IRD’s new high wealth individuals research project unleashed

Labour government’s quest to broaden the tax base?

Inland Revenue (IRD) last week issued information requests to 400 NZ high wealth individuals (HWI) identified as having wealth of at least $20 million.  These letters put those captured by these requests on notice they have been selected to participate in a government research project aimed at assessing their family unit’s wealth and accessing information about their wider business affairs.

What’s it all about?

This project is at the behest of the government to “fill a knowledge gap” about economic income and wealth, and effective tax rates in NZ to ensure that the tax system and future tax policy operates equitably.

While IRD targeting of HWI’s has been a constant audit focus, this new information gathering exercise has no precedent. To enable the current project, the Labour government urgently pushed through a legislative amendment, without public consultation, allowing them to demand information well beyond that which underpins a person’s actual taxable income, all in the name of setting tax policy. This legislation was rammed through (along with the 39% tax rate hike) without any due process.

Ultimately the outcome of this so-called research project will be “a report” due by June 2023, which will be made public.

What information is being sought?

This is extensive, yet also unclear where it will go.

Demands for information will be in phases, and canvass entities controlled, business interests, and HWI family unit specific financial and personal information covering a very lengthy 6 years, 2016-2021.

Who is behind this project?

A specific unit within the IRD has been established to undertake this HWI research project.

The initiative is driven by Revenue Minister David Parker who was a passionate advocate for introducing a capital gains tax – yes, the one recommended by the Cullen Tax Working Group but ruled out by Jacinda Ardern while she is Prime Minister.

Despite David Parker’s obsession with wealth inequality, he is on record stating he is not planning wealth or inheritance taxes with this initiative.

Where will this project go and should I be concerned?

  • The conclusions to this report are quite predictable.
  • The NZ effective tax rates of economic wealth and economic income are 0% which is a product of NZ having no specific capital gains tax or inheritance tax. This contrasts markedly from taxes on revenue-based assets and taxable income.
  • Such a report can only conclude that the effective tax rate of HWI persons relative to economic measures of total income is “disproportionately low”.
  • Will this conclusion be used for political purposing by Revenue Minister David Parker to broaden the country’s tax base?
  • The potential exists for this new project to be a trojan horse and provide another crack at a form of capital gains tax or wealth tax, or even, more prosaically, an attempt to find instances of avoiding the new HWI targeted 39% tax rate.
  • There are inherent underlying issues and flaws with a project that tackles economic wealth and income measurement:
    • economic income is unclear and nebulous;
    • asset appreciation over recent years has outstripped historic trends with unprecedented low
      interest rates;
    • market value movements in asset valuations can be volatile – for example, bitcoin investments can change in the blink of an eye;
    • it will be intriguing to see how IRD negotiate these tough measurement factors.

In summary, there is much to be concerned about with this HWI research project.

What should you do if you have received a letter from IRD?

VCFO is already assisting clients identified as HWI for this project. If you have received this IRD letter or know a HWI person who is worried about this, contact us at VCFO for an initial discussion about what this means and your options.