PM’s call on capital gains tax proposal

At long last New Zealand can stop discussing capital gains tax in the abstract and consider a concrete proposal. Sir Michael Cullen’s tax working group has proposed a relatively simple, clean and comprehensive tax on the sale of a broad range of assets. It is a tax the Labour Party, if not all its governing partners, may take to next year’s election, if they have the courage.

The working group has recommended a tax on gains from the sale of a business, investment property and certain other assets at the taxpayer’s marginal rate, which means 33 per cent in most cases. It has not advocated a reduction in the top rate, which would be possible with the revenue gathered from capital gains, and would give the Government a carrot to dangle to voters as well as making its proposed new tax a little more palatable. Cullen’s group has suggested the revenue be used for an income tax cut only at the bottom of the scale by way of an increase in the income threshold where the next tax rate begins. It even suggests the next rate be increased to make the scale more steeply progressive. That might appeal to Labour and the Greens but they would be brave indeed to put it to a popular vote.

Many will find the mechanics of the proposed tax off-putting. First the Government would declare a list of assets to be liable for the tax. The group recommends the list start with all type of land and improvements (except owner-occupied homes), business assets and company shares. The Government would set a date at which the market value of all these assets would be assessed and gains from that date would be taxable.

The system chosen looks much more practical and affordable than taxing capital gains as they accrue on paper rather than waiting until they are cashed. The group seems unconcerned that assets could be over-valued at the outset. If an asset was sold for less than its stated value the loss would be tax deductible against other income, though the group sees risks that this could be abused. It would seem better to have a rule that the loss could be offset only against gains in the same asset class.

There are bound to be anomalies, such as when ownership of an asset that has gained value is transferred without money changing hands. The proposal is to “roll over” the tax liability to the new owner and the total gain to be taxed if it is eventually sold. That should take care of inheritance and relationship property transfers but there may be other situations where the tax is harder to apply.

Cullen’s group does not believe a capital gains tax will have much impact on house prices and rents, on the evidence of similar tax changes in countries such as Australia, Canada and South Africa. But residential rental property could become an easier target in political calculations if there is much greater concern for the damage a capital gains tax could do to productive business investment. Taxing only the gains on rental (and vacant) houses could put those on the market and see the capital put to better use. Now it is time for the Prime Minister to say, “Let’s do this.”