COMMENT: Back in 1986, Finance Minister Roger Douglas introduced a value added tax on point-of sale purchases to replace a confusing array of sales taxes.

The new Goods and Services Tax, or GST, was broadly modelled on similar taxes in Australia, the UK and the US but differed from these in two key respects. Firstly, it was universal, which means that unlike other countries where the politicians had caved to populist pressure, the New Zealand tax applied to everything, with no exemptions. This single step arguably made our GST system the simplest and most successful in the world and, despite periodic election pledges to remove it from certain goods, it has stood the test of time, avoiding the need for an army of inspectors tasked with deciding whether a biscuit is a food staple or a luxury item.

The other key feature of GST in New Zealand was that it was part of a more comprehensive package of fundamental tax reforms. It replaced much more crippling sales taxes with a fairer, consistent, rate – and those who were made worse off by the changes were compensated through the introduction of the Family Support scheme. As a result, few people were greatly affected by the change.

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Contrast that with more recent attempts at tax reform which have invariably ended up as politicised exercises in which there are winners and losers and where we end up fighting with each other over perceived issues of equity and fairness. The most recent example of this were the proposals made by the Tax Working Group in 2019.

The group, which was established in late 2017 under the Chairmanship of ex Finance Minister Michael Cullen, was tasked with “improving the fairness, balance and structure of the tax system over the following 10 years”.

Sadly, the group’s final report achieved none of these things and, instead proposed a punitive capital gains tax on house sales made by property investors.

That proposal was ultimately killed off by Prime Minister Jacinda Ardern in the face of a voter backlash and opposition from her partners in Government, NZ First. The rejection of the tax also came with a promise that there would be no further attempts to introduce a capital gains tax while Ardern was prime minister.

Despite this, we’re now seeing renewed calls for an introduction of such a tax from some quarters.

But will it happen?

Actually, it already has.

New Zealand has taxed capital gains for decades where such gains are the primary basis of income for a business. For example, a property trader (as distinct from an investor) who buys and sells property quickly in the expectation of making a profit on the increase in value has always paid tax on those capital gains because that’s the nature of their business. Admittedly this was a bit loose for a long time, but was tidied up by National with the introduction of the Bright Line test in October 2015.

The question, now, is around whether we should go beyond this and tax the gains made on any asset that increases in value, even if it wasn’t purchased primarily for that purpose. For example, should we tax the gains made in the value of rental property, even though property investors are in the business of providing long term rental accommodation? This would mean that investors, who already pay tax on the profit from their rental business, would be paying tax twice.

Likewise, should homeowners pay CGT on the same basis? And if the answer is yes – why, and how?

There’s nothing wrong with having this debate from time to time, but if we’re going to have it again, let’s introduce some proper ground rules. For starters, let’s model the debate on the way we introduced GST in 1986 where there was agreement that we were looking at the whole tax system, where we looked to rebalance things so that no one was too adversely affected, and where the focus was on reform rather than punishment. If we do that, there’s a chance we could get buy in from enough Kiwis to make it happen.

That said, Ardern has invested too much political capital in her promise not to introduce a CGT, so, other than further pointless tinkering with the Bright Line test, I suspect that the chances of any further action on CGT while she is prime Minister are virtually nil.

- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]


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