Capital gains policy stumbles

Scott Mason.
Scott Mason.
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 says.

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 answer.

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 said.

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 would apply.

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 property.

''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 Truman asked.

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 same provisions.''

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.

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