MAX HAYTON. The New Zealand Government considers capital gains tax.

Mar 4, 2019

The New Zealand Coalition Government promised to create a fairer tax system.  With growing inequality and a tax regime that leaves critical areas untaxed, the burden could be shared more fairly.  The first step has been taken but hazards lie ahead.

New Zealand is a relatively low tax economy.  The top income tax rate is 33 percent on incomes over $NZ70, 000, but the first $NZ70, 000 is taxed at the rates applying to the lower brackets.  A consumption tax (GST) is charged at fifteen percent.

There are no death duties, inheritance tax or estate tax.  A limited form of capital gains tax (CGT) was introduced in 2015 to suppress speculation on residential rental properties.  The tax is applied at the owner’s income tax rate if the owner sells a rental property within five years of buying it.  The tax does not apply to the taxpayer’s own home.

The rampant house prices in Auckland were the main reason for introducing this form of capital gains tax.  The house price phenomenon that blocked first home buyers from entering the market became a crisis that threatened to destabilise the economy.  For this reason the government of the day was able to push through the CGT.  At any other time and for any other reason there would have been a massive political reaction.

New Zealanders have long enjoyed an environment where capital gains produced by houses, rental properties, holiday homes, shares, businesses, farms and other assets have been tax free.  They expect these assets to help fund comfortable retirements.  It is such an ingrained feature of New Zealand society that some say is essential to the Kiwi lifestyle.

Others say it is unfair that the tax burden is carried by those who can’t avoid income tax or GST and too much of the nation’s wealth is invested in property instead of productive enterprises.

To address the issue the coalition government under Jacinda Ardern set up a Tax Working Group of eleven experts.  Inevitably they would look for ways to tax capital gains.  After talking about tax to thousands of New Zealanders and consulting some experts in Australia the Working Group has produced its final report.

The Working Group says the inconsistent treatment of capital gains reduces the fairness of the tax system and benefits the wealthiest members of society.  They said a CGT would produce a fairer system and reduce the opportunities for tax planning and tax avoidance. In particular, all the members of the group agreed that there should be an extension of the tax on capital gains made from residential rental investment properties. The family home would be excluded.

A majority of eight members of the group went further and supported the introduction of a broad based CGT on a wide range of asset classes.  This would involve an increase in compliance and efficiency costs, but these would be outweighed by improvements in the fairness and integrity of the tax system.

To start the process a “valuation day” would be announced.  The value of all assets covered by the tax would be set on that day.  Taxpayers could take their time.  They would have five years in which to assess the valuation day value of their assets unless they sell first.

The tax would be charged when the capital gain is realised by sale of the asset.  The tax rate on the capital gain would be the same as the taxpayer’s marginal tax rate.

The Working Group proposed that the taxpayer’s own home and works of art be exempt from any CGT, and intellectual property was considered too difficult to tax.

The tax would be charged on capital gain on almost everything else including second houses, rental properties, holiday homes, shares, businesses and farms.

The government could choose whether or not to introduce many or all of the recommendations.  It could impose CGT on a limited list of asset classes, perhaps only on rental properties to further dampen property speculation and the rising cost of houses.

The report has stimulated the expected debate ranging from support to outrage.

The government itself won’t make a substantive response to the report until it has formed a consensus with its coalition partners, New Zealand First and the Greens.  The government plans to produce its full response in April.  Any legislation would be introduced and passed but would not be due to take effect until April 2021.  In this way the government’s fate could depend on the electoral acceptance or rejection of its tax reforms in the General Election next year.

This is where the problem lies.  The Working Group was made up of experts not active politicians, although the Chair was Sir Michael Cullen, the successful and admired Labour Finance Minister under Prime Minister Helen Clark.

Some commentators believe the toxicity of Capital Gains Tax in New Zealand will mean the recommendations won’t survive the public debate nor the coalition consensus discussions.

The Leader of the Opposition National Party, Simon Bridges, said the proposals are an assault on the Kiwi way of life, would be an attack on the “squeezed middle” of New Zealand society and the Opposition will fight it all the way.  Bridges called it a “monster tax grab” and National would overturn any law setting up CGT.  The farmers’ group, Federated Farmers, say CGT is a “mangy dog”.

The debate has also produced some passionate arguments in favour of Capital Gains Tax. The six day a week broadcaster Jack Tame said the current tax system can be considered a massive subsidy that has helped to make some people disproportionately rich. The Cactus Outdoor Clothing founder and commercial property and tech investor, Ben Kepes, said: “There has long been the concern that, instead of being invested in businesses or other productive assets, a huge proportion of Kiwi wealth is locked up in speculative property investment. As such, a CGT levels the playing field and should result in a significant shift of capital from speculative to productive assets.  At an ethical level, and putting aside the not insignificant self-interest aspects that seem to creep into conversations around CGT, the proposal would hopefully see a move towards a more equitable distribution of wealth and, potentially as a flow on effect, more interest in the social and economic bottom lines of commercial entities.”

The current Labour-led government narrowly gained power in 2017 on the decision of the NZ First leader, Winston Peters, who held the balance of power.  He is opposed to CGT. Farmers, small businesses and landlords are also vehemently opposed. The National Party Opposition are likely to launch a form of Project Fear based on the old allegation that Labour governments “tax and spend”.  It is not difficult to see that introducing a comprehensive form of CGT into New Zealand legislation could produce serious risks for Jacinda Ardern’s government in the General Election next year.

Max Hayton is a former political journalist and Foreign Editor for Television in New Zealand.

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