How to make CGT more acceptable

Photoshopped image credit: Pixy

I found this opinion piece on Stuff over the weekend and it is worth a bit of a discussion. The government’s position on the introduction of CGT is that it will be ‘fair’. I am concerned that, although a lot of supporters think that CGT will be a tax applied mostly to the very rich, it is in fact, middle New Zealand that will pay the brunt of it; which is not ‘fair’ at all. However, Janine Starks, who wrote the article, has a few very good suggestions that just might make the tax more palatable to many people. Let us see what you think. quote.

CGT is a game of snakes and ladders. The Tax Working Group have dumped a big pile of snakes at Grant Robertson’s feet and now he needs to cull, shorten, simplify and add some ladders.

Here’s how the political generosity would look:
1. Add more housing exemptions. Exempt one property per adult. It allows a couple to have a home, plus a bach or a rental. It’s generous, but are we really after the small Kiwi dream? Go and chase those with a proper rental portfolio. end quote.

I think taxing landlords has always been the primary aim of those supporting CGT, but at least this would exempt the holiday home. I’m not sure how a holiday home owned by a number of family members would work, though. quote.

2. Discount the tax on capital gains to 20 per cent. Current proposals would see most people paying a 33 per cent marginal rate on gains. Stop using the words “income is income is income”. It isn’t. Wages, dividends, interest and rent are income. Those things are regular and less risky. end quote.

Most countries with CGT apply a lower rate, often a flat rate. There is no reason why this could not be done here. quote.

3. Kiwi business relief. Why differentiate between those who farm cows or data? Chances are it’s your retirement plan and all business owners deserve a partial exemption. A lifetime retirement allowance could exempt $1 million in gains for those aged 65-plus.

We need CGT exemptions to focus on individuals and what they own, not the level of turnover of a company. It humanises money and makes it easier to judge fairness.

When Sam Morgan sold Trade Me he personally netted $227m. As a start-up most of it would be a capital gain. Do we mind if he received $1m tax-free and paid CGT on $226m? end quote.

I like this, because it exempts a large number of small businesses currently caught by the TWG’s proposal. If the idea is to tax the really rich, then this proposal helps to do just that. quote.

4. KiwiSaver, managed funds and direct shares. The tangled snake pit. Taxation of PIEs, FIFs and direct shareholdings is no longer fit for purpose. There’s an unacceptable level of anomalies that investors can’t navigate. It’s so bad even fund managers threw their hands in the air when the Tax Working Group offered them the chance to tax only the realised gains of local Kiwi and Aussie shares. They want to use a more onerous method of taxing paper gains, because it’s an admin nightmare.

Seriously, Grant? When fund managers are turning down tax concessions available to direct investors, you’ve got a balls-up on your hands.

The next mutant snake swings between the CV tree and the 5 per cent cap on foreign shares. Whoops, a KiwiSaver manager can’t take advantage of that swing or the $50,000 de minimus exemption enjoyed by direct investors. Surely this one is headed for a lethal injection, because New Zealand and Aussie shares don’t have a 5 per cent cap on their gains. end quote.

This area is way too complex, could cause some serious problems for our local sharemarket, which is a minnow by world standards and it could encourage foreign investors to swoop in and take over many of our most valuable companies, because they have a tax advantage. All because Jacinda thinks it is ‘fair’. It isn’t. I also bitterly disagree with further taxation on retirement savings, particularly in KiwiSaver, which, quite frankly, are taxed enough already. quote.

Finally there’s a tangle of ladders proposed for lower-income earners. Fiddling with PIR rates and employer contributions to name a couple. It’s all got so convoluted everyone’s lost track of which concession was the apology for which anomaly.

Stuff. end quote.

I like the idea of a flat rate of CGT, and also the idea of applying exemptions at the lower end of the scale, meaning many middle taxpayers would escape the CGT net. The biggest problem here is that these exemptions will result in a much lower tax take than predicted. That is potentially a real problem for a tax-and-spend government, that thinks people who earn over $70,000 a year are wealthy.

There is nothing ‘fair’ about taxing a small business owner’s capital gain of $50,000 while a $1 million apartment in Auckland goes tax-free because it is a family home. Let us hope that common sense prevails when the government announces how exactly they intend to implement CGT, in a few weeks time.