High-earning New Zealanders moved nearly $6b income a year into trusts after the Government introduced a new 39 percent personal tax rate – but now Inland Revenue will chase it down
The Prime Minister promised no major new taxes in this Budget – and he didn’t need them.
New Zealanders will pay nearly $80 billion more in tax over the next four years, according to Treasury projections.
Three-quarters of that will be GST paid on more expensive food and other goods and services, and income tax as workers’ pay rises move them up into higher income tax brackets. Another $12b will be corporate taxes.
READ MORE: * ECE expansion, prescription changes in 'pragmatic' Budget * Budget 2023: Climate fund slashed by $800m * Budget 2023: Childcare relief slow to land for parents
But there are "not major" new taxes the Government hopes will somewhat address the stark discrepancy identified in an Inland Revenue report: that the country’s wealthiest households are paying half the effective tax rate of regular workers.
The Government has announced an increase to the trustees tax rate from 33 percent, to align it with the top personal tax rate of 39 percent on income over $180,000. It’s forecast to bring in an extra $350m a year to Crown coffers from next year.
From this July, the Government is also reinstating the $528m a year fuel excise and road user charges that were set aside at the start of the Ukraine war.
Digital accommodation and rideshare providers will begin paying GST in the coming year, at a projected $47m a year.
And from 2026/27 the Government will earn a comparatively paltry $25m a year from the rather clunkily named Global Anti-Base Erosion Tax Rules for New Zealand. That is a tax on large multi-national enterprises operating in New Zealand where their income, in either New Zealand or other countries where they operate, bears an effective tax rate below 15 percent.
Separate from the tax on multinationals, the Government is also working with the OECD to align taxation on overseas-based digital platforms like Google.
At the last election, Labour promised there would be no major new taxes. And even combined, these tax increases don’t constitute major new tax changes, the Finance Minister insists. “No, they don’t.”
In response to Newsroom questions, Grant Robertson says ministers had signalled they’d make changes to the trustee tax rate, if they saw people misusing the gap between the personal rate and the trustee rate.
“There is evidence that this has occurred,” he says. “It’s worth noting that Treasury and Inland Revenue recommended that we do this."
He says 78 percent of all trustee income is earned by the top 5 percent of trusts – that’s $13.3b out of $17.1b. “This is about a small group of New Zealanders paying a little more as a result of this."
The additional $350 million a year pales in comparison with the overall tax take, he says. It is by no means a “major new tax change”.
The trustee tax change was driven by the (not unexpected) discovery that when the 39 percent personal rate was introduced in 2021, high-income earners dodged it by making greater use of trusts.
Revenue Minister David Parker says there has been a massive 50 percent spike in income subject to the trustee rate, from $11.4 billion in the 2020 tax year to $17.1 billion in the 2021 tax year.
This week’s change will mean a small number of trusts – but a large quantity of money – will now incur an additional 6 percent in tax.
Parker says some taxpayers are circumventing the top personal rate, which reduced the progressivity and fairness of the income tax system.
“There is a large difference between the average tax rate ordinary New Zealanders pay on their full income compared to the super-wealthy. This change is this Budget’s response to that research,” he says.
"The report also shows that a substantial number of the super-wealthy funnel their income through trusts which minimises their tax bill. This change remedies that.”
The Budget Economic and Fiscal Update, prepared by the Treasury, says source deductions (mainly PAYE on wages and salaries) are forecast to grow at an average of $3.9b a year, predominantly because of wage growth and fiscal drag.
GST is expected to increase by $2.0b in the current year, mostly driven by higher private consumption owing to high inflation. Growth in GST revenue is then forecast to be lower, at an average of $1.7b a year.
This is mostly owing to the growth forecast for private consumption and residential investment weakening in the 2023/24 and 2024/25 years. The previous strong growth in corporate tax has slowed, the Treasury says.
And increased revenue from the 39 percent personal tax rate, capital expensing and the end of some of the Covid-19 tax-relief measures has been partially offset by weak forecasts for taxable profits in the current year.
From 2023/24 the forecast for firms’ net operating surplus is forecast to grow on average by 6.5 percent, contributing $1.6b a year to corporate tax revenue growth. Increasing interest rates have driven the growth in residents’ withholding tax on interest, expected to grow by $0.9b this year.
“Inflation is projected to keeping falling and be back inside the Reserve Bank’s target band of 1 to 3 percent late next year," said Robertson.
