Capital Gains Tax by stealth

Deloitte Chief Exec Thomas Pippos writes

72 per cent of respondents to the Mood of the Boardroom CEO survey believe that politicians have no appetite to engage on a capital gains tax and only 47 per cent believe not introducing one was a lost opportunity in terms of raising revenue and levelling the playing field.

By contrast however, the bright line rules are accepted by 71 per cent as a CGT under a different name and 88 per cent believe they should have been introduced earlier; 86 per cent also think extending the rule from two to five years would have a noticeable dampening effect on property.

What’s in a name here isn’t new. Officials, followed by all politicians, have continued to erode the capital boundary by taxing capital gains over time, but always by another name.

In addition to the bright line rules, we currently have proposals to tax capital gains in employee share arrangements. Other traditional capital gains made by employees are already taxed.

Capital gains on financial instruments, derivatives, bonds etc. are taxed, including on an unrealised basis. So are (in effect) capital gains on portfolio shareholdings in global companies (excluding Australian). We also have older rules that tax capital gains in certain property transactions. None are called a “CGT”.

Does this mean that taxing property (even under a different name) will address Auckland’s challenges?

No. It would raise revenue, reduce the net gains investors derive, possibly dampen some of the heat in the market and broaden the tax base. But only 53 per cent believe that it will reduce the attractiveness of property investment and 46 per cent believe it would negatively impact prices.

Somewhat interestingly, any such measures are likely to also increase the percentage of income tax paid by the highest earning 10 per cent from the currently reported 45 per cent; recognising that income and wealth disparity also play a part in these statistics.

Equalising the taxation treatment across asset classes is one thing, but taxes can also discourage forms of investment. Stamp duty is one example. Survey respondents generally exhibited tissue rejection to that with only 43 per cent thinking a stamp duty is a viable option and 29 per cent wishing it was introduced earlier. What did however find favour was banning foreign ownership (68 per cent and ring fencing losses (71 per cent).

Irrespective of the rules, Inland Revenue came in for a bit of a hammering as only 13 per cent felt that they are suitably policing the boundaries. Possibly related to this, of those that had a view, 93 per cent felt that people thought that their property gains were simply not taxable.

Overall therefore there is an overwhelming sentiment of unfinished business for property tax settings viewed through an Auckland lens.

Ultimately Auckland is too different to the rest of New Zealand.  Most measures to deal with Auckland aren’t appropriate for most other places.  And it seems that as far as the big wigs of business are concerned, the government missed another opportunity to fix the long running problems associated with capital gains on property.


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