Wellington, 26 April 2023 — The Treasury and Inland Revenue reports on taxation released today support the key conclusions of the Sapere Report commissioned by OliverShaw and released 18th April. However, the HWIRP does not deliver hard data that can be relied upon to develop sound tax policy.
“As the Sapere report noted, the methodology adopted by the Inland Revenue’s High Wealth Individual Research Project (HWIRP) is inconsistent with the Treasury report and best international practice,” said Robin Oliver. “Compared to the Sapere and Treasury reports it is therefore likely to paint a misleading picture of our tax system making it seem broken when it is not. In particular, the headline claim of HWIRP: ‘…when personal, company and trustee taxes are included, the median family in the high-wealth group paid 8.9% of their economic income in tax,’ cannot be relied upon. It is based on, officials’ assumptions about unrealised capital gains and a tax treatment of the family home that would not be acceptable to New Zealanders.
“Indeed, all three reports confirm that our tax system is not broken. As Geoff Nightingale of PwC has said, the tax system raises substantial money to fund government and does so relatively efficiently compared to other comparable countries.
“All these reports demonstrate that overall, our tax rules are fair in that the rich do pay tax in New Zealand and in general a person’s tax increases as income increases even if income is more widely defined than it is under our income tax legislation,” says Oliver.
HWIRP (page 91) shows the 311 high wealth households each paid on average $2.5 million in tax in 2021. The amount paid by this group increased from, $436 million in 2016 to $764 million in 2021 — an increase of 75%. The rich pay tax and they are paying more.”
The Sapere and Treasury reports show that for everyone it is normal for effective tax rates to be less than rates set out in the income tax law. The Inland Revenue report provides no such context and focuses only on about 400 selected high wealth households. The Inland Revenue report suggests that on average these high wealth households have effective tax rates materially lower than the Sapere report’s estimates of 23% to 31%.
The difference results from assumptions and gathering methods used in the HWIRP. The Inland Revenue report:
Adopts a selective definition of economic income that seems set up to suggest low effective tax rates for high income households.
Ignores inflation and how this artificially increases the income from capital.
Suggests an ideal tax system that takes economic theory to absurd levels – taxing the rental value of owner-occupied homes, taxing unrealised as well as realised capital gains and taxing companies at such a high rate that investment in higher productivity would vanish.
Is not based on hard data but estimates by officials of how much income assets generate.
Unjustifiably mixes economic and legal concepts in calculating effective tax rates.
“For high wealth households, Inland Revenue estimates that 83% of their income has been unrealised capital gains that are not taxed,” says Oliver. “Including that in income naturally generates a low effective tax rate. However, this is just officials’ backroom estimates of how much investments have increased in value. It does not measure cash or anything that these households can spend. No country has a comprehensive tax on unrealised gains because no one would want one. It is like saying the homeowner in a period of rapidly rising house prices has made huge amounts of income and should sell their house in order to have the cash to pay a large proportion of the proceeds to the government. Nonsense.”
About OliverShaw
OliverShaw is a specialist tax advisory practice founded in 2011 by Robin Oliver MNZM LLB MA and Mike Shaw CA, recognised experts in tax policy, tax economics and tax advice. Both have previously worked as senior partners at big four accounting firms, and Robin served as Deputy Commissioner of Policy at IRD for 16 years. OliverShaw has acted as advisors to the Corporate Taxpayer Group, the Financial Services Council, local bodies, NZX listed corporates, high wealth individuals and highly innovative start up organisations.
