Source: New Zealand Government
Good morning and thank you for inviting me here to talk to you today.
In the last few weeks, tax has been very much at the forefront, with some significant developments. I wanted to talk about those today.
As with every other New Zealand government, the changes we are trying to introduce, we see as being important for the health of the tax system and the economy. Of course different Governments have varying views on what is good for the tax system. I’ll come back to that point later.
But whatever views the Government of the day has, we all agree that without an efficient, fully functioning tax system, governments can do little.
Our tax system is a national asset, raising vital revenue and impacting on the decisions of people and businesses as they invest every day.
In recent times, with the floods and adverse weather hitting the North Island, we can see why we all need to pay our share.
We all use the infrastructure. We all use the emergency services. And of course these are all funded by our tax dollars. If you use those services but are not paying your share of taxes, then you are unfairly relying on others to subsidise you.
Taxes pay for services that make society more prosperous, fairer, and more peaceful: education, health, roads, the police, the justice system that protects the property rights and contracts of those with investments.
All of these are essential to our economy and society. But a good tax system is efficient and tries to avoid creating distortions and undue compliance costs.
Taxes have a direct effect on the prosperity of us all. Tax policy settings affect investment returns. Bad laws can distort investment into speculative asset classes, rather than encouraging investment in the productive sectors that create jobs and earn exports.
We all benefit from a system that is as fair and efficient as possible.
And the tax system needs to be sustainable over time. It needs to factor in the impact it has on decisions that people make. Determining whether a tax system is efficient, sustainable, and fair is a constant challenge. Circumstances change.
High wealth
We are trying to bring more transparency into the tax system and we want to do that in order to make the system fairer.
The first of the recent development I want to talk about today, was the release of the IRD’s research into high wealth individuals.
Much has already been said about the IRD’s research project and its findings.
The first thing I want to say is that this is really about the truly wealthy. People who try to paint this research as an attack on the average Kiwi mum and dad have a pretty warped view of what life is like for the average Kiwi.
The study looked at the income and tax of people who generally had net worth of more than $50 million, or $20 million if they controlled significant businesses, over the period 1 April 2015 to 31 March 2021.
The median wealth (i.e net assets) of the group in 2021 was $106m, with the mean (i.e. average) higher still at $276m.
The top decile in New Zealand overall – that is, the top 10 percent – holds 63 per cent of household net worth (excluding owner-occupied housing). Some of you will have done the maths quickly in your head but for those of you who haven’t, that means that the top decile holds more wealth than all the other 9 deciles combined.
And the top 1 percent of households hold more than a quarter of all the financial assets in New Zealand.
We really are only talking about a very, very small group of people. But this very small group of people are immensely wealthy.
Any concern that this is about shining a spotlight on the tax affairs of middle income New Zealanders is unfounded.
And that is the other thing I want to say about this research project – it is most certainly not an attack by any means.
This is not about knee-capping the rich. That wealth was largely gained by personal endeavour and risk and creativity. We actually need more of that. They are valued members of society.
One of the things that they, and all New Zealanders value about our society is how laid-back we are. And at the heart of that is that New Zealanders think of our society as an egalitarian one. That applies to many aspects of daily life, yet strangely, not to taxation.
All we are attempting to do is bring more transparency into the system to ensure that the tax system is functioning as smoothly and efficiently and fairly as possible.
How can you possibly claim that ours is a fair tax system if nobody knows anything about the tax treatment of one sector of the population which controls most of the wealth?
So onto the findings.
Nobody was terribly surprised that a disparity was discovered. But it was the sheer size of that disparity which was surprising.
I think everyone here now knows, at least in general terms, what the findings of the IRD report were.
But to recap, the IRD found that when all sources of income and tax are included, the median of the effective tax rates for the high-wealth group (excluding GST) is 8.9%.
That is the median tax rate (excluding GST) paid by the wealthiest in this country. That includes the tax they pay personally and through company tax and trustee tax.
If GST is added, that effective tax rate rises to just 9.5%.
As I said before, this is not an attack on the super-wealthy. Some have even expressed a willingness to pay more.
There have been commentators who have been dismissive of people wanting to pay more and suggested they simply pay Inland Revenue a bit more. But anyone who knows anything about the tax system and about how tax rates are set knows that that cannot be done.
Tax rates are set by Parliament and are not negotiable.
An excess amount of tax will simply be recognised in IRD’s automated system as a refund and returned to the individual.
And if Inland Revenue were to go against the law passed by parliament and agree that the tax rate is not high enough for an individual, then the converse must also be true and people could pay less tax giving the argument that the tax rate is too high for them individually.
Tax rates are not up for negotiation.
To understand the tax system, IRD needed to consider the income and taxes of all those entities– personal income tax, company tax, tax paid by trusts, as well as GST. Then we can understand how the system works overall. The detailed analysis by Inland Revenue has done that.
Most of the high wealth group’s economic income comes from investment returns.
Economic income is much broader than personal taxable income. It includes all income sources that increase a person’s ability to buy goods, services, pay for everyday living costs and save. The financial affairs of the very wealthy are often complex and can involve partnerships plus hundreds of companies and multiple trusts.
So while the wealthy may generally be compliant, the vast majority of their income is lightly taxed or not taxed at all. This is not a fault of the wealthy, but it is a fault of the settings of our tax system.
There have been commentators who have tried to discredit the findings and the value of the research by pointing to the dollar value of tax paid by the very wealthy. But that is a creative use of the facts.
Of course the wealthy pay a lot in tax. If you have a large income which is taxed at source such as from salary or interest, it is to be expected that the tax on that will go up. We do have a progressive income tax system, after all.
But when all sources of income and tax, including GST, are included, the median of the effective tax rates for the very wealthy is just 9.5%.
By far the major source of the wealth comes from untaxed or lightly taxed sources.
For instance, 67% of the total income (economic income) of the high wealth group was earned through trusts.
Which brings me to the next major development – Budget 2023.
Budget 2023
On Budget night, my colleague, David Parker introduced a taxation Bill – the Taxation (Annual Rates for 2023-24, Multinational Tax and Remedial Matters) Bill.
The bill proposes aligning the top tax trustee tax rate with the top personal tax rate from the 2024/25 income year.
I have said that the super-wealthy are generally compliant. But we also know that there are people who attempt to get around their tax obligations.
We introduced a new top personal income tax rate of 39%, but at the time we did not also raise the trustee rate. But now we do need to act.
Aligning the trustee and top personal tax rates at 39 percent will make the tax system fairer. It will also improve its progressivity. The change is about preventing higher-income earners from circumventing the top tax rate.
About 78 percent of trustee income is earned by 5 percent of all trusts, and that becomes even more concentrated at the very top end of those top 5 percent—these really are the big trusts, the super-wealthy.
Inland Revenue has evidence of big shift in income to trusts when it became widely known that the Government was going to increase the top personal tax rate. We said we’d monitor it, and we’re now addressing the issue.
We remain committed to wanting to avoid over-taxing smaller trusts.
This isn’t targeting the smaller family trust that might own a rental property, for example. These smaller trusts can continue to use existing rules to allocate their income to trust beneficiaries who are taxed at their personal tax rates.
That doesn’t change.
The Government is also proposing targeted measures to help prevent the over-taxation of trusts in certain circumstances, such as estates, which are taxed as trusts, and trusts for disabled persons.
That’s already a problem in the current system—in some situations the effective trust taxation rate at 33c in the dollar is taxing estates at higher than the effective tax rate of the taxpayers that are involved in that estate.
Inland Revenue will continue to monitor the use of structures that undermine the 39% personal tax rate.
The select committee has been approached to agree to Inland Revenue officials meeting with external stakeholders on the proposals. We hope that you will take the opportunity to engage with the proposals and with officials. We know that we do not have all the answers, so in the spirit of GTPP, we ask for your input to help us refine the proposals.
Submissions to the Committee on the trustee rate proposals and all other items in the Bill close on 30 June 2023.
Multinationals tax
And just on the Bill, some of the keen eyed amongst you will have spotted that the Budget also reflects an increase in revenue from imposing a tax on some large multinational enterprises headquartered in or operating in New Zealand.
One of the key features of the bill is to ensure that multinationals pay their fair share of tax. It achieves this by including measures developed by the OECD as part of their drive to reform international income tax—the framework for large multinational companies.
The bill allows New Zealand to take part in this global minimum tax of 15 percent, which is being introduced around the world for large multinational enterprises.
The objective is to stop the race to the bottom amongst Governments attempting to attract the mobile income of large multinationals by offering low effective tax rates. This initiative puts a floor on tax competition by creating a minimum rate.
The OECD-led work, which is endorsed by more than 130 countries, will help both developed and developing countries raise revenue from multinational enterprises. It will reduce undesirable tax competition between countries without preventing the use of tax incentives by those countries to attract real investment.
The OECD has estimated that it will increase global tax revenues from large multinationals by about US$220 billion a year, or nine percent of their current level. This tax is often referred to as the Global Anti-Base Erosion, or GloBE, tax. It is only payable where profits in a country are taxed at an effective rate of less than 15 percent.
New Zealand already has a 28 percent corporate tax rate and a robust international tax regime, so it’s unlikely that the tax will raise much revenue directly in New Zealand. There are only about 20 or 25 New Zealand – based multinationals that are in scope of the GloBE rules. You have to have a high turnover to be caught up in this.
But participation in the system will mean that those New Zealand multinationals can pay any GloBE tax they owe to New Zealand rather than paying that same amount of tax under those rules to an overseas jurisdiction, which would, of course, not be benefiting the New Zealand tax system.
In fact, most of the locally based multinationals have told Inland Revenue that they prefer to deal with Inland Revenue in New Zealand alone rather than a range of other tax jurisdictions in respect of this issue.
If this legislation was not passed, then those multinationals, once this rule comes into effect, would have to be dealing with those overseas tax jurisdictions in respect of the same issue, which would be more complex for them.
You are probably aware that in its recently announced Budget, Australia said it is introducing the same GloBE rules proposed in this bill for the same reasons.
In New Zealand, the change is estimated to raise about $25 million of top-up tax a year from 2026-27 onwards.
It’s a relatively small amount, but it’s about New Zealand doing the right thing by playing its part in this global effort.
And it will benefit our tax system and tax systems around the world, making for a more settled approach to tax rates setting.
That’s a good thing for citizens and for overseas investors. Certainty and predictability in tax policy development are important considerations for businesses and for overseas investors.
Tax Principles
One way that we can improve that certainty is through improved transparency and by agreeing on the fundamentals of tax policy development. This is the third development I want to mention.
The tax system touches the lives of everyone, so it makes sense that people should have a reasonable understanding of what it is trying to achieve and how.
What we want is a properly engaged and informed public. So that when changes are proposed, they can gauge for themselves whether those changes are in the interests of society and not simply to fulfil an ideological standpoint.
Yet, despite the importance of the tax system, the fundamental facts are often unknown or treated as a matter of opinion.
The tax debate in New Zealand can become mired in unnecessary controversy, and people can quite properly become confused about what constitutes good tax policy. So the second Bill introduced by David Parker was the Taxation Principles Reporting Bill.
This bill introduces a set of sound tax principles that enable a reporting framework to help people understand how the tax system is measuring up in relation to those principles.
You are probably very familiar with the principles we have settled on: they’re well established and generally accepted amongst tax academics, professionals, and the OECD as the hallmarks of a good tax system. Many can be traced back to Adam Smith’s great 1776 work The Wealth of Nations which sets out four principles of taxation.
In this Bill the first principle is horizontal equity. In other words, people with the same levels of income should pay similar amounts of tax. Along with that is vertical equity. That is that the overall system should require people with higher levels of economic income to pay a higher proportion of that income in tax.
The other principles we have selected are efficiency, minimising administration and compliance costs, revenue integrity, certainty, predictability, and, finally, flexibility, and adaptability.
Enshrining these principles in legislation will mean that the fundamentals of a good tax system will clearly be set out for all to refer to. It will provide direction to officials on what information about the tax system should be reported on.
The bill proposes that officials periodically report on the operation of the tax system, using the principles set out in the legislation as the basis for their reporting.
This Bill is not a straitjacket.
Different Governments will want to focus on different aspects of the system at different times to deal with the challenges of the day. Different Governments can quite properly have different views on how progressive the tax system should be, but it should be a fact-based discussion.
The reports will build up a time series showing how the tax system is changing in relation to these core principles. And by providing information to the public, like that presented in the high-wealth individual report, we can have an informed debate on tax, using solid evidence.
Citizens will then be able to see what trade-offs a Government chooses to make. Because often when deciding on a tax policy, trade-offs between the different principles will have to be made, along with an eye to the fiscal cost of any change.
All New Zealanders should be able to trust the fundamentals and know the facts about our tax system. So officials will report actual outcomes of the tax system in relation to these principles. They will set out how the measures are determined and what assumptions they make or what caveats apply.
This will improve transparency. For instance, people will be able to see levels of taxation across society and who is effectively exempt from tax and who isn’t. Debates about any changes to the tax system can then be fact-based.
It doesn’t in any way prescribe what tax policies they might want to adopt; it simply gives an objective basis for having a debate about the fairness of the current system. It’s not intended to be political, and we are happy to talk about the guard rails that are in the Bill.
Ultimately, this is about what is good for the health of the tax system and by extension the economy.
To protect our way of life, to improve our standard of living, we need a fair and efficient tax system, a tax system that works for all citizens and encourages productive use of both labour and capital.
I see the tax principles as ushering in a new era for New Zealand tax policy development. Once understood by the public and used properly by politicians and officials, tax policy will shed the ideological vagaries it has been subject to and can start to work for the betterment of our economy.
Together, the High Wealth research, the changes in the current tax bill and the tax principles will bring more transparency to the tax system.
Thank you
