Tax trade-off
The silver lining of capital gains tax
Savers who invest their money in bank savings accounts, Kiwisaver cash deposits and term deposits could benefit if the Government implements a capital gains tax.
Interest from such savings is currently taxed without taking into account the fact that the value of savings will be whittled away by inflation.
But PwC tax expert Geof Nightingale, who sits on the Government’s Tax Working Group, said that if the group recommended a capital gains tax, it was likely that tax on both capital gains and interest would be adjusted to take inflation into account.
Government sources have hinted at similar thinking.
Adjusting interest on savings for inflation would eliminate a longstanding bugbear for retirees and others living off small cash nest eggs.
Age Concern, Consumer NZ, the Financial Services Council and the Taxpayers’ Union lobby group backed a ‘‘Fair Tax for Savers’’ campaign in 2014.
They argued income tax should only be charged on the interest that savers received after subtracting inflation, not on all interest.
The then-revenue minister Todd McClay warned at the time that the campaign’s request would likely result in ‘‘a significant reduction in government revenue’’.
But Nightingale believed that thinking could well change if a capital gains tax (CGT) came in.
If a CGT was imposed on the likes of investment property and shares, it should not tax the ‘‘inflationary component’’ of the increase in the value of each asset, he said.
Inflation-adjusting of savings interest would just extend the same treatment to cash deposits.
‘‘If you did impose a CGT you might well then give yourself some room to stop taxing the inflationary component of interest. That is seriously something that the working group will be looking at over the next few months.’’
ANZ Bank has been offering an interest rate of 3.5 per cent on one-year term deposits. But after tax at the top rate of 33 per cent and inflation at an expected annual rate of 2 per cent, that would drop to a ‘‘real return’’ of only 0.33 per cent.
If tax was only charged after inflation, the real rate of return would triple to 1 per cent.
Tax Working Group chairman Michael Cullen has suggested another trade-off being considered by the working group could result in a reduction in GST.
The working group was only likely to come to a conclusion there was a case for new environmental taxes after ‘‘quite a long debate’’.
But if it did, there would be a case for reducing GST as both taxes might fall on people in a similar way, he has said.
Nightingale cautioned, however, that a lot of money would have to be raised by new environment taxes to justify a cut in the overall rate of GST, and questioned whether there was an appetite for an alternative of introducing exemptions for certain items.
Minter Ellison Rudd Watts tax policy leader Andrew Ryan believed the working group was likely to recommend a capital gains tax (CGT), if it followed the ‘‘norms’’ set by other tax authorities.
But he believed the penny had not yet dropped with many small business owners that might mean they had to pay tax on any profits they made when they sold up their firms, or sold down their shareholding.
‘‘I suspect what they have thought about is that their family home is okay but that they might have trouble with the batch or the boat.’’
The law firm has advised business owners to make submissions to the Tax Working Group on the details of how a CGT should work, if they wanted it to be as ‘‘business-friendly’’ as possible.
One question was whether a CGT might only apply to assets bought after the tax came in, or whether assets that people already owned would be valued and counted, he said.
The former would be businessfriendly and was ‘‘not without precedent’’ overseas, but would mean the tax would take longer to raise money, he said.
Another issue on which businesses should consider making submissions concerned possible exclusions for assets other than the family home. ‘‘There may be scope for other exemptions, and in particular for exemptions in respect of small businesses and their assets,’’ Ryan said.
‘‘The Australian CGT regime affords a number of exemptions to assets held by small businesses. This can be a cost-efficient way to ensure that a CGT catches significant gains without disincentivising small business innovation,’’ he said.