Labour's capital gains tax policy is starting to unravel
as accountants and politicians take aim at the major party
policy following a slip-up by Labour leader David Cunliffe.
New Zealand has had back-door capital gains taxes in place
for many years, Crowe Horwarth tax principal Scott Mason
The Foreign Investment Fund income, on foreign shares and
superannuation funds, was an example.
If a New Zealand investor bought Google shares on the United
States sharemarket, Google did not pay dividends but the
shares might rise in value.
Ordinarily, the dividends would be taxed. But with the FIF,
the New Zealand Inland Revenue Department would each year tax
some of the capital gain on the shares, even though there was
no dividend, Mr Mason said.
There were also provisions in the Financial Arrangement rules
which dragged capital transactions into the tax net by
deeming any gain to be income, he said.
Labour Party leader David Cunliffe was caught out twice in
tax questions during a leaders debate on Tuesday with Prime
Minister John Key.
Mr Key was adamant New Zealand had a capital gains tax in
place and then threw a question at Mr Cunliffe about family
homes being held in trusts which the Labour leader could not
The question was whether a family home held in a trust would
be subject to Labour's capital gains tax. Labour advisers
later said it was exempt although the policy says: ''We will
ensure trusts are not used as a means of avoiding a CGT''.
Mr Mason said an interesting point was Mr Cunliffe seeming to
suggest CGT would deal to speculators. If that was true, they
would be getting a tax cut. At present, they pay tax on the
full profit at their marginal rate of say 33%. Under CGT, the
tax rate was reduced to 15%.
''I suspect he just doesn't quite understand how it works at
all, as even Labour's website says: `Assets currently taxed
at the individual's marginal or at the business tax rate will
continue to fall under the existing regime'.''
As to the detail of Labour's proposed CGT, who would know, he
Despite being Labour's policy for more than three years, the
party had released very little detail, instead saying some
experts would design the final policy.
''The policy on their website does specifically say they will
attack trust structures, so I can see why Mr Key felt
concerned and asked the question. Mr Cunliffe's lack of
response during the debate makes one wonder whether the later
clarification was policy on the run.''
Perhaps the party did not want the detail released until
after the election, Mr Mason said.
Finance Minister Bill English said nowhere in Labour's CGT
policy did it exclude family homes owned by trusts.
Labour was trying to say the test for whether a capital gains
tax applied was not whether a trust owned the property but
who lived in it.
That would require Inland Revenue to confirm the living
arrangements of householders in deciding whether the law
Labour's proposed capital gains tax was already full of
holes, applying only to a quarter of the housing market but
to every New Zealand business and farm, he said.
Mr Cunliffe hit back yesterday, releasing a list of 15 new
taxes introduced by National, which included GST rising to
15%, increased taxes on KiwiSaver and a list of increases in
things such as prescriptions and online company filing fees.
Deloitte Dunedin tax partner Peter Truman said if capital
gains tax was applied on the sale of an asset, it would
dissuade some people from selling investment property. That
could reduce supply and put upward pressure on prices.
Equity was enhanced if a capital gains tax provided roll-over
relief, as was the case in Australia.
In that case, selling one holiday home in Twizel and buying a
replacement one in Queenstown would defer the taxing on the
sale of the Twizel property until the Queenstown property was
sold and not replaced, he said.
Labour's policy provided an exemption to the family home but
Mr Truman said that encouraged people to invest in or upgrade
their family house rather than investing in a rental
''What is the economic difference between someone with a
$500,000 family house [exempt] and a $500,000 holiday home
[taxable] and someone with a $1 million family house?'' Mr
Mr Mason said the most obvious example of existing
''pseudo-CGT'' was around land.
Anyone who bought land with an intent to sell - such as
speculators - to develop or subdivide for sale, or build and
improve for sale, were already caught by existing provisions.
''However, it gets worse. If you are even just associated to
such people, then the land you own can be caught by these
Mr Cunliffe suggested those people were not paying tax and
the IRD was blind to the practice, Mr Mason said.
''This is simply not true. IRD has been, and continue to be,
very active in this space having dedicated teams and projects
across the country.''
IRD closely reviewed the time frames between purchase and
sale of all properties as the information was easily
available to it, he said.
Act Party leader Jamie Whyte said exempting the family home
from a capital gains tax was harder than it sounded.
There were questions to be answered about whether children
living at home were charged board, or whether a boarder also
lived in the home.