Devil is in detail with CGT

TAXING TIMES
Last updated 13:24 07/04/2014
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Taxing Times is a weekly column that looks at various aspects of tax and money management.

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In my article on March 22 I discussed some of the issues that arise when thinking about a whether a capital gains tax is a good policy option for New Zealand.

My conclusion was that there are competing policy objectives, and, in making the decision, a lot depends on the policy design of the tax itself.

That is, if the tax is poorly defined, for example, it contains too many exemptions and reliefs, then it could well cause more harm to our tax system and overall economic efficiency than it resolves.

A phrase often used in tax is that the "devil is in the detail". So, following on from my last article, I set out below what I understand to be the policies of two key parties advocating a CGT, namely the Labour and Green parties, from their respective websites.

Labour party policy

Labour's policy has been thought through in quite some detail and gives readers a good insight into what they propose. The key features are:

Flat rate of 15 per cent on the net gain at the time of realisation;

The tax will apply to sales of land (other than the family residence), shares, units in a unit trust, options, leases, goodwill, contractual rights, foreign currency, precious metals, intellectual property rights and endowment life insurance policies;

Capital losses can only be deducted against capital gains;

No inflation indexation;

Only gains made after introduction will be taxed - achieved by taxing gains over market value at the time of introduction;

As above, an exemption will apply for the family residence and also for personal property such as motor vehicles and whiteware and the like, collectables such as art and jewellery, small business assets less than $250,000 sold at the time of retirement, and lump sum withdrawals from retirement schemes such as KiwiSaver.

Green Party policy

The Green Party policy design detail by contrast is quite high level. Their policy provides:

The introduction of a comprehensive capital gains tax - which I presume will be included within other income as opposed to being a separate tax like the Labour proposal;

Gains will be taxed upon realisation;

Gains will be inflation adjusted;

Applies to assets in New Zealand that are purchased and sold by New Zealand residents, as well as people living overseas;

An exemption for the family home is supported;

Mechanisms to allow the capital gain to be spread over several years for New Zealand residents.

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Interestingly, the policy design between the Green and Labour parties has striking differences: Labour advocate a separate tax at 15 per cent, presumably to avoid the "lock in" affect that a CGT can have that discourages asset sales, and no inflation adjustment, whereas the Green Party policy is a tax that would appear to be the same as an income tax, and as such the "gain" will be included in tax returns along with other income, but will be inflation adjusted. There is particular mention of taxing non-resident people in the Green Party policy.

While both parties advocate exempting the family home, there are several other exemptions advocated by Labour that concern me in terms of policy design. In my experience, exemptions in a capital gains tax system tend to be the most heavily exploited.

The policy dilemma facing politicians in designing a CGT is that it is hard to have an effective CGT that minimises economic distortions and raises revenue, but at the same time does not tax things that are unpopular.

If a CGT does not remove some economic distortions and raise revenue, best we don't go there.

* 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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