By Terry Baucher*
Does the news that the Tax Working Group’s interim report due very shortly won’t specifically recommend a capital gains tax (CGT) mean it will be the fifth such group in the past 50 years to have considered the issue before concluding “Yeah, nah”?
Not yet. Firstly, this is an interim report which is intended to invite further commentary on the TWG’s initial proposals. This is broadly similar to the process followed by the McLeod Tax Review in 2001. My understanding is that the interim report will analyse in some detail not only the merits or otherwise of a CGT but also how it might work in practice. It will probably be the most comprehensive review of the issues around CGT since the Consultative Document on the Taxation of Income from Capital in 1990.
Although the issue of CGT is dominating attention, the TWG has a very wide brief and its interim report will examine other issues such as the overall design and fairness of the tax system, environmental taxes, the taxation of savings, GST exemptions for particular goods, the taxation of companies and multinationals, the possibility of a land tax and taxpayer rights in dealing with Inland Revenue. The resulting report will be substantial and is probably likely to run to over 200 pages. Yet, for all that the focus will be on the TWG’s proposals around the taxation of capital.
Rather like Banquo’s Ghost the issue of CGT has been an unwelcome guest for every tax review over the past fifty years. During that time the debate over CGT has developed a Groundhog Day quality to it. Every few years a review of New Zealand’s tax system is announced. Some months later, after due deliberation, a report is released which includes passages summarising the pros and cons of a CGT before concluding, somewhat reluctantly, it is not appropriate.
In between each review a major change is introduced widening the scope of income tax to include transactions previously treated as exempt capital gains. These legislative changes essentially undermine the previous review’s reasoning against a CGT. At frequent intervals, international organisations such as the OECD and the IMF will call for a CGT to address imbalances in New Zealand’s economy around housing and saving. The IMF’s recommendation in March 2017 for a CGT was just the latest such instance.
Meantime, as if thumbing their noses at each tax review’s arguments against a CGT, the list of countries introducing capital gains tax legislation grows: Canada in 1972, Australia in 1985 and South Africa in 2001.
This rather pusillanimous pattern began with the Ross Committee in 1967 which after declaring “On grounds of equity there is strong justification for taxing realised capital gains,” concluded “we have finally decided against such a recommendation”. The Ross Committee was followed in 1982 by the McCaw Task Force, which opined “The Task Force considers that failure to tax real capital gains is inequitable in principle, and is seen by many to be so.” Ultimately, the McCaw Task Force was “not convinced of the need for a separate capital gains tax, does not propose its introduction, even though capital gains are being made by some which should in principle be taxed.”
The McLeod Tax Review in 2001 detemined “New Zealand should not adopt a general realisation-based capital gains tax. We believe that such a tax would not necessarily make our tax system fairer and more efficient.” It then proceeded to hedge its bets by adding; “Nevertheless, we also remain of the view that the absence of a tax on capital gains does create tensions and problems in specific areas.”
In 2010 it was the turn of the Victoria University of Wellington Tax Working Group. In time-honoured fashion its report concluded:
“The most comprehensive option for base-broadening with respect to the taxation of capital is to introduce a comprehensive capital gains tax (CGT). While some view this as a viable option for base-broadening, most members of the TWG have significant concerns over the practical challenges arising from a comprehensive CGT and the potential distortions and other efficiency implications that may arise from a partial CGT.”
And yet, despite all this previous consideration and rejection, another tax review finds itself confronting the CGT issue anew. There are several key factors as to why this pattern endures but three merit closer review.
Firstly, in the absence of a comprehensive CGT, there is presently no clear legislative framework to deal with the taxation of capital gains in general and the arrival of completely new asset classes such as cryptocurrencies like Bitcoin. This results in confusing uncertainty as some taxpayers report gains as income whilst others treat the gains as tax free. Although issues still arise in other jurisdictions with capital gains regimes, investors know that returns will be taxed either as income or under the relevant CGT regime.
By contrast investors in cryptocurrencies are presently unsure about whether gains are taxable or exempt. This all-or-nothing approach understandably tempts investors to treat gains as tax free sometimes on the most dubious of grounds. Even though the bright-line test relating to sales of residential property has been law now for almost three years, there appears to be widespread non-compliance.
Secondly, as every tax review has acknowledged to varying degrees, the present tax treatment of capital is inequitable and creates unfairness. Differing tax treatment applies to different classes of assets leading to what the 2010 review called ‘incoherence’. The TWG’s brief includes reviewing the overall fairness of the system and in this regard the background issues paper noted that “real property held for more than two years (soon to be five) is undertaxed relative to other investments when there are capital gains”. Since peaking at 73.8 % in 1991 home ownership has fallen steadily to 63.2% in 2016. This means those substantial untaxed capital gains are being derived by fewer people.
Separate from the issue about unfair tax treatment the TWG is also considering the issue of wealth inequality. A background paper on the taxation of capital Income and wealth commented:
“Something that may not have been given enough attention in the discussion until recently has been that wealth ownership has a very skewed distribution, and reducing the tax on capital income may have contributed an increasing level of inequality in many developed countries in recent years.”
This combination of growing wealth inequality and favoured tax treatment for some assets, most notably property, means that the issue of a CGT is unlilkely to fade away even if the TWG decides not to recommend it. At some point the nettle must be grasped either through a comprehensive CGT or some other tax such as a land tax.
Finally there is plain simple self-interest. Not just of groups such as the NZ Property Investors Federation but of our elected representatives. As Thomas Coughlan pointed out earlier this week currently 113 MPs own 306 properties between them or an average of 2.6 each. At a time of falling home ownership only seven MPs do not own any property meaning property owners are greatly over-represented in Parliament. Even if the TWG does recommend a CGT, getting it into law will require a large number of MPs to decide their self-interest in getting re-elected outweighs their pecuniary self-interest.
We’ll know in a few days whether the present TWG is proposing to break the pattern of fifty years or whether we’ll find ourselves re-hashing the same arguments in 10 years time. I’m hopeful that we will see the TWG signal a change of approach, either in the form of a CGT or some other mechanism such as a land tax. For now it’s a question of wait and see.
*Terry Baucher is a tax consultant and director of Baucher Consulting Limited a specialist tax consultancy. He is the co-author with Deborah Russell MP of Tax and Fairness published in 2017 by Bridget Williams Books and parts of which have been reproduced here.
45 Comments
It's a surprise to me that a CGT may not be recommended ! I believe a CGT needs to be applied to all Capital gains. Talks of a CGT just on property investment always looked like an envy tax but if we had no exceptions like the family home then everyone would have skin in the game. A full CGT covers all capital gains housing ,farms businesses everything. Form overseas studies it can be set at a relatively modest rate ( 7.5%) and generates enormous returns. If NZ is to change it's culture to more productive investment then it is needed !
CGT on the family home is only reasonable if you allow for them to swap like for like without tax, and in some cases be able to hold cash from a sale in waiting for a purchase without having to pay tax. This is very complex to enforce and so exempting the family home is the easy win.
Both points are very real issues. The question is to how to best sort out a good overall solution instead of just dismissing the concept completely.
The issue of taxing inflationary gains is already an issue. Look at the taxation of interest earnings. I remember earning 9% on a term deposit... well, okay, 9% before tax. At the time inflation was a bit higher than it is currently. Some of that 9% interest was illusory as it was just keeping the return ahead of inflation, but I was still taxed on the total interest rather than the interest above inflation.
I am still a fan of no exemption CGT, even with owning a home that is now worth 7 digits due to silly gains.
If you really need to put some form of exemption, maybe the US variant might be in order, where if you lived in the house for the majority of the prior 5 years, you get to exempt $250k of the capital gains if you sold it. In some locations in the US, you could also sell and then buy an equivalent or higher price home without realizing the capital gains. I'm uncertain as to whether these are beneficial in the larger picture.
I would be happy to have the CGT on the family home to be indexed by inflation, where only gains in excess of inflation get taxed for the family home.
A couple of points relating to CGT .
Firstly; The asset class most commonly referred to when discussing a CGT (especially with some passion relating to fairness) is residential investment properties due to the recent rapid increases in the housing market over the past decade. Yes, CGT applies to other equities such as share trading and businesses.
So for those blinded in anger by those who have made substantial CG on properties over the past decade, and are crying out for a CGT in terms of fairness, consideration needs to be taken about the following:
The worst time to introduce a CGT is at the end of boom period (and I think that this was argued by John Key - yeah; hate, hate, hate). Arguably, as a tax is not retrospective, any CG would be taken on the value of the property on the date the law was enacted. So for the considerable CG over the past decade CG are unlikely to be subject to a CGT tax. So what of the immediate future; given that the outlook of the housing market at best being relatively flat with a risk of a some correction, then any CGT in the immediate future is likely to be relatively small, and quite possibly where there is a demonstrable loss then a tax credit. I am sure that any anecdotal situations relating to the later situation would cause considerable ire to those baying for a CGT on property investors.
Personally, given the potential risks to economic stability and social factors associated with significant sustained CG as witnessed over the past decade, along with the RBNZ LVRs and the bright line test, I don't think that we are likely to see a similar such event in the future.
In short, the introduction of a CGT now is akin to shutting the door after the horse has bolted.
Secondly; while a business may make a capital gain, equally there are many, many small businesses especially which make capital losses. Do those who argue for a CGT fully appreciate that taxpayers would be essentially underwriting a third (tax credits) of businesses - and share traders - making a capital loss. Yeah - it annoys me that Gareth Morgan walked away with many millions in CG on the sale of Trade Me.
But that is envy, and that is the underlying reason why many argue for a CGT.
I disagree.
I also advocate that the implementation of a CGT should be absolute, and that any sale should have the full capital gains taxed, regardless of the purchase date. Yes, that would stick me with more than $200k of gains that would be taxed if I sold tomorrow. That is as it should be. I received a large capital gain, and it should be considered as income. My advocation for a comprehensive CGT isn't envy, it is instead about fairness.
Given that Labour excluded a tax on the family home or land under it, whatever the Tax Working Grop comes up with will have to fall disproportionately on investors and businesses. Multiple property owners should be backing the TOP proposal over this as it requires all asset owners to be treated equally.
The TOP stance is a bit of about face as Gareth was adamant that property investors/speculators should be subjected to a CGT (despite having profited capital gains tax free from the sale of his share of his son's Trade Me).
Maybe the ghost of Gareth in TOP no longer has influence, or maybe Gareth is no longer interested?
TOP was always about an annual capital tax, not a tax on realised capital gains.
TOP has an asset tax and a reduction in income tax resulting in 80% better off. Anything from the tax working group is likely to add new tax to a % of the population, without anyone becoming better off.
Or maybe they saw (some of) the problems with a blanket CGT like the ones you pointed out above and came up with a better idea?
Their current idea achieves the same ends as people have been wanting a CGT for (direct investment away from unproductive assets into produtive business being the main one), but without the downsides like you pointed out above. Since its not a capital gains tax there are no capital loss issues like you have outlined above.
You are in-correct its consistent at least going back almost 2 years. You can view the historic comments, dated around December 2016.
https://www.top.org.nz/isn_t_it_just_a_capital_gains_tax
"It’s nothing like a capital gains tax; they are totally ineffectual at halting speculation as we have seen overseas. This is an annual levy (like rates) and what it’s doing is making income tax fair. Without it, one section of society – the property owners – win at the expense of everyone else. "
@Kiwimm A CGT will always have to exempt the family home in some way or else you cant efficiently sell your home and buy another as your family grows.
TOP policy is completely retarded and makes us all serfs again.
You fix tax by taxing profit, that means a hefty standard deduction for PAYE, tax on capital gain (exempt family home as ti is not a profitable exercise) and tax on business profit. You tax it all flat and you have the fairest system you can.
So, hypothetically, a CGT is implemented and the government factors this into its budgets. Then the housing bubble drops and there is no capital gains for 10 years. Where do we make up this deficit from? And even worse, capital losses get carried forward reducing future receipts.
An asset or land tax has certainty of cashflow.
Capital losses from the sale of business are already carried forward. CGT is only on realized gains and so is always a small factor. As CGT falls your tax on business profit and income rises. On average income tax will be lower, the middle class will save and consume more and you will see higher average growth and lower wealth inequality.
I am not against CGT. I never understood why the fruit of labour should be taxed but not fruit of the capital. So I am pro CGT on this basis. However, the other reasons mentioned for CGT are not very convincing to me.
As long as the rate of accumulation of wealth is greater than the CGT rate, the wealty will continue to get wealthier. So all a CGT does is to slow the pace of inequality a tad but does not reverse it. Canada that has CGT has higher inequality that NZ.
There is a also a dream that CGT will mean that money will flow to "productive business ventures". This assumes that there are currently billion dollar worth of attractive, feasible business opportunities in NZ and the only reason they do not fly is that the needed capital is tied in real estate. I find this very improbable. Where there is money to be made, investments will go. Look at NZ farming sector, money is flowed into it to the saturation point. CGT wont address that.
CGT won't do anything to stem the fast rising in house prices, take Sydney and Melbourne as example. The only thing it will do is putting those buying and selling houses for living on a equal footing as running other businesses and more revenue for the good ol' government.
CGT won't do anything to stem the fast rising in house prices, take Sydney and Melbourne as example.
TOPS policy isn't a CGT.. its much more effective in that it's constant, it doesn't wait till the property is sold (except for pensioners), and therefore doesn't discourage selling or impair the ability to move to follow a job opportunity etc. Also Australian CGT exempts the home, which is basically a loophole you can fly an A380 through.
The only thing it will do is putting those buying and selling houses for living on a equal footing as running other businesses and more revenue for the good ol' government.
Correct about the first part, but incorrect about increasing govt revenue. The reduction in PAYE taxe will offset the equity tax.
Look forward to paying tax on your bicycle, based on the imaginary income you are receiving from it. And not just once like income tax - the wealth tax is charged annually, until the tax paid exceeds the value of the bike.
Bicycle bicycle bicycle
They want to tax my bicycle bicycle bicycle
They want to tax bicycle
They want to tax my bike
They want to tax my bicycle
They want to tax it when they like
You say black I say white
You say bark I say bite
You say shark I say hey man
Jaws was never my scene
And I don't like Star Wars
There are two main groups that don't contribute their fair share to fund the nations infrastructure; beneficiaries (inc boomers on super) and landlords. These people are leeching off workers productivity and providing nothing of value to the nation.
If this tax problem is not sorted out expect more of the same brain drain. The smart working kiwis, the ones that were not given a house deposit by their aristocrat parents, will flee to Australia and Canada. New Zealand will keep replacing them with whatever bottom of the barrel immigrants they can get.
We have a fake democracy which (by the 5% threshold and biased media) which effectively blocks any alternatives to the status Quo entering parliament. Looking at the big picture Labour and National are the same; pro-welfare, pro-property, pro-China, anti-productivity parties.
It has been said that capital gains tax is like taxing a thief. I tend to agree, the root of the problem is that the land bankers are making gains way beyond inflation in the first place. Better to look at taxing land banking via a land value tax and removing ridiculous regulations that stifle productivity (e.g. BRANZ and WorkSafe).
Although being a double "leach" (a boomer on super and a past landlord) I do actually have understanding and empathy for your frustration.
I think that the working party's report will raise a number of issues and some possible constructive (albeit partial) solutions.
From your comments I suspect that you are possibly a millennium; we boomers do care about your generation, a fair and just system, and a great future for New Zealand - after all most of us have children of your generation, as well as grandchildren, who we do care greatly about (whether we are, or are not, aristocrats).
Capital gains are the tax, a tax designed by central bankers who define the value of money or credit, therefore have defined an inflated value of assets, hence taxing working class people a transferring wealth to asset holders. It makes sense that central government should tax to of set the central banks taxation by stealth.
Yep and they all got together and voted Labour. Doesn't matter just keep on taxing everything I have got because I managed to get ahead in life. Sounds great just give it to those sitting about all day doing nothing or just living for today and spending it on the wrong stuff. If I was 20 years old again I would be out of this country in a flash. Now even Fonterra cannot make a profit when we are paying twice as much for our milk as we should be.Glad I'm out of the race to get ahead, this country is stuffed.
This current CGT review is going to largely end up just another talk fest. Prime Minister Peters is not likely to support 470,000 business owners having a chunk of their lifetime businesses filched by the government when they sell and retire. And the likelihood of him supporting middle NZ having their KiwiSaver returns clipped while fat cat mansions are exempted, is also not strong.
Cindy will put on her serious face and reveal to the waiting nation that the coalition remains committed to capital gains being taxed and that while she also supports this, personally, in principle, absolutely, the technical challenges and complexities of collection render it only marginally viable. A few non controversial TWG recommendations will be implemented to save face. And we ground hoggers will all smile and nod.
I do wish that article-writers and common taters alike would use internationally recognised terms when they discuss 'gains'.
The terms are 'Realised' and 'Unrealised'.
Realized is the simpler one: it means the deal is done, the munny has changed hands, and your erstwhile Term Asset (like machinery, mine, bridge, plane, right) has turned into Cash At Bank (or an investment or another current or term asset or - y'all get the drift.)
Unrealized is tricksy. It isn't Realised, so getting at a Gain's Value can mean any of the following:
- Marked to market: an active market for equivalent assets exists, and can offer solid current valuations
- Valued according to a solid international standard e.g. a per-room valuation for hotels of a certain class
- Valued by a registered professional familiar with the context and active in it
- Valued by legislation (e.g. the FIF regime - a deemed rate of return)
- Valued by my cuzzie - may be lowballed or highballed depending on the nature of the Gain, and your relationship to cuz...
- Valued by your political friend - another wide range possible
- Valued by your political enemy - will cost ya....
Common taters may care to add other classes of Valuation......
Valued as a going concern and break up asset value are two that spring to mind. Also, value at cycle peak and value at cycle low and averages therof, such as average p/e value over the last 7 years.
Valuation is difficult, value in NZD of uncertain real value? Value in USD is probably fairer, or value in a basket of commodities, or Special Drawing Rights perhaps. The change in house values is mainly a result of the future value of a cash flow stream being discounted at a lower rate of interest. A building is usually priced at a function of it's rental income. The appropriate capitalisation rate varies from one place to another and from one time to another.. The lower the cap rate the higher the imputed value.
My problem with the whole subject is you cannot tell whether the apparent gain was from currency devaluation effects or business cycle effects or gain in real value. A house is still a house, but the income is probably higher if you cram more people in. Hence it makes sense to tax the income rather than the gain in value, or than taxing both.
The main inequity is the transfer of savings to the banking sector that is not taxed as a service. There ought to also be a bank royalty tax for the use of the monetary system as a common good. The pollies like to amp up our outrage and get us fighting amongst ourselves so we don't look at causes too much.
...the list of countries introducing capital gains tax legislation grows: Canada in 1972, Australia in 1985 and South Africa in 2001.
Not exactly impressive is it? Canada 46 years ago and Australia 33 years ago. The link seems broken as well and when you fix it doesn't go to a list of countries.
Land tax on all property except family home. Easy. Multiple property owners get to pick one and move into it. The rest are accordingly for income or speculation and should have a reasonable rate of return on value/debt to cover tax. Simple and hard to avoid. Like rates if owner is mia or pretends to not read english seize and use for state housing. We have a good housing owner register. Use it.
Overseas tax resident/owners simply tax at a higher rate. If that is a disencentive then great. We should include kiwis in the overseas tax resident catogory. How much tax could Great Mercury Island generate. Whine that in your box.
For lawyers and accountants acting as fronts, great. Proof of NZ tax earned funds please. If short qualifys at higher rate and make the lawyer etc liable personally for the tax shortfall.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.