Growing the CGT

It seems likely that if Labour gets a second term, the writing is on the wall for broader capital gains tax (CGT) collection. From the outset the family home and land have been ringfenced by Labour’s working group, and will likely be exempt. But if you own a bach, a rental property, an extra piece of land, business, shares, or even intangible assets like goodwill, you will find that any capital gains or income you make off them may be taxable in the near future.

I say ‘broader’ collection because New Zealand already has capital gains taxes, but the coverage of these taxes is spotty. For example, the tax on interest you receive from having money in the bank is already a capital gains tax. We also already have a bright-line test for quick turnover investment properties, as introduced under National. Despite the fancy name, this is simply a capital gains tax.

So while the housing crisis was front and centre for the introduction of the bright-line test, it’s important to realise that this current broadening of CGT is not focused on fixing the housing crisis. It’s part of the government’s attempts to find ways to pivot away from income tax as the main form of revenue, as the future of paid work becomes increasingly at risk of automation and our population ages.

In many respects this is a good thing, especially if it rebalances some of our investment decisions in the short term away from simply owning more property, but at best this will be a side benefit. It might simply mean that people just decide to over-invest in the family home.

So while this is a long-term move to ensure the security of government income, it seems to be more popularly discussed along equity or fairness lines. I say this because if equity is so important, any examination of the tax system should go hand in hand with an examination of how any changes fit alongside the welfare system. The two are intrinsically linked in many ways.

For example, understanding whether it’s better to increase accommodation supplements or lower tax rates for people on low incomes facing rent increases is a good question to ask before we change the tax structures around owning rental properties. There is no point giving with one hand by increasing supplements, and then taking this away with higher rents because of a capital gains tax with the other hand through disconnected reviews.

Overall, we must bear in mind that many of the problems we have today are not going to be solved simply by broadening capital gains taxes. The report from the Tax Working Group introduces as many questions as answers. Trying to solve one problem often introduces a whole series of trickier issues. Will your family home still be exempt if you lose your job and decide to work from home?

Navigating these issues, alongside interaction with the welfare system, will be the make or break of any of the Working Group’s proposals.

"We must bear in mind that many of the problems we have today are not going to be solved simply by broadening capital gains taxes."