Why NZ millionaires pay lower tax rate than income earners

The wealthiest Kiwis pay 12 per cent of their total income in tax on average, according to research from Inland Revenue and Treasury, Stuff can reveal.

The same research found 42 per cent of the wealthiest Kiwis were paying lower tax rates than the lowest tax rate paid by people who earn their money from an ordinary job or a benefit. That compares with an effective tax rate of about 16-18 per cent on New Zealanders earning the median income from salaries and wages of $55,000-$60,000.

An effective tax rate is the percentage of total tax a person pays measured against their total income. This differs from marginal tax rates, such as income tax brackets or flat tax rates such as company tax or GST.

According to Treasury, 42 per cent of high wealth individuals (HWIs) pay less than 10 per cent of their total income in tax. That is lower than the lowest income tax rate which is 10.5 per cent, which income earners pay on income up to $14,000.

The reason for the disparity between New Zealand’s wealthiest people and regular salary and wage earners is that the wealthiest tend to earn a large part of their income in parts of the economy that are either taxed lightly or not taxed at all.

The figures come from a sample of HWIs analysed by Treasury and IRD. Generally, IRD defines an HWI as a person or a family who control wealth greater than $50 million. The Treasury paper in question did not specify what it meant by an HWI because it wanted to focus on anyone who might fall into the top 10 and 1 per cent of New Zealanders by wealth.

The research looked at ‘‘economic income’’ which ‘‘is a broader concept than taxable income and includes, for example, capital gains’’. In New Zealand, economic income, as opposed to ‘‘taxable

Treasury

income’’, which is defined in legislation, is not a concept used in tax law. Treasury noted that the 42 per cent of HWIs paying less than 10 per cent of their economic incomes in tax were paying at a rate ‘‘lower than the statutory tax rate’’. The paper warned this ‘‘could be due to the source of income earned (for example, capital gains), the use of imputation credits, or the use of loss carry forwards’’. ‘‘As nearly 80 per cent of the tax paid by these HWIs was corporate tax, the timing of imputation credits and loss carry forwards is likely to explain the large variability in effective rates,’’ Treasury said.

The research comes from a Treasury paper delivered to Finance Minister Grant Robertson, Associate Finance Minister David Parker, and then Revenue Minister Stuart Nash in August last year. Parker has since become Revenue Minister.

According to Treasury, Parker had requested ‘‘improved estimates of the distribution of wealth in New Zealand’’. Currently, data on wealth comes from the Household Economic Survey (HES), from Stats NZ. It is conducted every three years by the Government statistician and is regarded as an accurate estimate of the wealth of most households.

However the HES is much less accurate at estimating the position of HWIs, particularly the top 1 per cent. The number of HWIs is too small to be accurately captured in surveys and there is suspicion some under-report their wealth when asked. Treasury says that, practically, the HES is only useful for households whose wealth is below $50m.

Treasury was reporting back to Parker on two ‘‘experimental methods’’ to better calculate the wealth of rich people.

The data also looked at where the super wealthy stored their wealth. It found the top 1 per cent had 11 per cent of the country’s wealth in owner-occupied housing. The data did not strip out how many of New Zealand’s investment properties were in the hands of the top 1 per cent.

42 per cent of high wealth individuals pay less than 10 per cent of their total income in tax.