Pay Less Tax

Pay Less Tax

Joseph Darby

How to minimise taxes like a rich-lister

In her day, billionaire hotelier Leona Helmsley was as famous as Kim Kardashian, and once said “only little people pay taxes.”

Helmsley’s notorious remark came to mind as tax is back in the headlines. The latest headline-grabbing claim is that wealthy Kiwis aren’t paying their fair share of income tax.

A closer look tells a more balanced story: the methodology in the report in question is unorthodox at best or flawed at worst.

The Latest Report’s “Economic Income”

It takes a little concentration to understand what happened here, the main finding from the 155-page report makes for great headlines, though the key to understanding the conclusion was to see the report-writers used the term “economic income.”

To determine their findings, the researchers included income from salary or wages, as well as the rise in asset values for businesses, property, and other assets to form a total figure they classed as “economic income”. Economic income is a legitimate term used by economists though this latest report has been met with disdain in most financial circles because:

  • Put kindly, this is ‘creative accounting’. Income is already clearly defined by well-established and internationally agreed accounting practices. Income is quite different to the capital gain (increase in value) of an asset such as a house, farm, or shareholding in a business.
  • “Economic income” isn’t used as the basis for tax in any country we’re aware of. Probably as it’s nearly impossible to determine; most small and mid-sized businesses cannot be valued until a willing buyer is found and they are sold.
  • Assets can have significant fluctuations in value, which could have all sorts of implications if this method were used to calculate tax. Based on the methodology in the latest report, it would be like suggesting a homeowner in a period of rapidly rising house prices has made piles of ‘income’ and should therefore sell their house to have the cash to pay a large proportion of the proceeds to the government as taxes. Conversely, if house prices were to drop, would all homeowners who experienced ‘negative economic income’ be getting a big juicy tax refund from the government on an unrealised loss in capital value? Instead of using this figure, nearly all governments, including the United States, Australia, and New Zealand, tax people based on realised income like wages, interest, dividends, and capital gains after the sale of assets (in New Zealand, this capital gains tax on property is the bright line test).

So, the report confused the definition of income, made measurements at a time when property values were shooting up in price, then concluded wealthy New Zealanders are paying less tax than most Kiwis.

Tax Minimisation Versus Tax Evasion

Despite a few sensational headlines, the wealthiest New Zealanders are paying what they’re legally required to. The report had zero suggestion any of them had broken the law.

The simple truth is the reason for the richest New Zealanders’ tax rates being so low by this measure is mostly a rather unimaginative (and perfectly legal) tax minimisation strategy available to everyone, including everyday New Zealanders.

Tax Evasion is Bad

If Leona Helmsley’s quote at the top of this page annoyed you, then rest easy knowing she later was convicted and jailed for tax evasion!

Tax Minimisation

So, while tax avoidance strategies might exist for the rich, this report mostly demonstrates the simplest tax strategy is so easy anyone could do it. More on that soon, but first...

Time for More Tax?

Despite wonky research methodology, it may be this report is a reasonable attempt to holistically help develop an evidence-based tax system. At any rate, the report’s findings are expected to trigger a debate about tax reform – and may have been conducted in the first place to increase public appetite for taxes such as a capital gains tax (on top of the Brightline test), wealth tax, or inheritance tax. If any such taxes were to occur, it would likely have a host of unexpected consequences – many homes in the major centres cost a million dollars, so does that mean the average Kiwi family homeowner is now classed as wealthy and should pay capital gains tax on the family home? What about a capital gains tax on KiwiSaver fund balances?

There is also potential to divide New Zealand society, pitching homeowners against non-homeowners, or older against younger generations.

For context when it comes to tax, it’s important to have a full picture. In our country that includes fully exploring the income redistribution embedded in our current tax and welfare system. This generally benefits the most vulnerable in society and reduces the effective tax rates payable by lower income earners. A great example of this is Working for Families Tax Credits, which means families with two kids, either with a single earner making $60,000, or two earners making $65,000 between them, pay no net tax. The amount they receive through Working for Families Tax Credits matches the amount they pay in income tax on their earnings. So, they’re on a 0% net tax rate. Add in a few other taxpayer-funded benefits, such as subsidised early childhood care, and soon you could say this young family is a net receiver of tax. We’re not saying there’s anything necessarily wrong with this, just highlighting that any tax matters should compare ‘apples with apples’.

Let’s also keep in mind the majority of the truly wealthy among us are the ones creating great opportunities, are employing people, funding medical breakthroughs which might benefit us all, paying GST, creating new companies, innovating, paying company tax and other taxes, inventing, and so on. Most of these actions are true value-add activities which grow genuine wealth – as a country, we cannot tax ourselves to riches.

In any case, opinions on what a “fair” tax system looks like differs to us all, probably along a spectrum between the differing viewpoints of:

  • Some might argue the wealthy should pay tax at a higher rate than others – they can probably afford to, after all.
  • Others might suggest it would be fairer if we each paid the same flat dollar amount to support our schools, hospitals and police in a model that might be called user pays.

Expert Opinion

As you might hope, tax experts have also weighed in. Robin Oliver from tax advisory company OliverShaw has pointed out we haven’t learned much with this latest report – everyone knows properties and other assets shot up in value over the five or so years during the study measurement period. Oliver then said of our tax code “… the general consensus is it’s a simple system, relatively, it raises a lot of money efficiently that the government can spend on houses, schools, and what have you, it works... and it’s also relatively fair.”

You might also point out that – just like a household or business budget – you can’t look at government income (taxation) in isolation without looking at the other side of the same coin: spending. Just like a household balancing the books, continued borrowing to fund routine expenditure can only end badly and that is what we taxpayers – via our elected representatives in the government – have chosen to do for several years now!

What Do Taxes Encourage?

You might have heard us say before that many of New Zealand’s current taxes are designed to adjust our behaviour. Consider:

  1. Heavy taxes on tobacco discourage smoking
  2. Taxes on alcohol discourage drinking
  3. Petrol taxes encourage us to use public transport, bicycles, and electric vehicles

Sometimes these are called sin taxes.

So, would taxes on wealth or capital gains encourage us to spend more and save or invest less? If so, surely that’s not in the best long-term interests of the country?

Behavioural Responses to Higher Taxes

Whatever your philosophical thoughts on the tax system, it’s always most important to focus on what you can control. In this case, that probably means living and investing in a tax-efficient way.

While this report does not signal a radical change in the New Zealand tax system, if there were to be such a change there will be some “behavioural response” by the wealthiest among us. In many cases, you can already do the same - which might include some of the basic approaches below, noting that the wealthiest Kiwis have a few more options available to them too!

PIE Funds

Even for top earners and trusts, Portfolio Investment Entities (PIE) structured funds have a maximum tax rate of 28 percent on any income earned within them.

What is a PIE fund? – you’re probably already invested in one, all KiwiSaver Schemes are structured as PIE funds. “Unlocked” PIE funds are available outside of KiwiSaver too – in other words you can get your money out more easily, as it’s not restricted by tight KiwiSaver withdrawal criteria.

Invest for Long-Term Capital Gains in Growth Assets That Pay Little or No Income

This is the tried and tested approach favoured by most billionaires the world over. Once your income needs are met, with plenty of surplus to be safe, this might include investing in:

  • Buying shares in growing companies that pay little or no dividends.
  • Property investment – the traditional ‘Kiwi favourite’ which provides income via rent and usually results in a capital gain too.
  • Your own business or side hustle. The income you earn is taxed, though the capital gain won’t currently be.

Borrow to Invest

This isn’t common for investments like shares but is very common for property investment and small-and-large business owners alike.

As a general guideline, any interest on a loan taken out to invest is tax deductible. Such a tax deduction reduces income.

Even if it’s a tradie buying a work ute – the interest and any fees on the loan should all be tax deductible.

Spend Less

This might sound ridiculous but hear us out! One of the main reasons the wealthy pay less tax as a percentage of their wealth is they pay a lot less of the so-called “sin taxes” mentioned earlier. Most successful (and wealthy) people aren’t heavy drinkers or smokers.

Unfortunate as it is, the sin taxes, and taxes like GST actually hurt lower- and middle-income earners the most. Lower- and middle-income earners or families need to spend more as a percentage of their earnings on things like transportation, and GST on necessities like food.

So, if you want to pay less tax, try spending less – you’ll save 15% GST on every purchase, and possibly a lot more depending on what you’re purchasing!


The best and brightest among us generally also have the best international opportunities – they can relocate to any friendly jurisdiction worldwide. Heck, right now there’s reports of plenty of low-income Kiwis heading to Australia in droves.

The reason tax rules are the way they are is that if you really hit the rich hard with more taxes, they will shut up shop and take their hard-fought dollars to keep doing business somewhere more favourable. If that happens, it will mean less dollars invested in New Zealand companies, less New Zealand-based research and development, less New Zealand- based innovation, less jobs, and so on.

The Bottom Line – Pay Tax like a Rich Lister

As dull as it may sound, the simplest way to minimise taxes is to buy investments then hold them for a long, long, time. Famous billionaire investor Warren Buffett is famous for saying in relation to investment assets that “our favourite holding period is forever.” Here at Become Wealth, we agree.

Not only is this a great investing strategy, it’s also the best way to minimise taxes.

While seeing a good accountant is the best way to learn more about anything mentioned above, if you would like to arrange a complimentary initial consultation with one of our financial advisers – who in this case are more focused on investing than taxation – then just reach out to us to book your complimentary initial consultation.

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