Article: Property Investment

Capital Gains Tax Heading Your Way with Frank NewmanCapital Gains Tax Heading Your Way with Frank Newman

Last week the Tax Working Group published its interim report on its recommended changes to the tax system. The 196 page report makes no firm recommendations but it discards a number of matters raised in the discussion paper and gives strong indications of what is likely to be included in the final report which is due in February.

The Group has recommended against changes to the GST tax regime and ruled out increasing the exemptions. Likewise, the Group is not recommending changes to the company tax rate, nor is it recommending a general wealth tax or a land tax.

It is however recommending a capital gains tax and sets out two options. The first is extending the capital gains tax net to include:

• “interests in land (other than the family home). This includes all other residential property, commercial, agricultural, industrial and leasehold interests not currently
• intangible property, including goodwill.
• all other assets held by a business or for income producing purposes that are not
already taxed on sale (such as plant and equipment);
• shares in companies and other equity interests.”

Exemptions will apply to the family home and “certain personal assets including cars, boats and other household durables…and higher value personal assets such as jewellery, fine art and other collectibles (rare coins, vintage cars etc.)”.

The second option is to tax “deemed” or assumed returns from investment assets.  Having put this as an alternative, they then essentially eliminate it by saying, “there has been little use of accrual based taxes in practise by other countries and we do not support adopting one.”

It is absolutely clear that the first of the alternatives will be recommended in their February report.

The Group justifies a capital gains tax by saying it “will improve the fairness and integrity of the tax system, and level the playing field between different types of investments. It will provide an increasing source of revenue over time…”

On the negative side, they say, “extending the taxation of capital income will [significantly] increase administration and compliance costs, and could lead to some reduction in the overall level of saving and investment in the economy.”

They also noted that the 2001 (McLeod) Tax Review said capital gains tax regimes tend to be one of the most complex areas of tax law in jurisdictions that have such taxes. Clearly that compliance cost will fall upon those with investment assets, and will be a significant revenue boost to the accounting industry.

The report predicts a capital gains tax would collect $290m in the first year ended 30 June 2022, rising to just under $6 billion in year 10. To put that into context, the tax revenue from individual income tax is currently $32 billion, GST $20b and company tax $14b.

Clearly as a result of the tax, less money will be available to reinvest (because tax will be paid from the sale proceeds) and more capital is likely to be diverted to assets that are not subject to capital gains tax such as the family home - and “personal assets including cars, boats and other household durables… and higher value personal assets such as jewellery, fine art and other collectibles (rare coins, vintage cars etc.)”

The long-term effect will be bigger and better appointed family homes housing ever larger collections of art (perhaps stamp collecting will become fashionable again!), and large garages housing classic cars.

With respect to environmental taxes, the Group says there is “significant scope for the tax system to sustain and enhance New Zealand’s natural capital” – including expanding the Waste Disposal Levy, strengthening the Emissions Trading Scheme, and advancing the use of congestion charging.

Not surprisingly, given it is chaired by Sir Michael Cullen - a former Finance Minister in the Helen Clark Government - the Tax Working Group has produced a very astute political document. It delivers exactly what the government wanted: an expanded capital gains tax regime that will have less impact on their voters than on National’s, along with a range of environmental taxes.
The politics is clearly evident in the comments of Finance Minister Robertson who has said total tax revenue will not increase should a capital gains tax be introduced. He has not ruled out tax cuts.

This is how I believe things will play out. The Tax Working Group will recommend a capital gains tax in its February report, which the government will accept. Legislation will then be introduced prior to the 2020 election - to come into effect on 1 April 2021. At the same time a reduction in income tax threshold limits will be introduced.

Taxing the “investment-rich” more, while taxing the “investment poor” less will appeal to Labour’s voter base, and may not cause great discontentment from the 46% of the population that support National, given it was National Party policy to reduce the income tax thresholds.

What Labour will not mention, is their intention to incrementally increase the tax rates once they are in place, as was the case with GST (10%, increased to 12.5%, then to 15%) and with the Brightline test (extended from 2 to 5 years). 

It’s smart politics. Shame it gets in the way of smart economics.

Frank Newman is the principal of Newman Property Consultancy. He is the author of numerous books on investment matters. For questions or comment about this article contact .(JavaScript must be enabled to view this email address)

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