Capital gains taxes - which side?

TAXING TIMES

CRAIG MACALISTER
Last updated 07:49 25/03/2014
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Taxing Times is a weekly column that looks at various aspects of tax and money management.

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The issue of whether New Zealand has a capital gains tax (or CGT) is the Transmission Gully of New Zealand's tax system.

That is, it's something we spend a lot of time and money talking about it without making any progress one way or the other. The perennial issue of whether New Zealand should have a capital gains tax is set to be hotly debated in the run- up to Election 2014.

Both the Green and Labour parties are advocating for a CGT.

People tend to fall into two distinct groups on this issue. On the one hand are those who believe a CGT would not bring in much revenue, would be costly to administer, easy to avoid, cause people to hold on to assets (the lock-in effect) and unlikely to achieve any cooling in the housing market.

Then there are those who believe a CGT would remove a distortion from New Zealand's tax system by removing the tax bias in favour of investment in capital assets. It would be more equitable, and provide more certainty over the taxation of property gains, and cool off property prices.

So who is right?

In my view the answer is somewhere in the middle and would depend very much on the design.

It is true that a CGT does not generate much tax revenue in its early years, and that it can be complex and cause lock-in.

Further, with the Australian model as a comparison, a CGT may not cool off the property market for long. Rather, it seems people just factor the cost of the tax into the prices of capital assets and the market just moves on much as before - witness Australian housing prices, especially prices in parts of Sydney.

Australia has both a capital gains tax and a stamp duty, which ranges progressively from 2 per cent to 7 per cent depending on what state you are in and whether the home is your private residence, investment property, whether you are a first home buyer or pensioner and so on.

The point being that these taxes have not quelled Australian property prices and makes me question the assertion a CGT would temper New Zealand prices.

Having said that, a CGT could well equalise the taxation of capital assets with the taxation of income from labour and other types of investment income and reduce the investment bias in capital assets.

However, whichever side of the line you find yourself sitting on, when thinking about a CGT and what it will or will not achieve, the question you need to ask yourself is what does the detail look like: if a CGT contains too many exemptions, it will be ineffective and costly.

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Too often in this debate I find that people are too quick to jump to the conclusion that a CGT will be good for this country because it will improve overall tax system efficiency without understanding what the tax will look like.

It's a little like agreeing with your partner that the house will look better with a new coat of paint without inquiring what colour paint they have chosen.

In my next article I will look at the CGT proposals put forward by Labour and the Greens, and help you decide which side of the line you sit on the issue.

Craig Macalister is tax principal at accounting firm Crowe Horwath. He can be contacted on (03) 211 3355.

- The Southland Times

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