27 Apr 2023

Capital gains tax back in the spotlight following IRD investigation

11:54 am on 27 April 2023
IRD; Tax Code Declaration

The IRD investigation showed the median effective tax rate for people worth more than $50 million is just 9.4 percent, compared to more than 20 percent for middle-wealth New Zealanders Photo: RNZ / Richard Tindiller

A capital gains tax is back on the political agenda following a report showing the country's richest families pay about half as much tax on their income as an average New Zealander.

The IRD investigation looked at effective tax rates paid across full income and assets - including capital gains, property and businesses, trusts and shares - rather than salaries or wages alone.

It showed the median effective tax rate for people worth more than $50 million is just 9.4 percent, compared to more than 20 percent for middle-wealth New Zealanders.

While former prime minister Jacinda Ardern categorically ruled out introducing a comprehensive capital gains tax, her successor Chris Hipkins has not ruled it out next term if Labour is re-elected.

Revenue Minister David Parker told Morning Report the report showed that someone earning $80,000 a year was paying an effective tax rate of around 30 percent, once the GST they paid on goods and services was taken into account.

"The 22 percent [they pay] from income tax, plus the 8 or 9 percent in GST, means that a person on about $80,000 - if they've got no other capital gain income, and a lot of them don't - is paying a tax rate of around 30 percent, whereas the wealthy are paying under 10."

Parker said the report proved the very wealthy in New Zealand had assets far in excess of what had previously been measured.

"This group of people have, on average, net assets of $276 million each ... I think that's probably the biggest surprise in this for most people, is that wealth is that concentrated at the top."

He said the government was trying to shed light on the unfairness in current tax settings and the results of the survey would have political consequences for all parties because the public would want to know how the highlighted disparities could be addressed.

"Until now, we've relied upon survey measures of health in the household economic survey, which have only ever found - in the history of the survey - two people with assets more than $20 million," he said.

"This study shows that middle income New Zealanders, who are earning most of their income from a salary, are paying two- or three-times the rate of tax of the very wealthy, and that breaches the most fundamental principal of tax."

He added: "If you're on a salary and you do a bit of overtime or your pay goes up, you pay extra tax on every dollar that you earn, and people accept that, because it's fair ... so the idea that because you're super-wealthy you should somehow pay lower rates of tax than middle-income people do, is wrong."

Parker said arguments from ACT and the Taxpayers' Union that the inclusion of the value of unrealised assets had skewed the numbers in the report and should not have been included were "bankrupt and rubbish".

"Once you've got $276 million, you actually don't need to sell assets. If you're making 10 percent on your money, you're making another $27 million a year to invest, you don't ever need to realise assets - you may wish to, but you don't have to - so the idea that you would exclude all unrealised capital gains in an assessment of the wealth of the super-rich, is absurd."

He said any decision on bringing in a capital gains tax would be up to Cabinet, not him, but added that Labour had said it would not be imposing "significant new taxes" during this term of government.

"Our policy in respect of the next period will, of course, not be made clear until closer to the election."

Parker said the report was not an attack on those who worked hard to attain wealth.

"It's not an attack against them, it is actually about fairness - and indeed I thank them for co-operating with the study to prove … what the status quo is."

When challenged about whether wealthy people had had a choice about co-operating with the investigation or not, Parker admitted that the law had been changed to enable their cooperation.

"But they have co-operated, as have their tax intermediaries because we have wanted to make sure that this is a robust study done as well as possible."

Existing tax system 'broadly fair' - Luxon

National Party Leader Christopher Luxon has labelled the IRD investigation "a complete and utter distraction" at a time the country is dealing with major economic challenges.

He told Morning Report that by Treasury's own admission the tax system was "broadly fair" and he supported that.

Luxon said the top 2 percent of income tax earners in New Zealand paid a quarter of all the country's income tax and he did not understand the point of "all these reports".

"It looks like [Labour] want to come back yet again to discussing a capital gains tax or a wealth tax, that seems to be what David Parker is obsessed around, otherwise what's the point of these reports and his speech yesterday?

"All I can tell you is it's a major distraction and I'd prefer it if Chris Hipkins and David Parker and Grant Robertson focused on fixing the economy to help the squeezed middle and we're going to do exactly that, that's where our focus is at the moment."

Government spending was to blame for the "sugar rush economics" which had spiked asset prices across the country, Luxon said.

"I don't think the wealthy is the cause of the problems that middle New Zealand is experiencing at the moment," he said.

"The people that are doing it incredibly tough are squeezed middle working income New Zealanders and they've been let down incredibly by government's mismanagement."

'There's been a significant gap' - Green Party

Green Party Leader James Shaw told Morning Report the party thought the government had a moral obligation to ensure the country's tax system was fair.

"We've been very consistent over 20 years ... it's just been obvious that there's been a significant gap in the amount of tax that's paid by the wealthiest New Zealanders versus the rest of us."

However he would not be drawn on whether the Greens would force Labour to address the disparities highlighted in the report should they find themselves in coalition with them again in the future.

"We don't announce our bottom lines in advance of the election campaign but we will be going into this campaign looking to address that challenge as we have consistently over the last 20 years."

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