Tom Pullar-Strecker: Our multibillion-dollar blind spot over rising business profits

Tuesday, 11 October 2022

Bank and power company profits hit the headlines in August, but profit trends in many industries are less easily observed.

Tom Pullar-Strecker is a senior business journalist at Stuff.

ANALYSIS: We know that business profits have been rising. How?

Well, the 28% company tax hasn’t changed since 2010. But the Government raised $19.9 billion from company tax in the year to the end of June.

That was 31% more than in 2019, the last full year before Covid, and 80% up on the $11.1b businesses paid in company tax in 2016.

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So where have profits been rising fastest?

NZ has a problem when it comes to talking about who is making money.

Is it among large businesses, those operating in certain industries, or those in particular regions such as provincial centres?

There are many reasons it would be useful to know that information.

Very large profits made year after year are evidence of economic inefficiency. They often signal a competition problem.

So information about where the biggest profits were being earnt, and whether they were rising or falling, could be helpful to the Commerce Commission, for example, in helping set its priorities.

As it stands, a commission spokesperson says its competition branch only gathers profit information from businesses if the sector they are operating in has been targeted for a market study.

“They don’t have a general power to require businesses to give profit information.”

Detailed information on trends in business profits (and losses) could also be useful for aspiring entrepreneurs, to figure out where there might be a gap in the market.

It could help agencies involved in economic development identify opportunities, as well as industries and regions that might be in need of support.

And when lobby groups complained members were doing it tough under this or that policy, it might help the public assess whether they had a point or were just whinging.

Listed businesses need to report their profits, so we do know, for example, that the profits of banks and power companies are large and rising fast.

But, unfortunately, trends in the profitability of private businesses, including New Zealand’s hundreds of thousands of small and medium-sized enterprises, sit in a blind spot.

Revenue Minister David Parker says there are limits to the information even he is able to receive.

The only organisation whose job it is to know the whole picture is Inland Revenue, which needs to know businesses’ profits in order to work out how much tax they should pay.

But it has always taken an extreme view of its responsibility to keep information confidential.

Former Revenue Minister Stuart Nash inexplicably reinforced that culture of secrecy in 2018.

Nash oversaw an amendment of the Tax Administration Act that instead of opening up Inland Revenue to modern levels of transparency, instead reduced the previously quite wide discretion that IR had (but was almost never willing to exercise) to release information when that was in the public interest.

Nash declined an invitation to respond to that criticism.

Current Revenue Minister David Parker says the confidentiality requirements of tax laws prevent him from “requesting or receiving information that would identify taxpayers, which is more likely the fewer players there are in a sector”.

“I am typically only informed of industries if it is pertinent to particular work being undertaken by the department,” he says.

An IR spokesperson says an increase in company profits in 2021 was broad-based, “not necessarily concentrated at the top”.

But that may be all we will find out.

Its spokesperson suggests there are “some anonymised statistics” that could be released, but says there would be an overhead in doing so.

“To make sure we maintain confidentiality, Inland Revenue staff have to physically check data to ensure releasing it doesn’t allow identification of people or organisations.

“This takes both time and resources.”

The Government did crack the mantle of secrecy surrounding anything to do with tax last year when it ordered Inland Revenue to conduct a survey of high wealth individuals, to find out how much tax they were paying.

That study has been controversial because it appears designed to lay the groundwork for the consideration of some sort of wealth tax, such as an inheritance tax, after the next election.

A study into trends in business profits would be much easier to conduct given IR already holds all the data and there would be no need for an additional survey.

It could help policy-makers decide whether there might be merit in following Australia and applying a discounted rate of company tax to small and medium-sized businesses.

But it would be helpful regardless of any particular policy agenda, simply to find out what was going on.

For now though, the bottom line when it comes to the question of what might be behind that multibillion-dollar rise in business profits, is that due to past decisions by ministers in the current Government, the public don’t actually have the right to know.