Capital gains: the taxing task of balancing economic and political considerations

 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..

Mahklouf  told a  Queenstown audience:

“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.




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