So will Sir Michael Cullen’s Tax Working Group in its interim report due out soon propose the government implements a capital gains tax?
When the TWG was set up most people believed its main purpose was to design a broad-based capital gains tax, not just to capture a new source of revenue but to make the tax system fairer and reduce inequalities.
But a report in Stuff this week speculated the TWG has stopped short of recommending a broad-based capital gains tax.
“However, doubts began creep in earlier this year that the Government would ultimately back the plan, amid concerns the new tax would be unpopular and would cause rents to rise without delivering much in the way of extra revenue for at least a decade”.
The Stuff report quoted Paul Drum, chief executive of accounting body CPA Australia, who said in a newspaper column that “a close reading of the tea leaves” suggested the “highly important and politicised” issue of the capital gains tax “is probably to be parked for further consultation and input”.
Sir Michael Cullen hinted that was on the money, saying he had “not reacted strongly to that comment”.
The Stuff report came only a few days after a speech made by the government’s senior economic adviser, Treasury Secretary Gabriel Makhlouf, presented a strong case for a capital gains tax..
“There is one area where we stand out as an outlier and which I think needs further attention. The current approach to the treatment of capital income – in particular, capital gains – is highly inconsistent. Some gains are already taxed but others are not. The result is therefore something of a patchwork, the results of which can be unfair, regressive and distortionary.
“A more consistent approach to the taxation of capital gains would increase the fairness of the tax system, and reduce distortions by levelling the playing field between different types of investments.
“For these reasons, the Treasury has long believed there is a real case to extend the taxation of capital income.
“I recognise that this would come with its own risks, and give rise to higher compliance and administration costs. But there are interventions available to address these risks. The extent to which the impacts are realised – whether positive or negative – will depend significantly on the design of policy”.
Point of Order has no particular expertise to offer on the virtues or otherwise of a capital gains tax, but it does seem odd if the Tax Working Group, in the light of most people thinking it had been set up specifically to advise on making the tax system fairer, now backs away from a broad-based CGT on property and sharemarket investments. Sir Michael, however, showed when he was Minister of Finance great acumen in balancing political and economic risks.
There is little doubt politically that it would be a killer for any party campaigning for it in the 2020 election.
As for the economic implications – or some of them – BusinessDesk has reported a University of Auckland study which says a capital gains tax could result in listed investment property companies paying an additional $100 million in tax a year.
University of Auckland accounting professors Jilnaught Wong and Norman Wong, as well as examining the impact of a capital gains tax on listed property companies, have pulled together other studies on the impact of the tax on property owners. For example, an Inland Revenue/NZ Treasury study in 2009 estimated that taxing gains on property, other than owner-occupied houses, could raise $4.2 billion a year.
BusinessDesk says investment property companies make much of their money from rents. They also generate income buying and selling assets but mostly don’t pay tax on the gains. This means their effective tax rate is far lower than other companies.
For example, the research found that Goodman Property Trust paid an effective tax rate of just 3% between 2015 and 2017, whereas Fisher & Paykel Healthcare paid 29%. Kiwi Property Group, formerly Kiwi Income Property Trust, paid effective tax at 16.7% over the three years, just about half of that paid by companies like Mainfreight, Restaurant Brands or Sky Network Television.