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Back Home 5 News 5 IRD’s tax report stretches the definition of ‘income’ for the rich

IRD’s tax report stretches the definition of ‘income’ for the rich

5 May 2023

| Author: Graham Murray, Mathew McKay & Matthew Seddon

Inland Revenue last week released a long-expected report on its high-wealth individuals research project, which states that the median effective tax rate (ETR) for a high-wealth New Zealand family on its “economic income” is 8.9%.

While Revenue Minister David Parker has said there will be “no new tax policy or tax switch” arising from the report’s release, it “will provide a fundamental baseline for debate” on the tax system. The report brings into focus the importance of defining “income” when assessing a person’s ETR.


The genesis of the report can be traced back to 2020 when the government expanded Inland Revenue’s information-gathering powers for tax policy development. The government allocated $5 million in its 2021 budget to allow Inland Revenue to exercise its new power to conduct the research into ETRs for high-wealth New Zealand families.

Economic income

The report calculates the ETR for 311 high-wealth New Zealand families between 1 April 2015 to 31 March 2021. The calculation compares how much tax high-wealth families in New Zealand pay relative to their “economic income”.

Economic income is defined in the report to be an individual’s ability to consume goods or services, including both taxable and non-taxable sources of income. Economic income seeks to measure the increase in an individual’s economic resources during the period and includes realised and unrealised capital gains.

Key findings

High-net worth individuals are more likely to hold capital assets than other taxpayers, whether directly or indirectly. Defining the comparator as economic income (wider than what is currently taxed in New Zealand), the report concludes that the main source of untaxed “income” is realised and unrealised capital gains.

Around 80% of the median high-wealth New Zealand family’s economic income was said to comprise realised and unrealised capital gains. The report makes the following specific claim: “Failing to tax forms of income that are earned predominantly by those who are better off is likely to have an important impact in reducing the progressivity of the tax system and is also likely to impose other economic costs through influencing the pattern of investment in the economy.”

As a comparator to ETRs based on economic income, the report also calculates an ETR based on a high-wealth New Zealand family’s “personal taxable income”. It defines personal taxable income as income that is subject to tax under current law such as salary and wages, dividends and interest.

The report concludes that the median personal taxable income ETR was around 30% on a median taxable income for a high-wealth New Zealand family. The report makes the following claim in this regard: “This result shows that taxes on personal taxable income are progressive and that high-wealth families will generally have a relatively high ETR on personal taxable income.”

The report also identifies that 67% of the median high-wealth New Zealand family’s economic income was earned through trusts, either as trustee income or capital gains from trust assets. The current tax rate for trustee income is 33%.


Tax policy and reform may be the subject of increased discussion in light of this report, especially as 2023 is an election year.

While Parker announced there would be “no new tax policy or tax switch” arising from the release of the report, he noted that the report “will provide a fundamental baseline for debate on the fairness of our tax system, allowing future tax policy to be based on better data and more solid evidence”. The report brings into focus the importance of defining “income” when assessing a person’s ETR and the debate about what ought and ought not to be regarded as income.

The finding of a median 30% ETR on a high-wealth New Zealand family’s personal taxable income largely correlates with New Zealand’s progressive income tax rates. This suggests high-wealth New Zealand families are paying the required amount of income tax on income that is currently subject to tax in New Zealand.

The finding of a median ETR of 8.9% on economic income reflects the adoption of a broader base for calculating the ETR. Using economic income as a base is significant departure from the concept of taxable income under the Income Tax Act 2007, which does not include gains of a capital nature, subject to some exceptions, such as the bright-line test, the financial arrangements rules and the foreign investment fund rules.

Including unrealised capital gains within the income base is of particular note, as such ‘gains on paper’ may not ultimately materialise. Many taxpayers would not regard an unrealised increase in the value of their home or their business as having the same character as other accepted forms of income, such as salary, dividends and interest.

As far as we are aware, no jurisdiction imposes tax comprehensively on economic income as defined in the report. The last year also demonstrates that economic losses can be suffered by holders of capital. The report considers only the position of highwealth families. Any broadening of the tax base to include items of economic income would impact all holders of capital assets such as land and business assets, not just high-net worth families. ■

Graham Murray and Mathew McKay are partners and Matthew Seddon is a lawyer at Bell Gully ■

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