IR certain to find wealthiest Kiwis pay low effective tax rate, experts say

Saturday, 11 December 2021

Revenue Minister David Parker faces taxing questions over IR's wealth study at a select committee in July.

Inland Revenue will inevitably find that the country’s wealthiest people pay a relatively low rate of tax on their income after it asks them to provide details on their financial affairs next year, tax experts say.

But there is no evidence yet that a threatened legal challenge to the research by rich-listers has got off the ground.

The Government allocated $5 million to IR in the Budget to study the financial affairs of high-wealth individuals, using new powers that were included in legislation that was passed under urgency last year.

Some assume the research could pave the way for the consideration of tax reforms, potentially including a wealth tax, such as an inheritance tax.

* Inland Revenue tells wealthiest NZers questions are coming

* Why Labour may propose an inheritance tax

* Revenue minister David Parker clashes with National on death and taxes

‘Just a night on the town’ is how one multimillionaire described a potential $15,000 fine for failure to comply with requests for information by Inland Revenue.

In January, IR is expected to require about 400 New Zealanders who it believes have a net worth above $20 million to provide it with details of their assets and income over the past five years.

An IR spokeswoman has previously confirmed the work should shed light on issues including the amount of inherited wealth.

John Cuthbertson, New Zealand tax leader at Chartered Accountants Australia and New Zealand (Caanz), gave qualified support for the research project.

“In the past, we and others have criticised IR for not having evidence or fact-based data around some suggested changes,” he said.

“If we're going to call someone out on that, then you've got to support the ability for them to meaningfully collect the information to put something together progressively for the future.”

But Cuthbertson said he had reservations concerning the way in which the findings of the study might be presented.

Inland Revenue commissioner Naomi Ferguson says the data on the wealthy is being collected so it can observe “stewardship level trends” in the tax system.

It was certain that the research would show wealthy individuals were paying a low effective tax rate, given that New Zealanders were only taxed on assets when they sold them and that asset prices had risen sharply during the Covid pandemic, he said.

“I think there is a risk this ends up being a bit of a beat-up,” he said.

“Everyone is paying a relatively low tax rate if you look at the unrealised gains on homes and shares and other things.”

The research study has prompted chatter about a possible legal challenge from some of the individuals who are being required to provide information to IR.

But that has not so far transpired.

An IR spokeswoman said on Friday that it was not aware of any papers being served.

Geof Nightingale, a tax partner at consult PwC, said he believed there was still a “reasonable prospect” of a challenge.

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He had some sympathy with critics of the study, describing it as “outrageous” that the legislation allowing the information-gathering exercise had been included in other measures that were rushed through parliament under urgency, when he believed it warranted fuller consideration.

But he said any legal challenge could only delay the research and could not prevent it.

The ‘best’ outcome of a judicial review might be a ruling that the way IR had applied its power to compel wealthy people to supply information was flawed and that process would need to be redesigned, he said.

“It won't overturn that power.”

Nightingale agreed a challenge could also backfire, by reinforcing suspicions wealthy individuals might have secrets to hide.

Sir Michael Cullen’s Tax Working Group was specifically instructed by the Government not to consider the rights or wrongs of an inheritance tax.

“Maybe that’s in their minds.

“I haven't seen a challenge emerge yet. There has been a lot of talk about it; there are a lot of lawyers talking to people, but I haven't seen one firm up yet,” he said.

Nightingale said it would have been better if IR had hired a “third party” to source the information from wealthy New Zealanders and anonymise it before passing it on to Inland Revenue.

But he agreed the use of an intermediary could have raised separate privacy issues, and that IR had a strong reputation for maintaining the confidentiality of taxpayer information.

“They are highly professional, but don't ask one of the 400 people who have got this questionnaire how they feel about it.”

Consigning the study to an intermediary would also have raised questions about how IR would have been able to enforce its requirement that participants provide truthful responses to the survey.

IR commissioner Naomi Ferguson confirmed that the personal and financial information IR was seeking could not be disclosed to other tax authorities overseas under tax treaty agreements.

Rather, it was being collated by IR so it could observe “stewardship level trends” in the tax system, she said.

Nightingale was a member of Sir Michael Cullen’s Tax Working Group and – like Caanz – supported its key recommendation in 2019 for a comprehensive capital gains tax (CGT).

That was subsequently ruled out by Jacinda Ardern for the entirety of her time in office, but she did not rule out ever campaigning for an inheritance tax or other wealth tax.

Despite his support for a comprehensive CGT, Nightingale expressed concern that the results of the IR study could be politicised, noting the department was due to present its findings in June 2023, shortly before the next election would need to take place.

He agreed with Cuthbertson that it was inevitable the research would show the wealthy paid low effective tax rates, and said it would be more helpful if it shed light on how wealth was distributed and the source of that wealth – which he agreed it might also do.

Nightingale believed Revenue Minister David Parker was supportive of broadening the tax base, which Cuthbertson said was currently unusually heavily focussed in New Zealand on personal income tax “and to a lesser extent on gst and company tax”.

Parker would personally support both a capital gains tax and an inheritance tax, Nightingale believed, describing the minister as “passionate” about the topic.

“I understand why, and I don't even necessarily disagree with his views, but we have processes in New Zealand and we do most of our tax and policy work through collaboration and cooperation and this doesn't feel like that at all,” he said.

Nightingale agreed work IR was doing in the area of tax and the wealthy would always be adversarial, but said the Government would be on “higher moral ground” if it had subjected IR’s new information-gathering powers to select committee scrutiny.

Parker has dismissed suggestions the IR research project is heading towards a foregone tax policy conclusion, saying in July that he was “not planning a wealth, inheritance or death tax”.