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Budget 2014: Why a capital gains tax will be off the agenda

Capital gains tax (CGT) has become a major policy difference between the two main political parties in the lead up to this year’s election but it’s unlikely to get any air time in the budget.

On the one hand, National has clearly given further consideration to a CGT, given comments from the OECD that it’s missing from our arsenal of taxation tools. Still, it hasn't firmly rejected it.

On the other hand, Labour has endorsed its intent to implement a full CGT regime, likely to be based on policy from the last election.

You can expect to see a standard CGT at a concessionary rate of 15% (to deal with the effects of inflation), exemptions for the family home, a likely grandfathering of assets being exempt, if they were acquired before implementation date, and taxation only on realisation. 

If CGT is such a critical weapon to the collection of taxation (which all governments desperately need, including New Zealand’s) and an integral part of market place policy, the question remains: Why isn’t National keen to implement it, starting with this year’s budget?

National has considered the trade-off between the additional complexity to the tax system, the range of quasi-CGT regimes already in place (certain land transactions, international tax regimes and financial arrangement rules, to name but a few) and the deferred nature of any potential additional tax revenue collected. It has concluded a full blown CGT regime is not needed.

Despite the policy purity, it’s widely recognised a CGT will only raise revenue of any substance after an estimated at 15 years. One should also read between the lines; until Inland Revenue’s first mainframe computer system is finally upgraded, such a significant policy change would likely be the last straw to a full collapse of the current computer system.

From a Labour perspective, one should also read between the lines. Despite not publicly stating this, CGT is a socialist tax that aims to tax the wealthy who own capital assets. 

It is, apparently, the panacea for the Auckland housing crisis, in that it will tax all the land speculators (despite the fact that true land speculators are already taxed under the land provisions of other tax acts) and transfer investment into productive assets.

Negative impact
The disturbing feature of a CGT policy, which has not been aired by either party, is the negative impact it will have on market behaviour and transactions.

New Zealand is clawing its way out of the economic doldrums. Confidence is high, taxes are being collected and a surplus is being promised in the budget. The last thing needed is an almighty hand-brake on the markets. 

A CGT would result in people holding on to their assets, given their preferential pre-CGT status. Assets would not be sold until the owner really wanted to quit and shift protected assets into CGT-affected assets. 

This would result in a nationwide shortage of supply in the housing market, as people hold on to property, most likely resulting in higher house prices. 

However, it may lead to an increase in the availability of rental properties, which may have a short term benefit to those looking for accommodation.

Despite Labour stating a CGT would shift resources efficiently into productive assets, businesses would also be subject to CGT. This would either be levied on the owners of the businesses that are bought or sold, either directly or indirectly on the shares, and on businesses themselves that buy and sell business assets.

Productive assets would therefore also be hit and the same market slowdown would hit productive sector transactions.

And finally, the negative impact on the ease of tax administration should also be acknowledged, given the significant rewrite of the rules and the increased complexity and lack of understanding that would result.

There will be a time and a place for considering the introduction of CGT. However, the negative impact on markets, business and a fragile economy means now is not the time. So don't expect to see any spectre of a CGT in this year's budget, or any time soon (pending election results later this year).

Greg Thompson is national director and partner, tax, at Grant Thornton New Zealand

Comments and questions

National have certainly softened their view on a comprehensive CGT. They have however stated that the IRD's computer system cannot handle any new taxes, so there will be no new taxes in the next term if they are elected.

The IMF Chief, Ray Brooks, recommended in 2011 that NZ introduce a CGT. Other developed countries have successfully done so. The reasons rehearsed again here seem a bit tired and thin, especially when the the rest of the world is concerned with ways of combating rising economic inequality.(A central theme of the last Davos Conference and addressed by the popular book by Piketty.)

Piketty is not writing about New Zealand and we are not the United States nor Europe. I would invite you to stop shuffling these cards together as though somehow they are all the same thing. They are not.

In NZ the top 10% of individuals own over half of the net wealth (almost 52%). These are Government figures, and the trend is widening. A CGT and sensible policies that address the issue are in many ways preferable to more radical future governments introducing more drastic change policies. These will follow if the problem is not addressed.

Capitalism, and wealth, is not a zero sum game. The fact that some people have more does not by definition mean that others must have taken less or must have a smaller share in order to balance some great mythical ledger of the nation’s wealth. You do understand that, right? Otherwise perhaps you might like to explain to me which poor country in the world has suffered most in order to make New Zealand rich?

If you feel you don’t have enough wealth, they go out and make some of your own. Grow it, dig it up, invent it, discover it, earn it, create it. It’s entirely up to you.

Well we kind of are the same in that we have the same problem. An ageing population, a retirement age of 65 years and a taxation system that is not collecting enough money to pay for the tidal wave of pensions that are coming.

Australia have a CGT and an asset value threshold you must be under to earn a pension. And they are still in the crapper. We are simply kicking the can down the road.

Australia have a CGT and asset value thresholds for pension entitlement......and they are still in the crapper.

And you're recommending that we follow them down their path?

Capital Gains Tax (CGT) on Property is but one target. Its the CGT on share trades and company sales is the main reason why this government is not going there.

Theres way more speculation, and insider trading, in share and money traders.

Just another case of an insider job!!!

Just how badly have we underinvested in systems management computers if CGT would overload the system in a country with such a small tax paying base. Tail wagging dog syndrome? Or just any way of avoiding a poison chalice at election time?

CGT is a major issue affecting economic productivity and investment balance, and just because the effects might take a while to gain momentum is not a reason for not doing the right thing.

It may be a small tax paying base, but the problem is that all governments have been loading up the IRD system with work which is not related to tax gathering.

Again it is all about the socialist agenda, take money from the people and businesses who actually create wealth for everybody and hand it over to politicians who will decide who gets YOUR money.

Acknowledging employees rarely risk capital with employment, the difference between the top and bottom paid employees is way beyond fairness and equity.

It is often top management who drive for lower cost at the expense of wages at the bottom, but all they are doing is transferring the low wages to their salary. As such, if the employer wont pay what is reasonable, then the tax system will have to do it.

Time to consider lifting the minimum wage to a living wage, to stop subsidising management salaries. Then they can complain about paying too much tax. But not until then!!

Your comment regarding "employees rarely risk capital" answers your own question!!! You are correct they very rarely do. A business owner however risks all their own capital (generally they take debt against their own family home) they then work long hours risking that capital to create value in a business. They pay tax, g.s.t, acc levies, fringe benefit tax and create employment. Your comments about management taking higher salaries at the expense of the workers is disingenuous. In most cases a business owner will pay their salaries of their employees first (including p.a.y.e.) then their shareholder salary and will then hope to make a profit after tax. They will be paying more in tax than they take out of the system. There has to be a REWARD FOR RISKING CAPITAL. No system is exactly fair however if you don't provide incentives for risking the capital you will stifle innovation and the desire to create businesses.........therefore leading to less tax take and no jobs for every one.

The computer issue is an unbelievably weak excuse. However, the expertise of this Government in managing the roll-out new computer systems and tech infrastructure is dismal (- Novopay and the UFB).

The belief that a CGT will stymie property values - particularly those in Auckland - is extremely unlikely. If one looks across the ditch there is not only CGT but also substantial Stamp Duties on purchase and annual Land Taxes in addition to local council rates - and yet the markets continue to appreciate at similar or greater (Sydney especially) rates to NZ. Sure there would probably be a short term knee-jerk reaction but then it will be business as usual. Value appreciation is linked entirely to demand and population growth obviously results in demand - as does the dearth of suitable alternative, secure investment options.

New Zealand has survived through many challenges and prospered well over the decades very without a capital gains tax in sight. And now the socialists are telling us that we must have one urgently in order to improve our wealth as a nation. (If it is not for that purpose then what purpose is it for?) Whenever did an increase in taxation improve the wealth of any modern first world nation?

Will a CGT stop house price inflation? No, in fact the evidence shows it has absolutely no effect on house price inflation whatsoever.

Will a CGT 'rebalance' investment into productive sectors of the economy and away from speculation? No, why would it as those investments (businesses) will be subject to the same CGT tax once the capital value of that investment increases over time, should they decide to sell. So a property investor for example is no better off investing in shares or a new business, because they will be CGT taxed at the same rate as their property investments are.

A CGT therefore provides no incentive for an investment in productive assets over non-productive assets, and I find it telling that Labour has never explained how a CGT is actually going to increase investment in productive assets. And just as telling, none of the economic simpletons in the MSM has asked them either, which reflects how poorly served this country is by its news media.

So what really is the purpose of a CGT given that it doesn't achieve the aims it is purported to apart from raising more revenue for politicians to bride electors with? It is without question, the socialist's spite and envy tax and another tool for them to use to transfer wealth from the productive members of society to the unproductive.

We pay a lot of tax, rates, excise duty, ACC levies, GST. We don't need additional taxes. The government both local and national need to spend less.

Agreed. I reckon GST should be lowered / removed and a CGT implemented.

Removal of GST will help local retailers battle online competitors in the e-commerce marketplace and bring down the cost of food.

There is a big difference between more tax and rebalancing the tax take including CGT. Higher taxation is a completely different subject.

I have a pension fund. If it goes up in value, will that gain be subject to a CGT?

Capital Gains tax is the wrong tax to use if the objective is to curb over investment in property and rebalance towards other more productive sectors.
Speculators are already covered under the current regime, (if they declare it).
Wealthy baby boomer landlords who have already reaped years of enormous tax free capital gains will just continue to hold to avoid it.
A blanket CSG is the least effective as it will just affect all sectors.
The smartest tax would be a land tax similar to rates. Then the "holders", will not be able to avoid it, and this will also be a disincentive to land bankers to buy and hold increasing the availability of supply.

You are of course correct re a land tax on all land owned. However, like raising the super age, no one dares suggest it as it would be a vote looser.

Property developers hate the idea, as they know they couldnt avoid it, as they can with a cgt..

Its time both the Nats and Labour sat down and agreed on a land tax...and other such issues (thereby removing power from the minor partys), instead of playing off each other for the sake of it.

As one of the few people who declare GST and Tax on my single dwelling residential property renovations, my simple suggestion is give the IR additional resources to enforce the current rules (and have a PR campaign that says they will).
There are a large number of people who have stated they have purchased property for the capital gain which by my reading means they are already have to pay GST and Tax (they just "omit" to).

If the tax is grandfathered (which i assume to mean the asset base price is market value set at implementation date) then this could result in huge tax benfits to asset owners if(when) the property market implodes. Please correct me if i am wrong on how this granfathering would work, but if I have assumed correctly, this tax could back fire in providing property investors large tax refunds on capital losses?

Yes rastus exactly right.
The dopes will look at bringing in a CGT after the horse has well and truly bolted, (property prices), and instead of capital gains they could have a line up of those who reaped all the tax free capital gains for many, many years claiming capital losses instead.
Yet another reason why Land Tax in this environment is the best targeted solution, and it counters any argument of computer system complexity.
It would be as simple as the quarterly rates assessment bill to administer.

The IRD computer issue primarily arises because of the lower rate. If a CGT was introduced at a taxpayers marginal rate (which it should be) there are existing boxes on tax returns that can handle the income from a capital gains tax as long as it flows through to the tax calculation.

If you want to reduce the CGT to take account of, say, inflation you could tax a percentage of the gain rather than a concessionary rate. There is no real argument to tax capital gains at a lower rate.

Again a CGT on a percentage of the gain can be done outside the tax return process and use existing boxes on the returns. Problem solved!

Property speculators are already taxed at their marginal rates, like all other income. .

Yip that's right - no computer issues with that!

An important disadvantage of CGT is that it exaggerates the swing from budget surplus to deficit in economic downturns as the CGT take gets replaced by CGT refunds! Many countries, e.g. the UK and US, discovered this to their discomfort at the onset of the GFC.

In any case, exempting the "Family Home" from CGT while imposing on productive businesses further advantages investment in mansions.

Singapore is a very successful country which has no CGT. They have grown from being much poorer than NZ to twice as rich, no doubt benefiting from avoiding the costs of the bureaucracy to collect CGT and the cost of distortions to business investment decisions.

The comment in the article " until Inland Revenue’s first mainframe computer system is finally upgraded, such a significant policy change would likely be the last straw to a full collapse of the current computer system." is not true. Any change can be done if there are enough experienced software people and realistic IT management.

CGT.may eventually come in just to appease us middle-class voters - after all we are being financially squeezed in all directions and have been for decades..

But 'trust-busting' which would do more good for the whole of NZ will never happen because Labour and National have their own Family Trusts!!

Yes, Labour MPs have as many trusts set up as National MPs.

CGT remember will not raise money without an actual capital gain, this means property prices have to keep rising from its implementation date. Hardly in line with a housing affordability drive.