Before examining the Project and some interesting issues which arise from it, it is perhaps worthwhile to set the scene for the Project being commenced. In 2017, a new coalition government led by the centre left Labour Party took power. An early project commissioned by the Government (amongst a plethora of other working groups and research projects) was the Tax Working Group (TWG), which looked at a number of elements of the New Zealand tax system, but in particular the issue of whether or not New Zealand should extend its range of taxes beyond income tax and goods and services tax to include taxes on capital, such as a capital gains tax (CGT) or wealth tax.
Despite a lot of work being put into the process and the TWG recommending a rather harsh CGT regime, the Government decided not to take it any further, and the Prime Minister at the time (Jacinda Ardern) indicated that there would be no introduction of a CGT during the term of any government she might lead. It is likely that her coalition partner would have blocked the introduction of a CGT, but her voluntarily ruling out CGT for the remainder of her time leading the Government was somewhat surprising.
Fast forwarding to 2020, the Labour Government took power on its own (without the need for coalition partners) after the so-called “Covid election”. This was the first time since the early 1990s introduction of proportional representation (MMP) that a single party had been able to govern on its own. As you might expect, the handbrake was off.
For reasons that are not within the scope of this article, Jacinda Ardern resigned as Prime Minister and was succeeded by Christopher Hipkins. His Revenue Minister, David Parker, was very keen to raise again the issue of capital taxes, and given Jacinda Ardern’s departure, the Labour Government were not constrained by her promise not to introduce CGT “on her watch”.
David Parker was a self-avowed fan of Thomas Piketty (the French economist/writer) and was very keen to resurrect this capital tax initiative.
During the workings of the prior TWG, there were attempts to fudge the capital/revenue distinction (presumably to encourage support from the electorate) by referring to capital gains on assets as “capital income”.
Economists and tax policy advisers have, since the 1960s, been pointing out that the lack of a comprehensive CGT in New Zealand (we have some specific CGT provisions for certain assets and transactions) was seen to be a significant deficiency, but no government had been brave enough to seek to implement a CGT, let alone a wealth tax.
David Parker and others raised the possibility of a wealth tax as an alternative to CGT, notwithstanding the fact that globally many jurisdictions have moved away from wealth taxes which can operate harshly and unfairly when the tax is imposed, as there has been no realisation of an asset which provides cash to meet the tax obligation, unlike the case when CGT arises on the realisation of an asset.
It was at this point David Parker commissioned the High Wealth Research Project. To conduct the research, it was necessary for a new section to be introduced into the Tax Administration Act 1994 (TAA), which would entitle IRD to request from taxpayers information that had no relevance to the enforcement of the Tax Acts (for the collection of tax), but rather could extend to other information gathered for the purposes of developing tax policy.
As can be imagined, there was considerable dissatisfaction with this among not only high wealth individuals, but also tax advisers and lawyers who considered it to be a departure from conventional tax policy. The view taken by some was that it was an invasion of privacy and could possibly be challenged on the basis of privacy law or human rights law. A number of high wealth individuals sought legal advice with a view to challenging the collection of the information, but it would appear that that did not run its full course, perhaps because of a perception that the New Zealand courts might not be sympathetic to the position of these individuals. Anecdotally, it has been suggested that a number of individuals refused to comply, but overall there was a high level of compliance.
What was interesting is that IRD’s Tax Policy Division who, on most matters, take a highly technical and principled approach to the interpretation of tax law and the development of tax law/policy, seemed to have some extent been captured by the Minister’s thinking. This is evident in a report they released in April 2023. In the writer’s opinion, some of the conclusions reached (which will be examined shortly) were – with respect – arguably a little self-serving from a revenue collection perspective. Before examining those points, it is worth noting that subsequent to the release of the report, and in light of the Labour Government’s poor showing in electoral polls, the Prime Minister gave assurances to the electorate that CGT and wealth tax would not be on the agenda under any government he might lead.
David Parker’s response to this was to abruptly resign as Revenue Minister, essentially as a protest against the work he had undertaken being “dumped”.
As it transpired, the Labour Government was unsuccessful in the 2023 election (although at the time of writing we are still yet to see a centre right coalition Government emerge from the coalition negotiations), but it is almost certain that the new Government will have no interest whatsoever in CGT or wealth tax.
One other element that flowed from Minister Parker’s work in this area was the introduction and enactment of the Tax Principles Act 2023. This piece of legislation had the objective of increasing transparency and the public’s understanding of tax policy development by establishing a reporting framework “informed” by tax principles. It is beyond the scope of this article to examine that novel piece of legislation, but it is something the writer will comment upon at a later date.
Quoted below are some significant extracts from the April 2023 summary report, which will hopefully give insight into some of the comments made above:
• “Inland Revenue gathered a lot of information from 311 of the wealthiest families in New Zealand. These families generally have a net worth of more than $50m.
• This information cannot be accessed by anyone except a small project team, and will not be used for tax compliance or audit activity.
• Inland Revenue also used information it already had or was publicly available …
• Most people work and are paid salary or wages …
• Often people talk about this as their ‘income’, and it is always taxed …
• Others make money by buying something of value, often property or a business, which they could sell later. Each of these things are taxed differently.
• When you add up all the ways people gain the ability to spend money, that is called their ‘economic income’ …
• The effective tax rate (tax paid divided by economic income) of the families we researched varied considerably, depending on how their economic income was gained from 2015 to 2021. The median (middle) effective tax rate was 8.9 per cent …
• If you subtract Government 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 per cent according to the Treasury research. The comparable median for the wealthiest families in New Zealand, from Inland Revenue’s research, is 9.4 per cent …
• The wealthiest people in New Zealand pay a higher rate of tax on their personal income than most people - things like wages, salary, interest and dividends. The median in the group researched was around 30 per cent tax paid on $268,000 of personal taxable income.
• Someone on the median wage, with no other taxable income, pays around 21 per cent of their wages in income tax.
• Personal taxable income is only a small part of the economic income of the wealthiest New Zealand families …
• From 1 April 2015 to 31 March 2021 the researched families got most of their economic income from increases in the value of businesses, property and financial portfolios they own or control. This is called capital gains.”
Interesting aspects of the passages quoted above are the IRD’s expansion of the “capital income” concept first mooted by the Government and the TWG. The wording is somewhat Orwellian “newspeak” from a fiscal perspective, as it attempts to lull the electorate and readers into the view that capital growth on assets is essentially income and should be taxed as such, thereby supporting the concept of capturing those gains either via a CGT or a wealth tax. However, one particularly disconcerting aspect of the expansion of this concept is looking at annual uplifts in value and treating that as economic income even though it is unrealised. We all know that assets can go up and down in value, and it was convenient that the research period between 2015 and 2021 was a period of very substantial growth in asset values, particularly real estate, in New Zealand.
By including these unrealised capital gains within the ambit of the wealthy individuals’ income, it was relatively easy to come up with an effective marginal tax rate of around 8 - 9 per cent for the high wealth sector. By contrast the “middle wealth New Zealander” had an effective tax rate of 20.2 per cent – supposedly.
These comparisons, however, lack integrity as a result of the fact that the calculations did not take account of uplift in the value of capital assets held by “middle wealth New Zealanders”. Residential real estate in New Zealand at all levels is relatively expensive by reference to average incomes. Most New Zealanders own their own homes, and these homeowners have benefitted substantially from the uplift in residential house prices. To exclude these unrealised gains for the average taxpayer but to include them for the high wealth individuals is misleading.
John has specialised in tax and trust law since 1984. John provides tax and trust advice to a wide range of New Zealand and offshore corporate and private clients, and not-for-profit organisations. The majority of his work is cross-border/international in nature. John is a frequent presenter at conferences in New Zealand and internationally and has authored numerous publications on tax and trust law issues. He was a part-time Teaching Fellow at the University of Auckland for the Master of Taxation Studies degree. John was Founding Chairman of the New Zealand branch of STEP and has served as a STEP Worldwide Council member.