Capital gains fuels wider tax debate

What effect will Winston Peters have on the final wording of the proposed capital gains tax...
What effect will Winston Peters have on the final wording of the proposed capital gains tax legislation? Photo: Getty Images
Since the release of the Tax Working Group's report last month the media has been rife with speculation on what the implications of a capital gains tax (CGT) might be.

I am always reticent to comment on any proposal before we know what will actually be included in the final legislation that will come before Parliament. And, in a comment that I never thought I would make, it will be interesting to see what moderating effect Winston Peters (NZ First) might have on the final wording of the proposed legislation.

The key proposal put forward by the working group was the introduction of a comprehensive tax that would be applied to capital gains. Rather than a unique tax rate being applied just to capital gains, the recommendations propose that any gains on capital (generally at the time of asset realisation) will be returned as part of your income and taxed at your marginal tax rate.

This will result in many capital gains being taxed at 33%. Although the proposal includes some exemptions (for example the family home, vehicles, artwork and relationship property transfers) the current recommendations would apply it to most other assets.

It is interesting to note that the rate of 33% is more than twice the rate that the electorate found unacceptable when Labour proposed, and then removed, a capital gains tax from its policy at the last election.

Should the current Government decide to pursue the introduction of a capital gains tax, it has indicated that it will introduce legislation into the House this parliamentary term and seek to have it passed before the 2020 election.

The new rules would not coming into force until April 2021, at the earliest.

Capital gains tax will therefore be an issue for the 2020 election, and may serve to make this one of the more interesting elections in recent times, especially as National has indicated it would repeal any capital gains tax legislation, should it form a government post-election. Some of the features of the proposal that concern me are. -

1. The impact of a capital gains tax on retirement savings, particularly savings through KiwiSaver, where the proposed changes will impact on net rates of return. Although the proposals include provisions to help compensate those KiwiSaver members on lower incomes, it is unclear how effective these would be in practice.

2. It is also possible that changes to the taxation of New Zealand and Australian shares will influence how investment capital is allocated, which may have unforeseen negative consequences.

3. There is no offset allowed for the capital gain that is created by general inflation. Yes, inflation might have been subdued over the last decade, but will that always be the case?

4. There is at least anecdotal evidence to suggest that the introduction of a capital gains tax may have a cooling effect on the property market, and that it may adversely impact on the supply and cost of rental housing.

While I do believe that many New Zealanders are concerned about the "wealth divide" that has developed in our country over recent years, the questions that I ask myself are. -

1. Will these proposed tax changes help close that wealth divide, and will they help make New Zealand a wealthier country?

2. If the answer is no to either, then what's the point?

Having said that, there is one thing that the Tax Working Group has done by putting forward these proposals.

It has fuelled a wide-ranging conversation about the future of taxation in New Zealand. With an ageing population, and a shrinking workforce, more money will be required from fewer people to fund services such as health and welfare.

To raise this money, we can either increase existing taxes or broaden the tax base to include new taxes. The outcome of the debate on capital gains tax will certainly provide an indication of which way New Zealanders want to go.

Peter Ashworth is a Principal of New Zealand Funds Management Ltd, and is an authorised financial adviser based in Dunedin. The opinions expressed in this column are his own and not necessarily that of his employer. His disclosure statements are available on request and free of charge.


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