National plays it tax safe
OPINION: With any Budget comes screeds of coverage on what it contains and how that might impact us, and also talk of what is missing.
The hoary old chestnut missing from Finance Minister Bill English's Zero Budget is a capital gains tax, first mooted seriously by Labour last July.
The National Business Review went so bold as to run a headline on Wednesday - the day before the Budget - predicting National could surprise everyone with a sudden shift in its tax policy towards a CGT. By Budget morning, NBR had pared that back to commentators having mixed views on whether the government would spring such a surprise.
In fact, it didn't. No surprise there for most of us but the question remains, should it have?
After all, the economic outlook is a lot tougher than National would like with the forecast operating surplus in the government's books in 2015 down to a narrow $197 million compared to $1.3b flagged a year ago.
Well-signalled tax measures that were in the Budget included a cut to the amount of tax deductions available for mixed use assets such as holiday homes, boats and aircraft and closing another loophole allowing farmers to cut their tax bill by switching livestock valuation methods from year to year.
The government hopes to reap an extra $410 million over the next year four years from that.
While National was prepared to go that far on hitting farmers and other wealthy asset owners, it stopped short of shutting down the biggest tax loophole of all and joining the rest of the OECD in taxing capital gains. That's despite a surprising groundswell of support for it among New Zealanders since Labour took a stand on the issue last year.
Labour proposed that if it had been elected, rather than routed, in the last election that it would introduce a flat 15 per cent capital gains tax from April 2013, applied to assets such as investment properties and businesses and even intellectual property rights such as patents and trademarks. Exemptions included the family home and retirement scheme payouts such as KiwiSaver.
English said, in defending National's dismissal of a CGT, that the last thing the productive sector needed right now with a recovering economy was yet another tax. Fair point.
There are indeed mixed views on the issue among market commentators with some saying the tax would be more trouble to administer than it would gain and the exemption of the family home makes it inefficient.
Others think it's high time those who make a windfall out of selling investment property should be taxed on that and see it as a way of lessening Kiwis' fascination with investing in property at the expense of more productive investments.
The two big problems with a capital gains tax in New Zealand is that the exemptions make it hardly worthwhile doing, given how much of our collective assets are tied up in the family home. There's also the issue of farmers putting up with relatively low returns over many years in the hope of a capital gain at the end of their working life when they sell the farm.
Is there a better way? A land tax has also been mooted whereby land owners, regardless of use, would pay an annual tax on the value of their land in much the same way as they currently pay rates. While this would draw into the net wealthy landowners who currently escape paying tax on their property investments, it would also catch elderly people without much cash flow who still live in valuable homes or Maori landowners who may not have the property in productive use.
On the other hand, it would be simple and efficient though as PWC tax partner Geof Nightingale points out, there would be a big hurdle to introducing it as property values would likely plummet.
You can see why National chose to play it safe and tinker around the tax policy edges in this Budget rather than risk upsetting voters on what is still a divisive issue.
- © Fairfax NZ News
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