Taxed to death?

“Philosophy teaches a man that he can’t take it with him; taxes teach him he can’t leave it behind either.” (Mignon McLaughlin, US journalist)

In many countries this quote is very true.?Governments love to tax you when you work, when you play (think of all that GST you’re paying every time you’re out socialising), when you buy something, when you sell something, and in some cases even when you die.

It has been interesting to read press over the past few days where speculation has been rising that the New Zealand Government is going to look at introducing some form of death or inheritance tax.?This has been fuelled by an easily overlooked $5 million funding allocation in the 2021 Budget to Inland Revenue to review the income and wealth positions of high-net-worth individuals.?More fuel was added to this fire by the release this week of Inland Revenue’s 2021-2022 work programme, which states that the Department will undertake research “involving the collection of information on the level of tax paid by high wealth individuals”.?The usual political games have begun with the Opposition parties claiming that the Government is clearly gearing up for the introduction of death taxes, while Revenue Minister David Parker has denied Official Information Act requests about the subject, stating that no such material exists.

It is understandable why such speculation is increasing.? As outlined in Budget 2021, our mountain of Government debt will have risen to $184 billion by 2024, peaking at 48% of GDP in the process.?While the Reserve Bank has now signalled an end to its printing of money, there are no signs that we are going to return to Government surpluses any time before 2025.?This debt mountain will need to be paid back at some point.?As anyone running a household knows, in order to be able to start repaying debts your either have to cut costs (unlikely under this Government) or get more money in the door.?A new type of tax on accumulated wealth is an obvious way to boost the Government’s coffers.

So what is an inheritance or death tax (otherwise known as a “death duty”)??Put simply, an inheritance tax it is imposed on people who receive assets from the estate of someone who has died.?A variant on this is a death duty that can be imposed on a deceased estate before any distributions of estate property have been.?It is possible for both types of death taxes to be imposed.?Another option being speculated about is a so called “wealth tax”, which is a taxed levied on the assets of the living and calculated in accordance with your net worth.?So even before you shuffle off your mortal coil, your assets start attracting tax.

Inheritance taxes and wealth taxes are not a new or novel idea.?New Zealand started imposing inheritance taxes in 1866 and only finally reduced the rate of death duty to 0% in 1993.?While New Zealand has never had a wealth tax, Green Party policy in the 2020 election was to introduce one on the 6% of the population who own net assets of more than $1 million.?Globally both types of taxes are common.?A number of mainly European countries (Switzerland, Norway, Luxembourg, France, Italy and Germany are prime examples) impose wealth taxes.?Inheritance/death taxes exist in even more countries; the UK and the US both impose estate taxes, as do Korea and Japan.?

The Government has ruled out any new taxes in its current term and Minister Parker has stated that death and wealth taxes are not currently under consideration.?But if the Government is going to stick to its word about not imposing a capital gains tax while the Prime Minister leads the Labour Party, perhaps this could be seen as a palatable policy going into the 2023 election.?If the Government can’t tax your capital gains while you’re alive, perhaps they’re going to try and tax them when you die.?It's kind of like the famous gambling quote “the house always wins”.

And before any younger reader yawns and says “OK Boomer” (even though I am a proud member of Generation X) inheritance, death and wealth taxes will indeed be paid by the estates of many boomers.?While that will increase Government revenues and help pay down debt that future generations are being saddled with, it is yet more private wealth finding its way into Government hands, rather than passing to the children of the people who legitimately accumulated that wealth.?And make no mistake, there will be a lot of complexity and cost, and therefore a loss to the economy, in collecting it.?You can expect all sorts of estate planning activity to take place, gift duty would need to be re-introduced, the family trust (already a beloved vehicle in New Zealand) would become even more popular and lawyers and accountants up and down the country would be rolling in estate planning work.

So let’s watch with interest and see what happens.?Death and taxes for so much of history have been a happy couple.?They divorced in New Zealand in 1993 but it seems like a reconciliation may be on the cards!

Bruce Bernacchi

23 July 2021

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