Capital Gains Tax: A sensible approach from the Taxpayers Union

Photoshopped image credit: Pixy

You may think that I am against the introduction of a capital gains tax (CGT) in any shape or form. That is not the case at all; I am in favour of a CGT that is fair and reasonable. However, from what we have heard so far on the subject, the latest proposals for CGT do not seem fair at all, and will impose a huge tax burden on New Zealanders.

The Taxpayers’ Union has outlined a framework which they would approve of for the introduction of CGT, and it is fair and reasonable. Here, they list 5 rules for the implementation of a CGT that they would agree with. quote.

To be fair, a new capital gains tax must abide by the following:

1. No Valuation Day:?Any capital gains tax regime should exclude a valuation day approach in favour of grandfathering assets into the system upon sale, as was the case in Australia when it introduced a capital gains tax.

2. Indexation for Inflation:?Any capital gains tax regime must discount for inflation, so taxpayers are taxed only on their real capital gains, rather than nominal gains.

3. Revenue Neutrality:?Given the Government’s surpluses, any revenue from a capital gains tax must be used to fund tax cuts in other areas so that the total tax burden does not increase overall.

4. Roll-Over Relief:?Tax should be paid only on sale ? not death. Further, there should be roll-over relief when capital raised from a sale is then immediately invested in the same asset class.

5. Discounted Rate:?Any capital gains tax should apply at a discounted rate, instead of at the full personal income tax rate, to avoid New Zealand?having one of the highest capital gains tax rates in the world.?end?quote.

“Grandfathering’ means that assets already owned would fall outside the CGT regime, as only assets bought after the introduction of the tax would be affected. This happened in Australia, and while it would delay any significant revenue take from CGT, it disposes of the impossible prospect of every asset in the country (other than family homes) being valued on April 1st 2021. It also disposes of any valuation anomalies, as the actual cost of an asset can be used as the base price for the tax calculation.

Indexing for inflation goes without saying. It would be grossly unfair to tax people on gains brought about entirely by inflation.

Revenue neutrality is something that the Tax Working Group has promised, but there is no indication of how that is to be achieved. As Labour governments almost never reduce taxes, it seems unlikely that this promise will be carried through, preferring to add to the taxpayer burden.

Jacinda Ardern Taxes meme

Roll over relief is something that Michael Cullen is trying to resist. CGT should only be paid on asset sales, not on transfer. My guess is that, once an asset is transferred (to a family member on death, for example), CGT will apply immediately. This is potentially unfair, because the transfer of an asset does not always include a wad of cash to pay the tax at the same time.

At the moment, Cullen insists that CGT will be paid at the taxpayer’s marginal tax rate, but this is disingenuous. The amount of the capital gain will, in many cases, force the individual’s taxable income for that year into the top tax bracket, meaning the vast majority of taxpayers will pay CGT at 33%. This is grossly unfair. Instead, a flat rate should apply, say of 20% on capital gains alone.

I agree wholeheartedly with the proposals listed above by the Taxpayers Union. I agree with the warning they give as well. quote.

If the Government puts forward a reasonable proposal, focused on fairness and steady reform, the Taxpayers? Union is ready to accept a tax shift. In contrast, if the Working Group process was just an excuse for aggressive tax hikes, we?ll fight it to the end.

? the taxpayers union end quote

I think you will have a fight on your hands, guys. We all will.