Capital gains tax (CGT) has become a major policy difference between the two main political parties in the lead up to this year’s election, but it’s unlikely to get any air time in the government's 2014 budget this month.
On the one hand, National has clearly given further consideration to a CGT, given comments from the OECD that it’s missing from our arsenal of taxation tools. Still, they have firmly rejected it.
On the other hand, Labour has endorsed their intent to implement a full CGT regime, likely to be based on their policy from the last election. You can expect to see a standard CGT roll out at a concessionary rate of 15% (to deal with the effects of inflation), exemptions for the family home, a likely grandfathering of assets being exempt, if they were acquired before implementation date, and taxation only upon realisation.
If CGT is such a critical weapon to the collection of taxation in New Zealand (which all governments desperately need, including New Zealand’s) and an integral part of market place policy, the question remains: Why isn’t National keen to implement it, starting with this year’s budget?
National have considered the trade-off between the additional complexity to the tax system, the range of quasi-CGT regimes already in place (certain land transactions, international tax regimes and financial arrangement rules to name but a few), and the deferred nature of any potential additional tax revenue collected. They’ve concluded that a full blown CGT regime belongs in the scrap heap for now.
Despite the policy purity, it’s widely recognised that a CGT will only raise revenue of any substance after some years of being in place (estimated at 15 years). One should also read between the lines, that until Inland Revenues First Mainframe computer system is finally upgraded, such a significant policy change would likely be the last straw to a full collapse of the current computer system.
From a Labour perspective, one should also read between the lines. Despite not publicly stating this, CGT is a socialist tax which aims to tax the wealthy who own capital assets. It is, apparently, the panacea for the Auckland housing crisis, in that it will tax all the land speculators (despite the fact that true land speculators are already taxed under the land provisions of other Tax Acts) and transfer investment into productive assets.
The disturbing feature of a CGT policy, which has not been aired by either party, is the negative impact it will have on market behaviour and transactions.
New Zealand seems to be clawing its way out of the economic doldrums. Confidence is high, taxes are being collected and a surplus is being promised in this year’s Budget. The last thing we need is an almighty hand-brake on our markets. A CGT would result in people holding onto their current assets, given their preferential pre-CGT status. Assets would not be sold, until the owner really wanted to quit and shift its protected assets into CGT affected assets.
This would result in a nationwide shortage of supply in the housing market, as people hold on to property, most likely resulting in higher house prices. However, it may lead to an increase in the availability of rental properties, which may have a short term benefit to those looking for accommodation.
Despite Labour stating a CGT would shift resources efficiently into productive assets, businesses would also be subject to CGTs. This would either be levied on the owners of the businesses that are bought or sold, either directly or indirectly on the shares, and on businesses themselves which buy and sell business assets. Productive assets would therefore also be hit, and the same market slowdown would hit productive sector transactions.
And finally, the negative impact on the ease of tax administration should also be acknowledged, given a significant rewrite to our current rules that would be required, and the increased complexity and lack of understanding that would result.
There will be a time and a place for considering the introduction of CGT. However, the negative impact this would have on our current markets, business and our fragile economy mean that now is not the time. So don't expect to see any spectre of a CGT in this year's budget, or any time soon (pending election results later this year).