rhb Chartered Accountants, Tax, Business Services, Tauranga

Broad view needed on Capital Gains Tax

I must confess, I support the introduction of a Capital Gains Tax ("CGT") in New Zealand. Previously, I sent a paper to the policy division of the IRD, outlining why I thought New Zealand needs a CGT. My simplistic view is based on the premise that a CGT will lead to a more efficient allocation of resources to productive sectors of the economy. That said, I do not like the CGT proposal that the labour party has released.

Interestingly, before the CGT policy was officially introduced, a statement was made and reported in the papers that farmers pay minimal income tax.  When the CGT proposal was announced, some commentary alluded to the idea that a CGT would finally ensure farmers paid 'some' tax when a farm is sold.  The nature of these comments indicates that farmers 'avoid' paying their taxes. 

What is annoying about these types of comments is that they are made for political reasons - and to maximise news coverage.  What is needed is a rational debate on whether a CGT will lead to a fairer and more efficient tax system, whereby New Zealand will be better off.

As a stating point, this debate should consider the following:

1.       A CGT should not be considered in isolation of other taxes.  It appears that the current proposal is merely to raise additional tax.  When introducing a CGT, consideration should be given how this tax will impact on the behaviours of existing taxpayers.  Ideally, the CGT should be broad based and encourage investment and growth.    A CGT will not achieve these outcomes in isolation.

Individual, company and trust tax rates should also be considered in conjunction with the introduction of a CGT.  Possibly align the top individual tax rate, trust and company tax rates, and reduce the income tax rates for the lower tax bracket.  This should be coupled with the CGT rate being set at the marginal tax rate of the taxpayer selling the asset as is the case in Australia (i.e. not the CGT rate of 15% that has been proposed).  

Unfortunately there is minimal debate on this approach.  A broad based CGT regime that has minimal exemptions (like the current regime) where the CGT paid is based on the marginal tax rate of the taxpayer, and ensuring that the 'rich' pay tax, may stimulate this debate.

2.       One of the proposed benefits of a CGT is to divert investment from housing to more productive sectors of the economy, thus mitigating housing booms.  However, Australia and the United States both have a CGT and still have endured a housing boom.  Some commenters have suggested that there is a shortage of housing in New Zealand, which has contributed to a heated housing market.

Significant tax changes have already been implemented that have removed the tax advantages that property investors have previously enjoyed.

Some commentators have taken the view that a CGT will actually increase housing rents.  This will be due to landlords investing in other forms of assets with existing rentals imputing a CGT cost into the rent. 

Consequently, a housing policy that addresses the affordability of housing would in my view be more relevant. When a CGT can be introduced in one year, you wonder why housing policy has not received the same urgency.

I believe we need to debate the real issues facing this country, rather than marginalise sectors of the economy for political point-scoring. I am sure that farmers would consider a CGT that was fair to everyone and resulted in the country being better off. Unfortunately, there has not been a considered political debate on the merits of a CGT for New Zealand.  Consequently, this tax will be put in the too hard basket.

Robbie Neilson is a Director of RHB Chartered Accountants Limited.

This article expresses the views of Robbie Neilson, and do not necessarily represent the views of the employees and directors of RHB Chartered Accountants Ltd.

Published in Bay of Plenty Times Farming Outlook, August 2011