NZ POLITICS DAILY: Capital gains tax confusion

Perhaps it's time for all politicians to “cut the crap” about capital gains taxes says Bryce Edwards.

Perhaps it’s time for all politicians to “cut the crap” about capital gains taxes. There’s a lot of confusion and ambiguity about the National Government’s announcement of a quasi-capital gains tax – partly fuelled by politicians on all sides who are deliberately muddying the waters. 

Is it a capital gains tax or not?

There’s ambiguity about whether the new arrangements constitute an actual “capital gains tax”. The consensus from both Government and Opposition politicians is that “it is not”. Most commentators categorically agree.

In reality, it is a major step along the continuum of possible capital tax regimes. The definition of a capital gains tax isn't black or white – instead there is a continuum on which such taxes exist. At one end of the continuum are New Zealand’s current arrangements – based on the 1956 Income Tax Act – and at the other end of the continuum is a totally comprehensive capital gains regime without exemptions. Even the so-called CGT regimes that Labour and Green campaigned upon last year were only partial – with lots of loopholes and exemptions.

Crucially, the changes open up the potential for much bigger shifts in the future. This is a point made very well today by Danyl Mclauchlin in his blog post, Progress. Here’s the key part: “this is a big deal on a psychological and political level. It means that subsequent governments – or maybe even this one – can incrementally increase the two year limit out to five years, ten years, then no limit, and New Zealand will have a realised capital gains tax on secondary property.  Yes, the way it came about is absurd. Labour campaigned on a Capital Gains Tax. National opposed it. More than opposed – they tore Labour apart over it. So Labour abandoned it and now National’s introduced a dummy one. Someone else will give it teeth”.

Before long, the debate amongst all political parties and commentators could well shift to adjusting the new framework in terms of the time limit, or reducing the exemptions – even the “family home” could eventually be thrown back into the mix to make it a truly comprehensive capital gains regime. 

Similarly, Liam Dann points out today “If the market continues to overheat there may be scope to extend the timeframe and harden up the rules” – see: New property tax rules a big step. He argues that “Overall, yesterday's announcement marks a major shift in government thinking”. 

For similar reasons, leftwing blogger No Right Turn sees National’s decision as a win for the left: “it will now be very easy for future governments to extend it to make it more comprehensive. A future Labour/Green government will be able to extend that brightline test to five years, or to infinity, while widening the net to capture other sources of capital gains such as financial wealth. And that's a Good Thing - because the current situation where the poor pay tax while the rich get tax-free capital gains is manifestly unfair” – see: Winning the argument on taxing capital gains

National’s new policy is supposed to make it easier to define when a capital gain should be taxed. Essentially it means that those housing transactions undertaken for profit in the first two years are now less ambiguous. 

Taxation lecturer Deborah Russell – also a Labour Party activist – has written one of the more thoughtful blog posts about the significance of the new rules – see: Preliminary thoughts on the government’s new tax. She says that the sheer extent of the changes means it is a big deal: “To my mind, that makes this a new tax, or at the least, a significantly expanded tax, and it taxes some capital transactions that previously weren’t taxed.  You can make a reasonable case for this not being a capital gains tax, and not being a new tax. Nevertheless, it’s a significant shift in the way that we tax, or don’t tax, property transactions”. 

Others are complaining that the new policy isn’t radical enough – see Gareth Morgan’s Government’s “Capital Gains Tax” too little, too late. He restates his belief that a proper capital gains tax needs to include the family home. 

Morgan will find agreement from John Shewan of Victoria University's business school, who says today that "If you wanted to change house prices you should tax all homes including family homes” – see Radio New Zealand’s Overseas investors 'unaffected' by new tax

How did National’s U-turn come about?

Government officials actually worked on this policy back in 2010, according to Rob Hosking, who has a very good account of it on the NBR website – see: Three big questions hang over property tax u-turn (paywalled). He explains the debates that went on amongst Treasury and IRD officials in 2010, including the detail that a much more radical five-year period was originally recommended: “That work was shunted into a policy siding in the run up to the 2010 Budget.  It never went away though, and it appears that some weeks ago ministers asked officials to fetch the work from the files…. The original policy work – obtained under the Official Information Act at the time – shows officials were not keen.  The Treasury saw it as a second-best option to a comprehensive capital gains tax on everything, including the family home.  However, realising that was not going to happen, Treasury officials appear to have buckled down and worked out how “bright-lining” might or might not work.  According to a report made to Mr English in March 2010, the Treasury wanted a five-year period – at least – in which property investors would be deemed traders and therefore taxed on the capital gain, not the two-year period announced yesterday”.

The Government was “pushed” to make the surprise announcement, according to Gordon Campbell, who views it as a “belated response to an inertia that was no longer politically viable” – see: On the government’s belated moves on property speculation

For Campbell, the Government is seeking to disguise it’s U-turn by fudging the terminology of capital gains taxes: “The Jesuitical distinctions in the government’s spin about its latest moves on property speculators are all about whether the government can claim that it jumped, or confess that it was pushed, into a response. Calling it a property tax means that it was an extension of existing provisions – while calling it a capital gains would be to ’fess up to sleeping with the enemy.  Definitional issues aside – and since this new tax walks and talks like a capital gains tax, lets call it that – there is no doubt that the government has had to be dragged reluctantly to this position”.

Veteran political commentator Richard Harman – always good for inside information – asserts that the initiative was a very recent one: “The Government’s capital gains tax proposal on investor housing announced today apparently came after pressure from some Auckland MPs.  Even so, Caucus as a whole played no role in the decision.  Backbench MPs were not briefed till a conference call last night.  The fact that the announcement --- event though it is a taxation measure – has come outside the formal Budget suggests that it is a very recent decision” – see: Political pressure from Auckland MPs forced the Government housing tax move.

Harman also speculates about dissent from the rightwing of the National caucus, perhaps from Judith Collins. And in this regard, Cameron Slater’s explains such dissent in his blog post, Why bother with it all then John?

What are the electoral consequences of the new policy?

National’s surprise has proven that this Government is not entirely out of ideas or beyond outwitting its parliamentary opponents, who are scrambling to come up with effective replies. For this reason, Rachel Smalley has labelled it National's clever move. She outlines how a government of the right has stolen the policy initiative from what had appeared to be the province of the left, leaving Labour looking unprincipled: “No-one predicted it, no-one saw it coming, least of all Labour.  So what does Andrew Little do now?  How on earth does he respond to this, given that he has categorically ruled out campaigning on a capital gains tax ahead of the next election?”

Labour’s problem is considered in a very good blog post by Grant Duncan, who explains that the party has been thoroughly snookered by National – see: Capital gains tax: Flip-flop of the century? Given that Labour has campaigned on shifting further towards a capital gains tax, but now moved away from that, Labour is in the strange situation where it can neither credibly oppose or support what National is doing. Andrew Little is going to have considerable difficulty in “cutting the crap” on this, in the way that he is now famous for demanding of John Key. 

Therefore, as Richard Harman says, “The Government’s announcement of what amounts to a capital gains tax on investor housing is a political coup.  Whilst it exposes National to some risk that it has done a “u turn” it more directly throws the spotlight on Labour’s indecision over tax policies“ – see: New housing tax a political coup

To see the difficulty opposition politicians are having in dealing with National’s shift, see Felix Marwick’s Capital gains tax policy rushed through development and TV3’s John Key 'fudging record' on bright line tax – Norman

Will it work?

There is no consensus on whether the policy will have the desired affect, but two news items report various commentators suggesting it may, depending on just how much the housing market – especially in Auckland – is currently being distorted by speculators – see TVNZ’s 'Big effect' on house prices if Government measures work - Property Investors and Murielle Baker’s Investors question house tax move

See also, Audrey Young’s Auckland property: New tax takes aim at property speculators, which cites economist Shamubeel Eaqub characterising it as “a step in the right direction”, and quotes Property Institute chief executive Ashley Church saying the announcement is "welcome tweaks", but not a major reform. 

All commentators seem to suggest that there is currently little way of really knowing how much the housing price problem is determined by speculators, but the new initiative will at least bring greater clarity to the situation. In this regard, Catherine Harris asks, Are Auckland landlords really in business or just speculating?

But according to Mark Keating, a senior lecturer in tax law, National’s new regime “appears so narrow as to be almost inconsequential” – see: New property rules too little too late

Finally, for some alternative debate and views on some of the capital gains tax issues, see my blog post, Top tweets about the “new capital gains tax policy”