IRD report: Wealthy pay half tax rate of average Kiwis

The wealthiest New Zealanders pay tax at half the rate of ordinary people, an IRD report has found.

An IRD study into the tax rate paid by a sample of 311 wealthy New Zealanders found they paid a median effective tax rate of 9.4 per cent.

Treasury reckons a comparable tax rate for a “middle wealth” Kiwi was 20.2 per cent - that rate includes GST they pay and any benefits someone might receive like Working for Families. If you leave those out, their tax rate is even higher.

The median wealth of the rich families was $106 million - but a handful of extremely wealthy people meant the mean wealth of those families was $276m.

Revenue Minister David Parker said the report showed “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”.

“We tax those who earn all their income from salaries at a much higher rate than the very wealthy,” he said.

The culprit in all of this is capital gains, which are largely untaxed in New Zealand.

And this group of people made a killing in capital gains - something the Government is not changing today, Parker said.

The 311 people’s income for the year ending March 2021 was $14.6 billion - about 4 per cent of that year’s GDP. IRD reckoned that year was particularly kind to the wealthy because of high capital gains earned on assets, and because of increased dividends and shareholder salary payouts, which occurred prior to the Government hiking the top tax rate to 39 per cent.

The report covered six years of income, going back to 2015 - some of which showed far smaller capital gains. In 2017, the group earned a comparatively meagre $1b, and the group of people has probably been hit by declining asset values since the 2021 peak.

The ultra-rich do pay tax on some of their incomes. In sheer dollar terms, the amount of tax is quite a lot. The group earned a median total income of $8m in 2018 and paid $642,000 in tax on it.

Where the 311 people in the report do actually pay tax, they pay an average tax rate of about 30 per cent.

But when all sources of income are included in the report that 30 per cent tax rate drops to 8.9 per cent. The reason for this is that large parts of this group’s income are taxed lightly or not taxed at all.

This is the key distinction the report draws between the wealthy and everyone else. For most people their total income, something called an “economic income” is more or less the income they get from their jobs and whatever they earn from the rising value of their home. For the ultra-wealthy, the income they earn from a job comprises less than 10 per cent of their total incomes.

The 311 people earned just 7 per cent of their incomes from personal taxable income - the kind that comprises the majority of ordinary people’s incomes.

The issue of capital gains is particularly acute to the ultra-wealthy because they own a lot of property and companies.

Revenue Minister David Parker has released IRD research into the tax paid by wealthy people. Photo / Mark Mitchell

The more people own, the greater their capital gains are likely to be.

The IRD report shows the 311 people surveyed made capital gains on property alone in 2018 of $818,446.

That is more than 10 times more in capital gains than even the wealthiest 10 per cent of New Zealanders earned in capital gains - and more than 100 times more than the middle 10 per cent.

The top 10 per cent of New Zealanders made capital gains of just $50,992 that year. The middle 10 per cent of New Zealanders made just $6996.

That $818,446 were not the only capital gains enjoyed by the wealthy in 2018 - they also earned gains from companies.

Things like inheritance or gift taxes might be put on the agenda by the report, which found that 66 of the families declared a “significant gift or inheritance”.

A total of $411m was reported, averaging $6.2m per gift.

Parker said there would not be an immediate change.

“I want to be clear today that I am not announcing any new tax policy or tax switch,” Parker said - adding that Labour would have a tax policy announced before the election.

He also doubled down on the importance of excluding the family home from any capital gains tax - a hallmark of Labour’s previous tax policies.

“I repeat again today that I have never favoured taxing the family home, either by way of capital gains or imputed rents. High rates of home ownership are a cornerstone of a fair society,” Parker said.

Parker noted that a similar research project conducted by the IRS, the tax agency in the United States, found the wealthiest American families paid effective federal tax rates of 8.2 per cent - similar to the wealthiest families here. However, many American states also had state-level taxes, meaning some wealthy American families would face higher rates of tax there than they would here.

The Government has been working on the report for two years after Parker raised concerns New Zealand had little data on the effective tax rate of the wealthy. Later, the Government decided Treasury should look into the average tax rate paid by ordinary New Zealanders so the IRD findings would have something to be compared to.

Parker said the problem with existing data was that it was incredibly poor. The wealthiest person ever captured by the Household Economic Survey, a three-yearly Stats NZ survey into household wealth, was worth less than $40m.

That suggested there was a large number of ultra-wealthy people not captured by public data.

This study looked at people worth $50m or more or who were worth $20m and had a controlling stake in a large company.

The report is not perfect. IRD had to make judgements on the value of the group’s capital gains on property by looking at comparable property sales. IRD also needed to find a way of valuing privately-held companies that did not have public valuations.

It did this by looking at similar companies for which a valuation was available.