How the rich get rich: Seven things you missed from the IRD’s wealth report

The IRD looked at how the wealthy earned their money. Photo / AP

This week, IRD released the results of the most comprehensive research into the wealth of the super-rich ever to have been attempted in this country - and one of the most comprehensive projects to have been undertaken anywhere.

The IRD looked into the wealth, income and tax of 311 individuals worth over $50 million (or who were worth more than $20m but had a controlling stake in a valuable company). The data unearthed by the project is incredibly rich, in part because the survey respondents were legally obliged to comply with the survey. There was nowhere to hide.

Here are some of the most interesting findings that you might have missed.

There are more rich people than we thought

Until Thursday, the best way of measuring the difference between the rich and poor in New Zealand was Stats NZ’s Household Economic Survey, or HES, which takes place every three years and measures the relative wealth of people living here.

The survey does a good job of measuring most of the population, but it does a poor job of measuring the very rich. By definition, there are very few people in the “top 1 per cent” and there’s a high likelihood that any survey will miss them.

There is also suspicion that the super-wealthy under-report their wealth to the survey.

Whatever the reason, the survey has only captured two seriously wealthy people: one worth about $20m and the other just less than $40m.

This report found many people who were far wealthier than this. The median net worth of people surveyed was $106m in 2021, while the mean worth was $275m. A quarter of respondents surveyed were worth more than $250m in 2021.

The rich people are getting richer

Not only are there more wealthy people than previously known, but they are getting richer. The survey looked at six years of income.

It showed that in those six years, the mean worth of the group increased by $70m.

In 2015, the mean wealth of the group was $205m. By 2018, this had increased to $237m, and by 2021, it had increased to $275m.

The median wealth increased too - from $60m in 2015 to $106m in 2021.

The number of extremely wealthy people in the group also increased over the five-year period. In 2015, just 36 in the group were worth more than $250m - by 2021, the number worth more than $250m had more than doubled to 77.

This extraordinary accumulation of wealth may be less unusual than it appears.

These wealthy individuals own an extraordinary amount of property, and between 2015 and 2021, New Zealand’s housing market went bananas.

In December 2015, the REINZ median house price was $460,000. By December 2021, it had nearly doubled to $900,000. If you own dozens of homes, you’re likely to enjoy that wealth increase many times over.

The rich own a lot of New Zealand

One of the more interesting parts of the survey is the fact IRD was able to blend it with the HES to give a more comprehensive view of the share of wealth held by the very wealthy.

It also shows how much neglecting the super-wealthy has impacted the accuracy of HES.

According to the HES, the top 1 per cent of people’s (as opposed to households’) share of wealth was 20 per cent, but blending the HES with IRD’s wealth data revises that figure upwards to 23.4 per cent.

The figures are striking. The bottom 50 per cent of households own only 2 per cent of the country’s wealth in 2021.

The top 5 per cent own 45.5 per cent.

This inequality appears to be improving, but very slowly. The top 1 per cent owned 25.6 per cent of wealth in 2015. This fell to 23.4 per cent by 2021.

Property is king

Who are these people, you might ask? All details are anonymised to keep respondents’ identities secret, but IRD published some data on each family’s “individual A”, the first person identified as part of each group in the survey (a head of household, perhaps).

Individual As were 94 per cent male, and had a median age of 68.

Twenty-eight per cent were classified as being in professional, scientific and technical services, while 26 per cent worked in rental, hiring and real estate services.

Agriculture, forestry, and fishing followed at 15 per cent, while financial and insurance services comprised just 13 per cent of the group.

Inheritance makes you rich

Sixty-six families declared an inheritance or gift. These totalled $411m.

These gifts appear to be increasing in size. The group asked for declarations of inheritances or gifts over the past 50 years.

Nearly 75 per cent of the gifts by value were received after 2010 (the figures were not inflation adjusted, which partly explains things).

When measured by family, of the mean inheritance of families who reported, one was $6.2m over the 50-year period. The median value of those inheritances was $1.3m, indicating that a handful of very large inheritances skewed the sample.

Inheritance has grown. Image / IRD report

Owning a property gives you good capital gains, but owning many is ideal

A big part of the story is capital gains on property - and this group owns a lot of property.

The 311 owned 6986 properties (this figure is the average number of properties held in each of the six years of the survey, to account for people buying and selling).

Of these, 1279 were held directly, 1126 were held in a trust and 4581 were held by a “land-rich entity”. Land-rich entities are a company or trading trust where said entity’s enterprise value (usually based on a multiple of earnings) is less than the value of its real property as an asset.

This could potentially be a holding company for land or other land-based businesses like a property developer or dealer.

The total capital gains of the group’s properties was $4.37 billion between 2015 and 2021.

The 311 people in the group earned an average of $818,446 in capital gains in 2021, compared with just $6996 for a median household. Even the top 10 per cent of households only earned $50,992 in capital gains that year.

Act and National raised the point that the income booked in the report was largely unrealised capital gains - income on paper, in other words.

That’s correct, although there were large realised gains too, which accrued when property was sold.

Realised capital gains in property held directly by the group were worth $237m over the six years - or 28 per cent of total capital gains from directly held property.

The figure for property held in trust was $137m, or 10 per cent of the total capital gains.

The realised gains for property held by “land-rich entities” over the period were $1.024b, or 47 per cent.

You’re probably paying quite a lot of tax

While a lot of attention has naturally been paid to what people are earning at the top end of the income scale, the Treasury report published alongside IRD’s report divulged how much tax ordinary people were paying.

Eighty per cent of income deciles pay average tax rates higher than 25 per cent (the other two have average tax rates of 23 per cent and 24 per cent).

National’s Nicola Willis was quick to point out that high inflation had been pushing people into higher tax brackets, meaning larger portions of their income were being taxed.

Someone on a median income in 2011, for example, would have paid about 15 per cent of their income in income tax (and then paid a fair whack more of their income in GST).

Thanks to bracket creep, a person on a median income today would be paying just less than 18 per cent income tax.

The problem, put simply, is that middle-income people are treated by the tax system like they are wealthier than they actually are.

One thing that does bring down people’s effective tax rates is Working for Families. In some cases, Working for Families means households pay “negative” tax, in the sense they get more out of the tax system than they pay into it.