about 67.2 percent of individual net worth, which is "significantly higher" than the 59.3 percent percent of wealth found through the HES. The top 1 percent held 26.1 percent, according to the Treasury research, compared to 20.1 percent found through HES.

Tax: Wealthiest Kiwis' effective tax rate less than half of middle NZ, driven by capital gains, new reports reveal
Photo credit: Treasury.

Speaking on AM, Prime Minister Chirs Hipkins said the research released on Wednesday provided "an opportunity for people to see an evidence-base for future tax decision-making". But he said, "we haven't made decisions based on that yet"

"Every political party will have access to that same information and they can formulate their tax policies and set them out before the next election," Hipkins said.

"As I've said, we've been clear that we'll be honouring the commitments that we made at the last election for this term of government and we will set out what our tax policy is before the next election so that New Zealanders are clear on that."

During the 2020 election, the Labour party promised no new taxes this term other than a new 39 percent tax rate on personal income earned over $180,000.

The IRD research prompted "a series of questions", Hipkins told AM.

"Of course, we've been asking those questions but we're not announcing any significant changes in tax policy in the next little while."