Capital gains tax: The latest update

Sharechat?produced an article today about the Tax Working Group’s latest proposals around capital gains. It seems my predictions were largely correct, and that the tax, when it is introduced, will be more far-reaching than anyone expected. quote:

A capital gains tax on the sale of investment property, businesses, shares and other assets such as farms is a step closer if the interim report of the Tax Working Group leads to firm recommendations in its final report next February.

The independent group?s final recommendations will then require government decisions, but the interim report, released this morning, falls firmly in favour of broadening the existing narrow range of capital gains taxes to capture profits on the sale of a far wider range of assets than the current regime. end quote.

There is no broad-based capital gains tax in New Zealand at the moment, although there are various forms of tax on assets that tax capital gains. But although there will still be no CGT on the family home, just about everything else will be captured.

As I have said before, for a CGT to work, it will have to apply to virtually every type of capital gain. quote:

However, an expanded CGT could include residential land other than under a family home, ?commercial, agricultural, industrial and leasehold interests not currently taxed, intangible assets, including goodwill; all other assets held by a business (for example, depreciable assets); and shares in companies?. end quote.

So, if you buy a section with the intention of building a house, but change your mind and sell it again, even if it is to buy another section, capital gains will apply to any gain made on the sale.

Maybe that is fair enough, but it will catch people out, without a doubt. Also, if your elderly parent dies, and you inherit the family home and sell it, CGT will apply. It will also apply to the sale of your holiday home. quote:

For its final report, the group will consider two types of capital gains tax:

? An extension of the existing tax net to cover the sale of a wider range of assets; or

? Taxing ?deemed returns from certain assets? or ?risk-free rate of return? approach, although Cullen said ?no one does that? because taxpayers could struggle to pay tax on unrealised increases in the value of assets covered by the regime.

Cullen said the working group could theoretically recommend against both options in its final report, but it was unlikely to do so. end quote.

No one does that… except here in New Zealand, where the Fair Dividend Rate applies to owners of overseas shares or businesses and is applied entirely on fictitious numbers, mostly applying to investors. Will that be disestablished once a full-scale CGT is introduced? I doubt it. quote:

The interim report recommends against land, wealth or gift taxes and was not permitted to consider reinstating death duties or inheritance taxes.

It finds a case for extending the range of environmental taxes, but warns they should be aimed at changing environmental outcomes over raising more revenue. end quote.

So here comes some form of environmental tax. Well, it was only a matter of time. quote:

On sugar taxes, Cullen appeared to favour a broad-based excise on sugar rather than explicitly taxing the sugar content of ?fizzy drinks? as that would act as a poorly targeted tax on low-income households. end quote.

And sugar taxes… well, that was only a matter of time too.

So farms and businesses will be caught by the CGT rules. I’m not particularly surprised, but it will come as a big kick to farmers, many of whom only make money when they come to sell their farms. Still, the full effect will depend on what the rate of CGT will be.

Many countries have a special rate of CGT, often at a rate of 20% or similar. There is speculation – and it is only speculation at this stage – that a CGT here will be applied at the marginal rate of the taxpayer. That will be 33% in a lot of cases. If this government introduces a new top tax rate, as Labour has proposed in previous election campaigns, it could be at a rate of, say 40% in the future.

For the record, overall, I am in favour of the introduction of a CGT, so long as it is? applied at a lower rate than personal tax rates, and so long as all the existing forms of CGT that we have in our tax system at the moment – the FDR, the Bright Line Test – are abolished, but I think that is unlikely to happen. I think we will simply end up with a convoluted system where different rates apply to different circumstances, and that will just be confusing for everyone.

When you consider that a CGT is often nothing more than a tax on inflation, particularly when applied to property, then it does seem very unfair.

But being fair or unfair will make no difference. We have to tax these ‘rich pricks’ in every way possible.