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Frank Newman


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Fairness has been talked about a lot lately, by the government. It appears to be justifying everything by saying “it’s the fair thing to do”. Fairness has replaced housing affordability as the primary justification for the government wanting to introduce a capital gains tax (CGT).

There is no question a good tax system should be fair, which is taken to mean that it should reflect a taxpayer’s ability to pay. It assumes those who earn more should pay more tax because they can afford to. That’s why we have what’s called a progressive income tax system.

But fairness is only one of a number of traits an efficient tax system should have. Another trait is simplicity to avoid anomalies or “collateral damage”, and reduce the risk of tax avoidance. It should also be easy to administer with minimal compliance cost on the party being taxed.

GST works well for these reasons. It’s a consumption tax paid only by those who consume goods and services. It has very few exemptions and is relatively easy to administer – although not without a cost to business owners.

And that’s why the proposed CGT fails miserably – it’s not fair, not simple, and has significant compliance costs that fall upon the taxpayer.

Even the Tax Working Group acknowledges there would be significant compliance costs. Is it fair that an estimated one billion dollar cost of obtaining investment valuations will fall on those own assets like baches, lifestyle blocks, rental property, businesses (large and small), farms, and intellectual property?

Is it fair that the proposed CGT regime taxes gains arising from inflation, when it is estimated that inflation accounts for about half of the gain in capital value? Other countries recognise that this is not fair and discount the rate to ensure the tax is paid on real gains.

Is it fair that capital gains accrued over a number of years would be taxed as income earned in the year the asset is sold?  The effect will be to tax incremental income as a lump sum at the owner’s highest income tax rate (33%). Surely it would be fairer to tax capital gains at a discounted rate to reflect the fact that had it been accounted for on an annual basis it would more than likely be averaged out at a lower marginal income tax rate.

Is it fair that the family home is exempt from the CGT? Why should those who sell their home in Auckland for millions and then reinvest in a much cheaper home in the provinces not be taxed on the gain?

Is it fair that the CGT creates an incentive to add value to one’s home, which is the least “productive” of all assets? Surely investment capital will be diverted into owner occupied housing to avoid the CGT?

Is that fair that those churning their home every five years or so will avoid the CGT? Is that the best thing for our economy?

Is it fair that iwi may be exempt from the capital gains tax? They presumably are arguing this on the basis that they are holding legacy assets for future generations. Well, don’t most people hope to provide for their descendents? 

Is it fair that lifestyle block owners will have to split the value of their property into a CGT exempt lot containing the house and curtilage of no more than 4500m2, and a balance area which would be subject to the CGT – even though that area may not be producing an income and may not be subdividable due to restrictive planning regulations.

Is it fair that New Zealand investors buying foreign shares will be taxed at a lower rate than New Zealanders buying New Zealand shares? Is it fair that the CGT will encourage individual investors and fund managers to invest in global sharemarkets rather than local shares?.

A capital gains tax may be fair if it captured all assets, family home included, was set at a relatively low tax rate (10% – 15%), was inflation indexed, and did not incur onerous compliance costs.

A capital gains tax may be a good idea in theory, but it’s a disaster in practice, which is why every tax working group dating back to the McCaw Report in 1982 has advised against a CGT.

Fund manager Brian Gaynor recently summarised the history of Tax Working Group recommendations over the last 50 years or so, and said of the two most recent reports:

“The 2001 McLeod Tax Review did ‘not consider that New Zealand should adopt a general realisations-based capital gains tax’ as it wouldn’t make our tax system fairer and ‘would increase the complexity and costs of our system’.

“The Professor Bob Buckle-chaired 2010 Tax Working Group Report concluded: ‘the most comprehensive option for base-broadening with respect to the taxation of capital is to introduce a comprehensive CGT. While some view this as a viable option for base-broadening, most members of the group have significant concerns over the practical challenges arising from a comprehensive CGT and the potential distortions and other efficiency implications that may arise from a partial CGT’.”

The Cullen proposal fails on all counts. It’s not workable and it’s certainly not fair. It’s ideological. The government’s response to it will be a test of pragmatism vs ideology.