Just when we thought the generic tax policy process took all the fun out of budget day surprises, for those of you who remember the days of huddling around the radio to hear the announcements of Government policy and tax rises, the 2012 Budget could deliver the king of all surprises.
The Government has promised innovation to turn the economy around. And despite its apparent protestations that CGT is off the agenda, it is the glaringly obvious tax which is missing from the broad base tax regime which New Zealand’s tax system is based on. New Zealand is the odd one out in the OECD in which CGT abounds.
So why would the Government introduce a CGT now, particularly when it has vehemently denied it has ever been on the cards, and as an inefficient and cumbersome system?
The celestial stars seem to be nicely aligning on this one.
Firstly, there have been a range of reviews which have called for the introduction of a Capital Gains Tax, including certain members of the Tax Working Group, comments by the Savings Working Group, OECD comments on New Zealand, and Treasury briefing papers to the incoming Government.
Secondly, the political will exists with both Labour and the Greens in support having reaffirmed post-election policies advocating CGT.
And thirdly, while historically CGT was a move to political suicide, the public debate on the issue has eased uncertainty with the voting public and reaffirmed a tax limited, in its scope and reach. It is relatively clear the family home won’t be touched.
Most importantly however, are recent events which could get it across the line.
Few can contemplate the type of capital gains to be made by the co-founders of Facebook, Mark Zukerberg and Eduardo Saverin and even some of the original Facebook employees with shareholdings following its IPO launch this week. The US Government however rubs its hands in glee at the resulting tax bill which could run into the billions of dollars, at a time when additional taxes are hard to come by. Likewise, the introduction of a CGT in New Zealand could go some way in appeasing the opponents of proposed assets sales, with a CGT enabling a “double dip” from the sale proceeds, both from their initial sale and then in the form of a CGT from any subsequent gain on the eventual disposal of those shares.
Finally the potential for a reheating of the property market in New Zealand could be assuaged through the impact of a CGT. While the reheating may have little to do with speculation and more to do with (under) supply and (over) demand, and relative values for earthquake compliant buildings, a CGT may have a desired effect of keeping a lid on the property sector and ensure limited opportunity to return to a property speculation that will detract the country from its need to develop the productive sector.
That said, the likelihood is that a full blown CGT is unlikely. With concerns about the property sector, we are more likely to see an extension to the quasi CGT rules already in existence with a focussed taxation of equities, and limitations on the deductibility and offset of tax losses. Examples could include deemed taxation for equities held less than a certain time period (such as say 3 years), and loss quarantining rules for rental properties, or a return to limiting the quantum of amount allowed to be offset against other income such as the specified activity limitations of the 1980’s where only $10,000 was able to be offset each year.
The Government has the option of being bold or tinkering around the edges again. Innovation lends weight to be bold, and a real surprise come Thursday.
Greg Thompson
Partner, Tax
T +64 (0)4 495 3775
M+64 (0)21 281 7332
E greg.thompson@nz.gt.com