CGT: More questions than answers

Photoshopped image credit: Pixy

So now it has been confirmed that the TWG recommends a Capital Gains Tax (CGT) for New Zealand. Nobody will be surprised by this. It has been well signalled. Now we have to wait until April to see exactly how the government intends to respond to the TWG report. Here’s a clue: it will announce that it is going to implement a Capital Gains Tax.

It seems, however, that not every member of the TWG is in agreement with the report. Some of its members actually do not agree with the introduction of the tax, and have already come out and said so. quote.

Three members of the Tax Working Group have penned their own paper on why they think the rest of the working group have got it wrong on a capital gains tax.

“New Zealand’s current tax system is relatively simple and efficient”, they said.

The dissenters are former Bell Gully tax partner Joanne Hodge, Business NZ chief executive Kirk Hope, and former Inland Revenue deputy commissioner Robin Oliver. end quote.

If a former IRD deputy commissioner is against the tax, you know you have got it wrong.


It said that the compliance and administrative costs of a capital gains tax (CGT) and its impact on “efficiency” would outweigh any gains in terms of increased tax, “fairness perceptions and possible integrity benefits”. 

“Business must take risks and be encouraged to experiment with new ideas and methods. Entrepreneurship and experimentation should be encouraged and not penalised.

“New Zealand’s tax system should not impede this,” they said.  

The comprehensive CGT the working group was proposing would harm innovation and be likely to “distort investment decisions”, they said. 

Hope, Hodge and Oliver agreed there might be a case for taxing more gains from investment properties, saying there was evidence rental home owners were relying on tax-free rises in house prices to make their investments stack up.

But they said that could best be achieved by tightening existing rules such as the “bright-line” test. They also agreed with officials that a capital gains tax would push up rents. end quote.

There are always unintended consequences and in this case, it will be detrimental to the very people this government claims it wants to help. People renting will end up paying more in rent. Madness. quote.

The three also clearly opposed taxing capital gains on land, businesses and shares.

Valuing business assets that would be subject to a CGT would be costly they warned.

“It can be seen from the rules the group has designed that there will be complexity, high compliance costs and inconsistent rules and these are characteristics of many overseas capital gains systems,” they said. end quote.

We have been told for many years, mostly by people like Gareth Morgan with vested interests, that we should end our love affair with property and invest in productive assets. Now they are going to be taxed as well. quote.

Kiwis could be left better off owning shares in foreign firms than in New Zealand companies under the proposed new rules, they said, while “foreigners owning New Zealand shares would mostly have no tax increase”.
“The outcome is clearly adverse.”

The three were also concerned a CGT could be “risky” for the Government if the value of assets such as local shares fell, because of the tax credits that would generate.   end quote.

A fall in share prices of listed companies might affect their performance, or their borrowing power. This is hardly a good way to stimulate the economy. quote.

“It is BusinessNZ’s judgment, shared by group members Joanne Hodge and Robin Oliver, that the disadvantages of the comprehensive capital gains tax rules developed by the group outweigh the advantages and the proposed rules should not be implemented,” they concluded.  

Stuff end quote.

If the government wants to disincentivise our economy and force aspirational New Zealanders overseas, then it should go ahead with this proposal. If not – and they should not – then they should drop it like the political hot potato that it already is. We all know they will not do that. Apparently, it is all about fairness. Who exactly they are being fair to, especially with discounted rates solely for iwi, remains to be seen.