A capital gains tax for NZ?

20:23, Aug 24 2014

New Zealand's comparatively simple tax system is one of our biggest assets. In spite of this, whether we should introduce capital gains tax (CGT) is among the defining issues for Election 2014.

Labour and the Greens want a tax on assets to shift investment away from housing, raise revenue and increase "fairness". They say the tax will be "comprehensive" - a matter of opinion - and will both give a blanket exemption for the family home.

The idea isn't crazy.

Almost all OECD countries have such a tax and support exceeds current polling for the opposition as a whole. For example, a recent poll found 41 per cent of respondents strongly or moderately in favour of such a tax (46 per cent in Auckland, perhaps influenced by those unable buy their first home).

But the debate's poorly informed.

A capital gains tax alone will not end property speculation. At most, the tax will cause a temporary slow down.

In fact, the OECD notes that the introduction of capital gains taxes in Australia (1985) and in Canada (1972) did not have any noticeable immediate impact on aggregate house prices. Australia's now had capital gains tax for nearly 30 years.

But house prices in Australia increased by 10.9 per cent in the year to March 2014 according to the Australian Bureau. And they've increased by 66 per cent since 2003 (that's as far back as current statistics go). Capital gains tax needs to be justified on other grounds.

And the dollars at stake are often overstated.

The Greens plan to raise $4.5 billion per annum in time, Labour gradually increasing revenue to $1b by 2020/21. Compare that to forecast total tax revenues of $66.4b in 2014/15. CGT is no panacea. Even these estimates look overstated.

Introducing a complex new tax isn't easy. Or quick. Typically, learned commissions (for New Zealand, as far back as the 1967 Ross Report) will pontificate about fairness, efficiency and broadening the tax base as arguments in support of capital gains tax.

They'll raise complexity, the difficulties of taxing long-held assets, and "lock-in" - that is, people refusing to sell because of the tax - as arguments against.

Then, most often, they'll recommend further study with a view to introducing a comprehensive capital gains tax at some point in the future.

Governments will then ignore the issue for a generation.

Until there's a crisis - perceived or real. That may be exclusion from home ownership in New Zealand, rampant inequality in South Africa or commercial property speculation in the UK. So the political triggers often differ from the reasons espoused by capital gains tax supporters.

Then the fun begins. Who should pay the tax? More pertinently, who shouldn't pay?

The rest of this series (to run through this week) will discuss the vital design issues. Exempting the family home - not as simple as it sounds - when to grant relief to small businesses, and the unfairness of taxing paper gains on assets held for long periods.

We'll also look at valuation and other tax planning opportunities.

David Snell is an executive director at EY. He previously worked at Treasury.