More insights from Inland Revenue’s High-wealth individuals research project.
Inland Revenue’s High-wealth individuals research project is arguably one of the most important pieces of research the department has undertaken in a long-time. The report’s headline conclusion that the average effective tax rate on the economic income of 311 of the wealthiest families in Aotearoa-New Zealand was just 9% reinforced long-held suspicions that the wealthy were not paying their fair share of tax.
One of the more interesting facets of the report was Chapter 15, which examined the impact of inheritances and gifts. As the report noted:
“In some countries, such as the UK, there is evidence that inherited wealth as a source of income has been increasing across generations, driven by a combination of increases in parental wealth and a reduction in the average number of siblings.”
But the report’s findings do not suggest that a similar pattern is happening here, yet. The findings do, however, potentially highlight a tax-driven behavioural pattern which is almost certainly set to continue without reform.
Inland Revenue requested from those surveyed an estimate for each decade from 1970 of the total nominal value of gifts and inheritances exceeding $25,000. The estimates included amounts received in trust distributions from testamentary trusts (i.e. trusts settled on the death of the donor) and from trusts settled by relatives.
Sixty-six family units (21% of the respondent group) declared a total of 91 inheritances or gifts (some families received more than one inheritance during the period under review). The total value of inheritances reported amounted to $411 million, nearly 75% of which was received after 2010. In the decade from 2010 to 2020, 49 gifts or inheritances were disclosed and eleven of these were for amounts over $5 million.
Although the average value of inheritances reported over the 50-year period surveyed was $6.2 million, the median value was much lower, at $1.3 million. As the report noted this indicates “that a relatively small number of quite large inheritances have skewed the distribution of the data.”
The report estimated the average inheritance for the six-year project period from 2015-2021 reviewed in detail was $6.7 million. Inland Revenue estimated the total amount of inheritances reported for the project period represented 4.2% of the economic income for the group which received inheritances.
(Source: Inland Revenue)
The rise in the value of inheritances could reflect wealth being passed down from older generations as they pass away. But they could also point to a glaring hole in Aotearoa-New Zealand’s tax base, the absence of estate and gift taxes. In fact, it is the absence of these combined with the lack of a comprehensive capital gains tax which makes our tax system so unique.
But that wasn’t always so. Estate and gift duties together with Land Tax were once very significant revenue sources for governments. Estate duties actually predate the introduction of income tax. Back in 1949 land tax together with estate and gift duties represented nearly £7 million or 5.3% of the government’s total tax revenue. That's the equivalent of $5.7 billion in 2022.
(Prepared by author from data in the New Zealand Yearbook 1950)
However, following the election of the First National Government in 1949 the revenue collected from these capital taxes began to decline as exemptions were greatly expanded much to the approval of National supporting farming and business interests. As the revenue from these sources declined, calls for their repeal increased on the basis that they raised little revenue but imposed significant compliance costs.
Land tax was eventually repealed with effect from 1 April 1992, and Estate Duty was no longer levied after 17th December 1992 before its final repeal in 1999. Gift duty lingered on until 1 October 2011. This pattern of powerful minority interests pressuring governments to reduce rates and/or increase exemptions leading to a decline in revenue -which then prompts calls for repeal because of inconsequential collections - largely explains the recent decline in the prevalence of wealth taxes across the OECD.
Here in Aotearoa-New Zealand the abolition of first Estate Duty and then Gift Duty might explain the rise in inheritances identified in the report. There is a noticeable rise in the value of inheritances being passed down from 1990 onwards, starting around the time estate duty was abolished. The rise in inheritance also seems to increase in the period after 2010, perhaps reflecting the final repeal of gift duty in 2011.
The publication of Inland Revenue’s report prompted calls for a wealth tax, which both the Green Party and Te Pati Māori have adopted as part of their election policies. But the reason wealth taxes have fallen out of favour throughout the OECD goes beyond pressure from self-interested groups. Threats to migrate if a wealth tax is introduced should not be taken lightly and there are real difficulties around valuing some assets and liabilities.
Instead, perhaps it’s time to go back to the past and reconsider the importance of Estate and Gift Duties not only as a means of addressing the concentration of wealth and reducing inequality, but also as a source of revenue. After all, if both Labour and National are committed to the tax principle of a “Broad Base, Low Rate” Estate and Gift Duties would help meet that objective and help fill the revenue gaps that keep popping up in their forecasted policies.
Terry Baucher is a tax expert specialising in cross-border tax, FBT, Inland Revenue audits and the sale and purchase of business assets.