Is capital gains tax needed?
In an earlier article, I wrote about why governments impose tax. In this article, I discuss capital gains tax (CGT) and ask whether we need it.
Some commentators argue that a CGT, or at least an income tax on all capital gains, is a necessary part of a modern tax system. Some political parties argue that a CGT is the answer to our tax problems and possibly other problems as well.
Excuse me for stating the obvious, but a CGT is a tax on capital gains. However, many "capital gains" are already taxed as income, including:
Gains from some land transactions - gains from subdivisions and land that has been rezoned as well as sales by persons other than those in a business relating to land;
Economic gain from financial arrangements, including foreign currency movements;
Foreign investment fund (FIF) investments - where the comparative method is used to calculate income; and
Gains from personal property acquired as part of a scheme or undertaking. Managers of superannuation funds would also add that gains on investments are also taxed as income.
At a recent conference on the design of a possible CGT, several foreign and local speakers highlighted relevant issues. These include:
Whether to have a separate CGT or have capital gains taxed as income;
Indexation to avoid, or at least reduce, the impact of inflation;
Whether to tax realised or unrealised gains;
Whether a CGT would be imposed at a lower rate or rates than income tax and, if so, the steps that would need to be taken to ensure that income is not treated as a capital gain and taxed at a lower rate;
Whether taxpayers would be able to offset capital losses against income or quarantined to be offset against future capital gains;
Whether non-residents would be subject to a CGT on New Zealand assets and, if so, how this would be enforced;
Whether our international tax treaties need to be renegotiated.
The general consensus of the conference was that a CGT or expansion of income tax to capture more capital gains should occur only if there is a good reason to do so. In my view, pressure on future governments to raise more revenue will result in an expansion of the tax base.
I am not in favour of a separate CGT. Rather, I would expand the definition of income to include gains that are currently tax-free, provided income tax rates are reduced.
It is likely that most taxable gains in New Zealand would relate to property; whereas, overseas it is mostly shares.
Taxpayers may delay selling land so as to defer the tax liability. Therefore, it may be necessary to impose an annual land tax to overcome this "locked in" effect.
Whatever form of CGT or expanded income tax is eventually introduced it is unlikely to be simple.
Murray McClennan is the principal of Tax Central Ltd, a specialist tax consulting firm. Email email@example.com to contact him. The above comments are of a general nature only and are not a substitute for specific advice.
The Southland Times