Capital Gains Tax is still out there

Grant Robertson says that people are ‘getting ahead of themselves’ by claiming that the Tax Working Group has abandoned its plan to introduce a capital gains tax and that we should all wait and see what the final report says.

The media are peddling the story that capital gains tax is off the table, but I believe that view to be completely wrong.

Stuff?reports: quote:

The Tax Working Group is understood to have stopped short of recommending a broad-based capital gains tax in an interim report, but Finance Minister Grant Robertson has played down the report’s?significance.

The working group chaired by Sir Michael Cullen was tasked with designing a capital gains tax for consideration by the Government, but is believed to have pushed back any firm recommendation until it publishes its final report in February. end quote

Both Grant Robertson and Michael Cullen have been gagging for a capital gains tax for years. The fact that is is impractical, unwieldy and difficult to implement and (to some extent) enforce will not necessarily stop politicians who are ideologically wedded to the idea of beating the ‘rich pricks’ with a big stick.

There are reasons why the implementation of a capital gains tax is not straightforward, but this probably will not stop them.

First of all, when capital gains tax was introduced in Australia, it took 15 years before it earned any significant tax revenue.

Tax laws are not applied retrospectively. Any existing gains are still tax-free at the date the tax is introduced. Gains will only be taxed if they have been earned since the date of the introduction of the tax.

(This could be great news for accountants, who will find themselves doing a lot of valuations…. yes, okay. I don’t make the rules.)

You know what will happen once a tax is announced. The market factors it in, long before it becomes effective.

But a capital gains tax may actually backfire.

At the moment, the Bright Line Test means that anyone who buys and sells an investment property – including a holiday home – within 5 years will be taxed on the capital gain at their marginal tax rate. This means that the taxpayer may be paying 33% of the gain to the taxman. But if a blanket capital gain tax is introduced, the rate will likely be less than that – possibly about 20%. So, on property at least, the tax take may actually be less than the take through the Bright Line Test at present.

This is, of course, assuming that the Bright Line Test is superceded by a capital gains tax, but we don’t actually know that.

Secondly, a capital gains tax will apply to all asset classes. It will apply to holiday homes, businesses, farms, shares, artworks and antiques. It may even (technically) apply to the sale of your car. Only the family home is exempt.

So when your elderly parent dies and you inherit the house – guess what? You sell it, and you pay capital gains tax. That’s a political football.

What happens if your family home is held in a trust? Will that still be exempt? We all know how politicians hate things they perceive to be ‘hidden’ in trusts, so what will happen here?

What happens with capital losses? In Australia and in the US, losses are carried forward to use against future capital gains. I assume we would do something similar here. This potentially pushes out any revenue stream from the capital gains tax even further.

One of the main reasons given for implementing a capital gains tax is to encourage investors out of the property market and into ‘productive’ assets, such as shares or other forms of business. The trouble is that these will be subject to a capital gains tax as well, and so that achieves nothing.

Introducing the tax right at the moment is fairly pointless, as both the property and share markets have enjoyed huge gains recently, and can be expected to slow down considerably for the next few years. That is not a reason not to introduce the tax, but it does mean that any revenue it produces for the next few years will not be significant.

I have had it said to me by a taxation expert that any capital gains tax introduced in New Zealand will HAVE to include the family home if it is to generate any reasonable amount of tax revenue at all. Of course, that would be political suicide, but it may provide an inkling into why the Tax Working Group is playing it down at the moment.

Potentially, with property anyway, it will be easy to circumvent. What is stopping me from moving into a rental property for a year and then selling it? There may be some rules introduced around the length of time one must live in a house before it can be deemed to be a family home, but people move on within a short time for all sorts of reasons. So, if regulations are introduced saying that a house must be lived in for a given time before it can be deemed as a family home, well… that is applying capital gains tax to the family home. Isn’t it?

Anyway, it is an interesting debate.

But remember what I said. The media is claiming that capital gains tax is off the table.

All I can say to that is… don’t believe everything you read.