If there’s such a good thing as a good tax, it’s one that discourages things we don’t want and encourages things we do.
That’s where the Tax Working Group was handicapped from the start when the government ruled out any CGT on the family home.
A CGT hasn’t had any impact on keeping house prices down in other countries, but if, as we’re constantly told New Zealander’s over-invest in their houses, taxing other capital gains and leaving houses alone will only make matters worse.
We’re also told, with good reason, that New Zealand lacks savings and investments. Why then would a government introduce a tax which disincentives them?
If has been widely forecast the Tax Working group’s report recommends a CGT on savings, investment and businesses and not on family homes, it will be getting the tax the bad more and the good less rule back to front.
It will almost certainly get a lot more wrong.
The Taxpayer’s Union provided five rules for a CGT:
To be fair, a new capital gains tax must abide by the following:
- 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.
- 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.
- 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.
- 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.
- 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.
The TU has also provided 19 details to look out for in the recommendation for a CGT:
Details to look out for include:
- Rollover relief:
- will the capital gains tax apply on death or just on sale of an asset;
- will the tax apply if capital is simply being recycled within the same asset class (selling a smaller farm to purchase a larger farm, for example)?
- The rate:
- will there will be a discounted or lower rate, like in Canada, Australia, the United Kingdom, or the United States?
- Revenue neutrality:
- will the revenue be offset with tax cuts;
- if so, who will receive them;
- will revenue neutrality be maintained in the medium-to-long term as CGT revenue grows?
- Family home exemption:
- will there be exemption exclusions for large properties (will lifestyle blocks be subject to the tax?);
- will there be a ‘maximum value’ for the family home;
- how much tax will be payable if there is an exemption exclusion?
- ‘Valuation Day’:
- will asset owners be required to value their property and businesses;
- if so, will it be at their expense, or will the general taxpayer be required to pay;
- if the general taxpayer is required to pay, what will be the estimated cost of ‘V-Day’;
- how much time will taxpayers have to obtain asset valuations;
- if valuations are not obtained, will other ‘default valuations’ be used?
- are there any sectoral exemptions (e.g. racing, fisheries);
- will Maori authorities pay capital gains tax, if so, at what rate;
- how are vehicles, boats, antiques etc. treated?
- at what rate are trusts taxed;
- will they be taxed on accrued or realised gains?
Fairness, which is the supposed motivation for introducing a CGT, is very much a matter of opinion but if the proposals from the TWG don’t meet the five rules, it will be anything but fair and do more harm by disincentivising savings and investment.