The headline from Inland Revenue's report on tax and the economic income of the wealthy is that the median effective tax rate of the 311 families surveyed was 8.9%, but as you'd expect there's a wealth of detail in the 155-page report.
Inland Revenue’s conclusion is backed up by Treasury’s two Analytical Notes supporting its working paper Estimating the Distribution of Wealth in New Zealand. This used slightly different methodology to Inland Revenue and dates from 2018 as it was based on the Household Economic Survey carried out in that year.
Last week’s Sapere report was less conclusive on the matter. But all three major papers point to a significant difference in the effective tax rate between those on average earnings and the wealthy. Untaxed income mostly in the form of untaxed capital gains is the prime explanation for that difference. That should not be surprising because it is a longstanding feature of our tax system and similar issues exist in other tax systems.
(Incidentally, both Inland Revenue and Treasury referenced the Sapere report, so I suspect there were a few last-minute edits last week).
Taken together the three reports will however re-ignite the debate around whether New Zealand should adopt a capital gains tax.
There is an enormous amount to process across the four Inland Revenue and Treasury papers so here are a few stand out points for me beyond the headline.
Inland Revenue estimates that just 17% of the economic income of the survey group across the period 1 April 2015 to 31st March 2021 was from either personal taxable income or taxable trustee income as shown in the following table.
Treasury developed nine(!) effective average tax rate methodologies the most comprehensive of which included personal income tax, ACC levies, portfolio investment entity tax, local government rates on both the principal residence and any secondary homes plus GST. Notably the Sapere report didn’t include GST and also didn’t factor in local government rates.
350 individuals were sent information notices of which 325 or 93% responded. Inland Revenue told me and other analysts Wednesday morning it was “very happy” with this level of compliance. Apparently, it’s well above the 75% response typically seen for similar surveys.
The median total net worth was estimated to be $60.3 million in 2015, $86.4 million in 2018 and $106.1 million in 2021. The proportion of families worth more than $250 million more than doubled from 36, or 12%, in 2015 to 77, or 25%, in 2021.
Interestingly, Inland Revenue asked about significant gifts and inheritances (defined as more than $25,000) for each decade since 1970. The total reported was $411 million, nearly 75% of which was received after 2010. In the decade 2010-2020, 49 inheritances or gifts were disclosed, 11 of which were for amounts exceeding $5 million.
Measured by family, the average inheritance reported was $6.2 million, although the median value was $1.3 million (or an average Auckland property) so a relatively small number of quite large inheritances have skewed the data. Overall Inland Revenue estimated the total amount of inheritance reported for the 2015-2021 period reviewed represented 4.2% of the economic income over the period.
I am a little surprised by these inheritance details, they are lower than I would have expected. That might be explained by the fact that the median age of respondents is 68 with the mean age being 67. Given typical demographics it might therefore be another decade or more before significant wealth starts being distributed by inheritances.
The Inland Revenue project didn’t take into account any effect of the increase in the top personal income tax rate to 39% from 1st April 2021. On the median income of $268,000 that would have increased the average effective tax rate on taxable income to around 31.6%. On the other hand, because capital gains remain largely untaxed that would also probably have increased the gap between effective tax rates on economic income and taxable income.
In practical terms the Government, Inland Revenue and Treasury would almost certainly want to obtain clearer data about unrealised capital gains on a more frequent basis so that this effect can be better measured and tracked. On the other hand, as the conclusion to the Sapere report notes, there are considerable compliance costs for both Government and those surveyed of involved in obtaining and providing the information required to develop this more detailed understanding. Nevertheless, I expect we will see increased data collection as part of tax returns and perhaps better funding of the Household Economic Survey in the future.
Although the debate about capital gains tax will start up again, I agree with other analysts and political commentators that it won’t be part of an election campaign. On the other hand, we could see the trust tax rate rise to 39%, from 33%, in alignment with the top individual tax rate. This was something Inland Revenue recommended back in 2020 prior to increase to 39%. Other jurisdictions such as Australia, the United Kingdom and the United States align trust and individual rates.
Aside from that, based on these reports we can expect the fairness of the tax system to be a matter of furious debate between now and the election.
107 Comments
https://www.ird.govt.nz/property/buying-and-selling-residential-propert…
NZs capital gains Tax.
It's fair and protects the family home that you live in.
What more do you/they want?
(Expletive deleted, Ed. No need to lower the tone). These 'advisors' are foxes guarding the henhouse on tax collection.
Land Value Tax, universally applied is the only god damn way to raise these taxes. Capital Gains Tax will be abused with the infinite exceptions. It will only apply to people who are too poor or too stupid to not hire a lawyer/accountant to avoid CGT.
Literally just reimpose the financial restrictions of the Roosevelt Administration on financial laws, impose universal land value tax with NO exceptions except deferrence of payment for retirees until death on 1 property. Low administrative overhead, productivity incentive and great for collecting revenue.
You know what the rules are and they apply to everyone equally. You cannot willingly forgo owning your primary residence and then complain it's a tax disadvantage. It makes no sense to tax the primary residence, how would anyone ever relocate? Yes, they have it in some US states but then interest becomes tax deductible.
If we had central banks willing to defend the purchasing power of our currency then this would not be an issue. Globally interest rates need to be double what they are, it's kind of scandalous.
US taxes the primary residence in all states. There is an exemption for a gain up to 250k or 500k for a couple. Something similar could easily work here. Most would avoid any tax, but those with multimillion dollar mansions would be subject to tax if they have a large capital gain.
I have zero issues with someone building a business and gaining wealth from that. Or working and earning a high income. The majority would support that as it helps us all collectively.
But where the problem is that the majority of wealth in the last 10 years has been from speculation and tax-free capital gains that have been a net negative for the country. It's brutally unfair that someone who toils away 40 hours a week has to pay 39% of their income in tax whilst someone who has sat by and simply held onto an asset and benefited from its increased value, which is often due to the collective work of others, may not have to contribute to anywhere near the same degree.
Exactly. CGT is a long overdue tax. I am sure a better implementation would be to raise tax bands to help workers and implement CGT to raise the lost taxes. Would be a good spin for labour if they cam convince their own wealthy donors
Job done.
It wont impact peoples incentive to start businesses or invest in property. It will just add another necessary component in decision making. I am sure accountants will try to minimise payments.. but ird will win in the long run as rules geta adjusted and in the main people will end up paying immediately or retrospectively.
National Act and Top will whinge.. but thats their job as the people who would pay the most are their sponsors and mates.
So I made a loss on my houses recently, if its considered income do I get to claim it back? Am I entitled to a benefit since I made no money on paper this year? Of course not it doesn't effect me in the slightest I don't care if my house goes up or down in price its a place to live. I don't want house prices to go up, since I want the next generation (including my children) to be able to afford a place to live and I definitely don't want to pay extra tax because enough morons are willing to pay ridiculous prices for houses.
Yes we've had a number of years in the last 10 years where house prices went up at the same rate as the average annual income! (which has been completely insane).
Ultimately to the benefit of those asset holders and to the detriment of those who don't own assets.
I'd wait until this current housing down trend has bottomed (6 months of flat data) before introducing the policy. Last thing you would want is for asset owners to claim a year of significant losses in order to avoid paying future taxes. Strike at the maximum point of pain.
Spiteful - perhaps. But what has happened the last 10-20 years has been morally and in principle completely unacceptable for the financial and social cohesion/stability of the country. And if our property investors are as smart as what they tell us, and have made as much money via property investment as they claim, a bit more tax each year shouldn't be a problem. Can't lose with property so there should be plenty of money then to contribute a bit back to society.
And of course E46, the Government can manipulate capital gains with policy. And when you have 7% inflation (again due to incompetent Government), a corresponding 7% gain in the value of an asset is worthless. And I'd say horseshite to your comment about speculation, most of the ultra wealth have actually built businesses that provide goods and services to people who WANT AND PAY for them.
"It's brutally unfair that someone who toils away 40 hours a week has to pay 39% of their income in tax whilst someone who has sat by and simply held onto an asset and benefited from its increased value". No it's not. It's entirely fair. The someone working 40hrs a week hasn't risked anything. And the asset owner more than likely worked 80 hours a week for next to nothing for 30 years to get the asset into a position to generate the sort of value increase that has accrued. If they are unhappy to get taxed 39% vote for a Government that will cut taxes. Collective work of others? Don't bloody work for the business then. Go find something else to do. Collective = sharing of the misery.
No, it's not. The worker is expending time, which is the one thing we can't make more of. Meanwhile, an asset holder may be in their position simply by being born at the right place at the right time. You can see plenty of people here who mistake that for 'hard work' and aren't prepared to accept that people might be working longer hours for wages that buy far less - even though every objective statistic we have suggests that's the case.
Well said.
I have no doubt that some of the wealthiest have worked exceptionally hard to get where they are, but at the same time some of our wealthiest actually inheritted all that wealth and may not of worked a day in their lives to earn that wealth. Someone explain to me how its fair they get a free ride whilst someone who came from nothing has to pay up to 39%?
No one wants to admit it, but the plutocrats weren't the ones buying up rentals en masse and flipping them for an incidental gain. That's the middle inflicting pain on itself. Far easier to blame the 1%ers when everyday Kiwis just decided to get in on the rorts - that's what actually did the damage.
They get that ride because of the parents largesse. And it's fair that they should be able to take advantage of their parents hard work and risk taking. That's why parents take the risk. To build a better life for their FAMILY. Tell me why it's fair that some feckless oaf should get a free ride via a benefit that is paid for by those that actually pay net income tax?
What nonsense GV. What you are claiming is patrimonial capitalism. A theory by Piketty which has been entirely debunked. Asset holders in the main create the asset through risking capital, and expending their time, and most of the ultra rich have made themselves that way themselves. Those that don't take risks, get to be wage earners. And you make it sound awful that kids inherit their parents stuff. Sounds just like envy to me.
Dude I don't even like the capital gains tax. I don't think we should be taxing actual productive businesses which I actually agree with you there. Where I think it's gone wrong is the speculation on land which is a unique asset in the fact that nobody actually made it in the first place, It was already there, it will always be there. The value of land does go up with the collective work of others without the owner actually having to do anything themselves.
Which is why I am generally advocating for a Land value tax. Not on the property itself as that is the result of work and effort which deserves a profit and return, not on the business that sits upon it, just the land itself. I don't know why we keep coming back to capital gains tax but here we are.
"EVERYBODY WORKS BUT THE VACANT LOT"
I paid $3600. for this lot and will hold 'till 1 get $6000. The profit is unearned increment made possible by the presence of this community and enterprise of its people. I take the profit without earning it.- Henry George
OK E46, see what you are saying. My problem is that it is Government (both central and local) policy that helps that speculation along. So it is in the Governments best interest to create policy that will increase the tax take. How about the Government gets out of the market all together. Land would then sort it's own equilibrium price out.
The issue with land is it forms a natural monopoly. It isn't inherently compatible with capitalistic principles of competition as there is a limited supply of it. That why a land value tax has been called "the least bad" tax by economists like Milton Friedman. Lands natural equlibrium under our current system is activly harmful to the wider system and is holding us back.
And I'm not sure what you're are arguing for here. Do you want the government to stop collecting tax alltogether? Unfortunately we do require revenue and as such we need to collect tax from somewhere. And in my view the least bad and most efficent way of getting that revenue whilst shifting the tax burden off of incomes is a land value tax.
I don't really care so much about New Zealand buisness owners earning millions off productive buisnesses as long as they are actually generating real value rather than being dependent upon speculation rather and rent-seeking, speculation and rent-seeking harms the wider economy as a whole and is the main reason the economy is in the awful state it is today.
I started work at 16, stayed employed fulltime (+ OT+part time jobs etc) until 60, then part time till currently (67). Paid 15% interest on the 1st mge on my first home (& more % on the next 2 mges), paid for my own tertiary education in middle age, funded my parents super (as they funded my grandparents), paid far more tax to support other people's benefits & super as well as my own (never received any Govt money in my life till NZSuper),..
& through it all brought up 2 kids who stayed out of trouble, employed & contributing to NZ.
If everyone had the self awareness to look after their own lives & families as I have NZ would be a much better place to live in.
What was your point again ?
Perfectly said kiwikdznz! Don't take any notice of strauss, fully invested in socialist dogma!
When Comrade Parker announced this study did anyone think the outcome would be different? The results were predetermined as it is just massaging stats to achieve the outcome you want. State sponsored tall poppy syndrome! Parker is a very bitter and twisted man!
yeah yeah kiwikids,...lots of us have done all that, working, contributing, raising kids...done well etc...but have also enjoyed the socialism of volunteer ambulance...the socialism of free medical (thats not a capitalist idea, ask the USA)the socialism of a fairly level playing field. But thats not the world that we've created for our kids and their peers... we've had the debacles of right wingers Muldoon, Douglas, Richardson, Key and the ineffectual Labour entities setting up a conveyor belt up for asset holders and a slippery slide down for the rest. I found a 1983 newspaper In Wgtn last week, advertising for a mechanic $16k salary, next page a house in Wgtn for $32k. Two years wages. If we had done a half decent job as custodians of our future kiwis they could buy a house for $180k.
Any pretence that our contribution was valuable is wrong. We've made a hell mess of it...
by HW2 | 26th Apr 23, 2:53pm 1682477633
In the future there won't be any capital gains on residential property. As retired poppy and Ind Observer says its overpriced and falls are coming.
The only reason to want a Cgt is if you dont believe that.
False claim there HW2 - you've heard it here first that I believe at some point in the future house prices will rise again and when they do, then it would be a good idea to have DTI limits and a CGT in place for when that eventually occurs.
Will that be tomorrow that prices rise again, or next week or next month? Probably not. Next year...perhaps. Two years from now - I'd argue a pretty good case for that.
Does this destroy your argument that I think house prices only go one way? Or is it best, for your cognitive ease, to put me in a mental binary bin in your brain, where I only ever believe that house prices fall?
by HW2 | 26th Apr 23, 3:19pm 1682479147
Noted. Though RET POPPY says that houses are still overpriced/unaffordable, mind you he's been saying that the last 6 or 7 years
They most probably are overpriced/unaffordable - that is why banks aren't lending anywhere as much as what they were.
They were affordable at current prices when mortgage rates were dropped to 2-3% but that condition may never happen again in our lifetimes.
Until wage inflation is greater than consumer price inflation and interest rates drop a bit, and house prices drop a bit more as well, then I don't see prices rising.
When these above mentioned conditions correct themselves, which I think will be in the next 12-18 months, then yes I will be with you and be bullish on property prices (I'm only a perma bear on housing during the late stages of what appears to have been a bubble - but when the bubble has let is air out, I will be as bullish at what you always appear to be).
A slight change in topic but....perhaps the capital gains tax from property should be allocated directly into a public infrastructure fund to pay to upgrade/increase the capacity of all of the overwhelmed infrastructure we have around the country as a result of excessive immigration the last 10 years (roads, transport systems, hospitals etc).
Property prices have clearly benefited from this mass influx of people, and will probably do so in the future as well. So if people want to come here and buy houses, then part of that deal is to pay capital gains on your house to increase the government tax take to cover the incresae cost of looking after all of these additional people.
It would be one place to put the money. But the obvious place is to increase tax brackets for the working middle class earners who are getting squeezed badly. I am particularly thinking of professionals in their 20-40s who will be paying most the tax -> e.g. entry level engineers, doctors, nurses, etc - who we want and need to stay in NZ.
If we trimmed benefits for the bottom 20% and taxed the top 20% via CGT we could increase tax brackets by a substantial amount at the same time we are reducing house prices....
Those who are able but choose not to work should be drafted.
They don't need more money, they need to shift how that revenue is collected.
Take the burden off incomes and shift more of the load onto speculators and capital. Australia isn't looking for more capital from New Zealand they are looking for more educated workers, and we need to make New Zealand a more attractive location for those who workers just as Australia is doing.
Perhaps that's our problem - we've allowed people/trusts to store their capital in places that aren't that beneficial for the overall financial and social health of the nation as a whole.
(i.e. parking it in tax free property as opposed to taxable bonds, shares (dividends), term deposits)
But once again, a lot easier to move that capital when it isn't tied up in land.
I don't think we should be bringing in a capital gains tax as we do need capital in the country and it could have a lot of unintended side effects. but what we need is for that capital to be better allocated than it has been. And all it has been doing recently is being fed into speculative assets and making the country a worse place to live for those who actually do the work and keep things running.
Land Value tax seems like the least worse way of shifting this tax burden off incomes.
I would define educated workers as labour rather than capital. Countries like Australia are desperate for labour as opposed to capital currently.
If New Zealand had made itself a more attractive place to live for educated workers we wouldn't have this problem. Instead, we have chosen to tax them into the ground and extract exorbitant housing costs from them in the form of speculation and rent-seeking. Can't be surprised when the cattle choose another paddock when you tear up the social contract and make the basic fundamentals of life so unaffordable.
I suggest you could argue it both ways E46. From Mr Brown's perspective the suggestion that investing in a robust education system should then result in increasing the wealth of the nation. Thus you can see educated workers as capital. However like any investment, if other parts of the system are not designed to further buttress the investment, then that capital cannot work to produce the wealth desired. In this case the 'capital' is mobile, and cannot reasonably be stopped. Thus NZs investment is Australia's gain.
Destroying the middleclass and not allowing free markets to naturally correct themselves (using bogus monetary and fiscal policy) is also against the fundamental way of how capitalism should work.
That is state control of pricing to favour one group of people over another group of people. It is undemocratic and will ultimately result in financial and social anarchy unless the free market is allowed to remove the distortions it has caused.
Agree. And why are we not talking about the incredible wastage by government of our hard earned taxes! By all past governments but the current muppets have taken money wastage to a whole new level. Countless billions frittered away with nothing positive to show for it. And they want even more tax to fritter away!
thats pure nonsense I-O, any idea that there's ever been such a thing as a free market is flawed...markets exist in a world regulated by policy... it might be policy sympathetic to rich getting richer or even maintaining status quo...but its still regulated and not free. If it was free the gangs with guns would run the place instead of the gangs with assets. Its not a sterile economic equation but a vested interest quagmire with rules set by a particular faction on a particular day. Unfortunately NZ has sleepwalked into passing all the national and hard won gains to those with assets, and the more you have the more you capitalise.
So many loopholes. As I said somewhere else:
1. Grandma has an asset, sells it. Grandma dies and you inherit the estate.
2. Grandma has a property and dies so you inherit.
Tax applies to one and not the other, so inheritances will need to fall into the net. This will then be dead in the water when people realize that it's going to cost them sh*tloads and not just Other People.
Well said, to much dodging available. Hence a land tax paid quarterly is far simpler and better.
In your example Grandma while alive and owning, the possible future owner, or the next generation who inherits would all be due to pay the land tax. Every quarter. Until they sell it to someone else. Who takes over the responsibility of paying.
Yet homeowners have been able to leverage the gains to their benefit without paying any tax.
How many investors have utilized capital gains to use as equity to buy an investment property? How many have taken out loans to buy stuff like boats and cars by drawing equity out through the mortgage?
Just because it is outside of their control doesn't mean they haven't got any real tangible benefits from capital gains.
I don't see a capital gains tax on unrealized gains as the best solution. In my view, a Land Value tax would certainly go a long way toward making New Zealand a lot more equitable by shifting the burden off of incomes and onto capital.
If people want to get ahead it should be through hard work, not through speculation and luck. It's clear that income earners in New Zealand are getting sick of paying for everything and would like to see the tax burden shifted around to share the load more equally.
The ird report implied about $700k of tax paid (1.7 million cash income) by people with 7 million dollar property portfolios in 2021. If you take the 20% capital losses from 2022 that would mean their economic income was 1.7 million cash less 1.4 million capital losses = 300k economic income with 700k tax paid or an effective tax on economic income of 250% ?
I still argue the fairest tax is a FTT - effectively tax for use of the currency. And it could be nominally an order-of-magnitude smaller than current tax levels, with minimal effect on overall taxation (though distribution would change fairly drastically).
Then again, what happens if people decide to use alternative currencies? Have to have laws for that too I suppose (or ban them as tax evasion).
Two ways to make the tax regime somewhat equitable .
Those with assets of say $25 million to pay 2% of their asset value exceeding $25 mil, every year as Asset Tax.
The first $25000 of any type of income to be universally exempt from any tax.
Who will bell the cat ? National or Labour ? May be Greens ?
yep, agreed, after you have say 10 million, never mind 25 million, hell what do you really need, you can likely have an overseas trip anytime, a nice extreme boat and even a Tesla...so let just say once you're worth 10 million you pay a 10% wealth tax on the rest...man if 10 mil isnt enough to feed the consumption urge youre a pretty unwell puppy
"Last week’s Sapere report was less conclusive on the matter. But all three major papers point to a significant difference in the effective tax rate between those on average earnings and the wealthy. Untaxed income mostly in the form of untaxed capital gains is the prime explanation for that difference. That should not be surprising because it is a longstanding feature of our tax system and similar issues exist in other tax systems."
Above comment cut and pasted from one of the commenters above. I am not surprised the current govt. is surprised by the most recent report they received. Did we ever need to build 10,000 homes or for that matter some of the unneccessary expenditure over the last 5-6 yrs? No, so please no more new taxes.
The Sapere report was conclusive on one thing, the rich pay a higher percentage of income tax on their taxable income that anyone else does. But given our revenue ministers ideology, you won't hear that from him. Nor will you read an article by the pimply faced kids and leftists that make up most of our so called journalists today.
Its not that they need it as the issue. Its who is the better investor of that capital? The State or the clever dickie that made the cash in the first place.
Eg Mr Musk. OK, take away all his billions and then what? The capital he had to invest in great things has gone - handed over to incompetent govt workers who have no ability to invest wisely.
It's about who is the best person to manage capital.
The Greens wanted it to be as low as $1m; e.g. multiple rental owners in rural NZ would be exempt but owning an average debt-free home in Auckland would see you caught in the net. It wasn't about pragmatism, it was about fueling their lust for huge expansive government spending first and foremost
The fly in the ointment which most ignore is a change in the capital value of an asset (on which CGT is based) is just a theoretical change in the value of that asset. I'm sure most people would be able to recall instances where people claimed their house was worth a certain value, but had some difficulty realising that value at sale. In Stuff today there is an article about people who bought a dairy farm on the SI west coast for $2.8 Mil but failed to properly do their due diligence, and found that they should have paid a lot less. For the farmer, he realised his capital aspirations for the farm. For the new owners, theirs sunk like a lead balloon, and they lost a lot of money. How would the capital value on which a CGT would be based, be determined. There are many examples of people talking theirs up, Trump comes to mind.
What should be taxable is when any change in value is realised. For example when the asset is sold, or used as collateral to borrow against, or shares are sold. Until then, the 'value' of any asset is really nothing more than someones wish list or wet dream, neither of which should be taxable.
And the NZ public is being played like a fiddle...
Interest comments - broadly speaking, analytical debate!
An unknown but democratic % of ‘the rest” - those greedy rich buggers, vote labour, they’ll tax ‘em!
The Teletubbies in power would do less long term harm to our society.......
I'm all in favor of a CGT for all assets and adjusted for inflation (like the UK). And by all assets I include the family home as not doing so is massively distorting.
I owned a home and some rentals in the UK. The CGT I paid when I left to come back was trivial compared to gains. We need IRD / Treasury / interest.co.nz to run up a web page calculator so people can see that a well designed CGT really isn't much of an issue for anybody - including the mega wealthy. At present far too many people simply are NOT doing the maths and are letting their knee do the jerking.
I'd suggest given the proposal we had last time was going to include Kiwisaver, it would be an issue for literally everyone with a retirement scheme.
Remember, this was the proposal for Kiwisaver:
- - No tax-free entry (after-tax earnings only)
- - Taxed on the income earned (robbed of the benefits of the compounding benefits of the tax value of your entire working career
- - Tax on the capital gain on exit.
That's what we were going to get. You can hope for a well-designed scheme but we simply don't have the capability to design one, or a tax policy wonks just don't care. We can't even adjust our tax brackets more than once a decade, we should be instantly distrustful of attempts to drag new revenue into the net until they've proven they can run the system they already have.
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