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Economic income and tax on a collision course? Inland Revenue’s effective tax rate project is about to start

Tax Alert - October 2021

It’s no secret that broadening of the tax base is on the wish-list of parts of the Labour Party. Since the failure to get a capital gains tax over the line in 2019, despite being recommended by the last Tax Working Group, it’s been necessary to search for more creative ways of expanding the tax base. While nothing is currently on the table in this electoral cycle, an information gathering exercise is about to start to better understand wealth and effective tax rates in New Zealand.

At present there is very limited data about high wealth individuals, and this can lead to conjecture as to whether these individuals are paying their fair share. The basic premise is simple, an individual who has a lot of appreciating assets in a country without a comprehensive capital gains tax is able to increase their wealth without the same tax burden as an individual who does not own any appreciating assets and only earns salary and wages. This all contributes to increasing wealth inequality.

In order to plug the information gaps, Inland Revenue are about to undertake a project to research the effective tax rates on the economic income of high wealth individuals. The research project will involve an extensive information request being sent to those who are fortunate enough to have been identified as part of this population. Around 400 “family units” with estimated wealth in excess of $20million will be receiving the first of two information requests in December 2021. The first information request will ask the individuals to confirm what businesses they hold interests in. Phase two of the project is expected to start in April/May 2022 and will formally request a range of financial and personal information from these individuals, covering six years. The data collected will be analysed and the ultimate output will be a report in June 2023. The report will be made public and will contain aggregated data.

The purpose of the report is to look at effective tax rates of high wealth individuals. The effective tax rate will be established by comparing income tax paid to the “economic income” (not income under current tax definitions). The results are going to inevitably show an effective tax rate which is below the highest marginal tax rate, because the calculations are measuring things which are not currently subject to tax. Whether the effective tax rate calculated for this population is materially different to the effective tax rate of an “average home-owning New Zealander” is another question, and not something which is in the scope of the project. Like all things to do with tax, its usually not as simple as it first seems, for example should GST be included in the calculations, what about foreign taxes, or charitable donations?

Please contact your usual Deloitte advisor if you’d like to understand more about this project.

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