As expected, the merits, or otherwise, of a capital gains tax (CGT) have been hotly debated in the weeks since the release of the recommendations of the Tax Working Group, chaired by Sir Michael Cullen.
Essentially, the group's key recommendation is to tax capital gains made on investment housing, shares, business assets and some “intangible” assets while exempting the family home and certain personal assets such as jewellery and fine art.
While CGT isn’t the group’s only recommendation, it’s easily the one that has most animated people on both sides of the debate, particularly given that it’s a topic on which few people occupy the middle ground. You generally either support a tax on capital gains, or you don’t.
For the record, I don’t, at least not in the form proposed. Even if you accept that the tax system needs reform – and while there’s merit to the argument, advanced by some, that capital gains are a form of income and should therefore be taxed – that position lost any validity the moment the Government decided to exempt the family home from consideration for no reason other than political expediency. There’s simply no compelling logic for heavily taxing one group while completely exempting another, particularly when the same distinction isn’t been made in respect of any of the other assets for which the CGT is being recommended.
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As a result, it’s hard not to draw the conclusion that the proposed CGT on rental investors is an envy tax designed to punish people who have tried to provide for themselves.
Sadly, it gets worse. Under the recommendations of the Tax Working Group, property investors would, in most cases, be liable to pay the top tax rate of 33 percent on any gains made. This would mean that capital gains, in New Zealand, would be taxed at one of the highest rates in the world – a recommendation which comes as a direct consequence of extracting the tax from such a small pool of taxpayers. As a result, someone who purchased an investment property for $650,000, and saw that property increase to $975,000, over time, would pay tax of $107,250 on that capital gain. That’s simply outrageous.
There is, of course, a much fairer solution, and that is to make CGT universal, much the same way as we did when we made GST universal when we introduced it back in the late 1980s.
GST was introduced at a flat rate and with almost no exemptions, and went on to become one of the fairest and cleanest value added taxes in the world. As a result, apart from being used as a periodic tool at election time, it is now pretty much universally accepted.
If the same approach was applied to CGT we could drop the rate to just 3.5 percent and still raise more revenue than the Tax Working Group is estimating over the first five years.
The numbers are straightforward. There are around 1.8 million homes in New Zealand and around 180,000 of these are sold each year. Based on the above example of a home being purchased at the current national median of around $650,000 and on-sold, in five years’ time, for $975,000 – a gain of $325,000 – a CGT of 3.5 percent would mean average tax of just $11,375 on the sale, but a whopping annual tax take of $2.05 billion.
It’s worth noting that these numbers deal solely with a CGT on property, whereas a truly universal capital gains tax would levy a small amount on the gain on all appreciating assets, which means there’s potential for significantly more revenue with which to “rebalance” the tax system without placing an unfair imposition on any single group of taxpayers.
If the Coalition can find a solution which minimises the impact of a CGT on New Zealanders, and reinvests the additional revenue back into the system in a way which is fair and sustainable, they may yet gain widespread support for the proposal. Otherwise, in its current form, the recommendation of the Tax Working Group is likely to contribute to limiting this Government to one term of office.
- Ashley Church is the former CEO of the Property Institute of New Zealand and the Auckland Property Investors Association. He has been a regular media commentator on property matters for over 20 years and now writes on behalf of OneRoof.
