Capital gains tax may require non-partisan approach

Scott Mason
Scott Mason
It is almost sad that following the 2014 David Cunliffe capital gains tax (CGT) PR debacle, Labour has taken CGT off the table as a policy platform.

New Zealand has a progressive income tax system that essentially taxes people who earn more at a greater rate, through a series of threshold steps.

We should be proud of our relatively simple, broad-base, low-rate tax system within the world context.

Income tax is both supplemented by a consumption tax (GST), and partially negated by a welfare payments system that hands back via several mechanisms all or most of the tax paid by low and middle-income earners, depending on family circumstances.

To give the context, a family of four needs an annual income of circa $100,000 before it actually pays a net income tax, after taking account of welfare payments such as Working for Families.

However, everyone is subject to GST on their consumption.

Our corporate tax system is essentially a withholding tax system, as it is final taxpayers (individuals/trusts) who ultimately bear the tax burden.

The unusual thing about our tax system, again within a world context, is that we do not comprehensively tax ''capital gains''.

For the purposes of this article, let us simplify things and say capital gains are those gains we make when we sell long-term assets for more than cost, thus excluding those who buy and sell even houses or shares with the intention of making quick gains, and should be paying tax now.

So I'm talking about goodwill from businesses, gains on buildings you have lived in or traded out of, gains on farms or shares, value of intellectual property created, and the likes.

Our tax system effectively excludes these types of capital gains from income.

Some will argue that this unfairly favours those with large amounts of capital who can invest in such things, as opposed to those who have their wealth and/or income solely derived from personal effort.

Others may argue that no capital gains tax encourages the good old Kiwi entrepreneurial spirit, investment in the long term generating jobs for others.

Ironically, both these perspectives are partially true.

The green-eyed arguments are less compelling.

Furthermore, a CGT is not about property speculators (as the Greens have suggested) as they are already generally caught by the current tax rules.

However, the tax exclusion of certain economic income, such as capital gains, does create bias and inefficiencies in investment decisions.

It is said that New Zealanders have a love affair with property, but, to be fair, our tax system partially drives this.

So could a CGT resolve this distortion and even address the fairness debate?

Quite possibly; but only if such was part of a comprehensive review of the entire progressive tax system.

And, as unpopular as this may be, houses will have to be included to some degree, as to exclude them will even further fuel a housing investment bias/crisis.

There is also inevitably a balance between a progressive tax system and over-taxing one end of the wealth scale via simply adding a new tax.

Fairness applies both ways, so the advent of a CGT may actually fund other tax system adjustments or reductions, as well as provide additional government revenue.

Notwithstanding, this is not a topic relevant to the 2017 election, in the current climate of greater awareness and concern about multinationals paying their fair share of tax in each country.

But today may, in fact, be the time when there is an actual appetite within the electorate to consider the relative merits of a properly constructed CGT.

The challenge is that in a political environment ruled by sound bites and photo opportunities, it is a complex topic with many options.

Hence, politically, rather than perhaps philosophically, it is off the table.

One wonders whether, like superannuation, this is a fundamental issue that needs to be resolved outside of party lines on a non-partisan basis; otherwise we could end up like Australia with a tax system that has so many politically motivated loopholes, and is so complex, it is simply dysfunctional.

-Scott Mason is the managing partner of tax advisory for Crowe Horwath Australasia.

Comments

All a capital gains tax will succeed in doing is create more business for tax advisory companies like Crowe Horwath.

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