BUDGET PREVIEW: A Capital Gains Tax surprise?

Be prepared for a cat among the pigeons on Thursday at 2pm with an announcement of the introduction of a Capital Gains Tax.

Just when we thought the generic tax policy process took all the fun out of Budget day surprises, for those of you who remember the days of huddling around the radio to hear the announcements of government policy and tax rises, 2012 could deliver the king of all surprises.

The government has promised innovation to turn the economy around.

And despite its apparent protestations that CGT is off the agenda, it is the glaringly obvious tax which is missing from the broad-base tax regime our tax system is based on.

New Zealand is the odd one out in the OECD, in which CGT abounds.

So why would the government introduce a CGT now, particularly when it has vehemently denied it has ever been on the cards, and that it is an inefficient and cumbersome system?

The celestial stars seem to be nicely aligning on this one.

First, there have been a range of reviews which have called for the introduction of a CGT, including certain members of the Tax Working Group, comments by the Savings Working Group, OECD comments on New Zealand and Treasury briefing papers to the incoming government.

Second, the political will exists, with Labour and the Greens in support and having reaffirmed post-election policies advocating CGT.

And third, while historically CGT was a move to political suicide, the public debate on the issue has eased uncertainty with the voting public and reaffirmed a tax limited in its scope and reach.

It is relatively clear the family home won’t be touched.

Most importantly, however, are recent events which could get it across the line.

Few can contemplate the type of capital gains to be made by the co-founders of Facebook, Mark Zukerberg and Eduardo Saverin, and even some of the original Facebook employees with shareholdings after its IPO launch this week.

The US Government rubs its hands in glee at the resulting tax bill, which could run into the billions of dollars at a time when additional taxes are hard to come by.

Likewise, the introduction of a CGT in New Zealand could go some way in appeasing the opponents of proposed assets sales.

Such a tax would enable a “double dip” from the sale proceeds, both from their initial sale and then in the form of a CGT from any subsequent gain on the eventual disposal of those shares.

Finally, the potential for a reheating of the property market could be assuaged through the impact of a CGT.

While the reheating may have little to do with speculation and more to do with (under) supply and (over) demand, and relative values for earthquake-compliant buildings, a CGT may have a desired effect of keeping a lid on the property sector.

It would also ensure limited opportunity to return to property speculation that will detract the country from its need to develop the productive sector.

That said, a full-blown CGT is unlikely.

With concerns about the property sector, we are more likely to see an extension to the quasi CGT rules already in existence, with a focused taxation of equities and limitations on the deductibility and offset of tax losses.

Examples could include deemed taxation for equities held less than a certain time period (such as, say, three years) and loss quarantining rules for rental properties, or a return to limiting the quantum of amount allowed to be offset against other income such as the specified activity limitations of the 1980s, when only $10,000 was able to be offset each year.

The government has the option of being bold or tinkering around the edges again.

Innovation lends weight to be bold, and a real surprise come Thursday.

Greg Thompson is a partner, tax, at Grant Thornton. 

Email: greg.thompson@nz.gt.com