CGT means 'significant changes to tax regimes'

Labour's proposed capital gains tax - labelled a populist "envy tax" - appears built on a mountain of complexities that could lead to the need to overhaul several aspects of the present tax regime.

Within 24 hours of its release on Thursday, analysts of the capital gains tax (CGT) are boring into its unknown folds of exemptions and taxes and are questioning its workability.

Labour, like National, wants to divert New Zealanders away from bubble-prone property investment and encourage savings and other investment.

Scott Mason, tax principal at WHK in Dunedin, said a move to CGT would be an "absolute, fundamental change to Kiwis' mind-sets" - developed over more than 100 years.

"Kiwis believe that if you buy then build up an asset, be it a house, business or farm, over time, with your investment, it becomes yours," Mr Mason said.

He said introducing CGT would be a "winner" for valuers, lawyers and accountants, while the "losers" would be "every Kiwi striving to do better for themselves by saving and investing in assets, as opposed to spending in the here and now".

"At the end of the day, in isolation, this is yet another socialist envy-tax designed for populist acclaim without thought as to consequence to the economy at a time where stability and growth are crucial," Mr Mason said.

Labour leader Phil Goff was reported to be appealing to New Zealanders to "do the right thing" by accepting new taxes as the right economic medicine and to fund "a fair go" for struggling families.

Most of the taxes fall on investment properties, farms and businesses, with Labour estimating CGT would raise about $2.3 billion annually after 10 years.

Mr Mason said for CGT to be implemented, there needed to be "significant changes to a number of existing tax regimes".

At the forefront would be changes to the taxation of land transactions and foreign investments, and the share imputation credit regime. Rules about company distributions would also need an overhaul.

CGT exemptions proposed by Labour, such as "collectibles", which could be cars, art or jewellery, would have to be well defined, he said.

"All of this merely distracts business from focusing on growth." "The complexity of this proposed regime cannot be under-estimated, as not only are there exemptions, there will need to be significant and complex rules to protect the integrity of those exemptions," Mr Mason said.

The New Zealand Herald reported Mr Goff as saying that while the plan was seen as sound, even by some investment property owners and businessmen who would lose out, he acknowledged it would not be welcomed by everyone.

"These changes won't be easy and some people won't like them. But it's the right thing to do," he said.

Mr Mason countered Mr Goff's claims that the top earners were not paying their tax share: in parliamentary question time this week, Finance Minister Bill English answered that the top 17% of households in the country paid 97% of the net income tax take.

Mr Mason also highlighted that in the Australian CGT regime, which punishes short-term shareholders as speculators with high taxes but has virtually no tax on long-held shares, the effects of CGT on housing were "limited".

"In the Aussie [CGT] experience, it did not change the property bubble nor materially impact on direct investment behaviours, although the latter is somewhat masked by their compulsory superannuation, which favours shares, fixed investments and cash," he said.

Mr Mason said it would be "suicidal" for Labour to push the top tax rate back up to 39% from the present 33%.

"Introducing CGT without a corresponding reduction in the marginal tax rates does not make sense".

Labour's proposals to limit trading losses for investments such as property would also be introduced if Labour is successful.

"So Ma and Pa property investors are not only faced with removal of depreciation but also the inability to claim deductions for cash losses; so if a tenant trashes the place, claiming the net loss arising may be deferred," Mr Mason said.

"One wonders who are supposed to own the property that renters want to live in."

- simon.hartley@odt.co.nz