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Tax Working Group is unlikely to agree on a capital gains tax regime

Wednesday 21st November 2018

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The 11-member Tax Working Group is unlikely to be able to meet its key task of designing a capital gains tax because the group can’t agree on it, says former Inland Revenue deputy commissioner Robin Oliver.

Those who read the group’s interim report, released in September, “will find that on these issues we often come to options, we don’t come to conclusions", Oliver said in a speech to the recent conference of SIFA, a group which represents independent financial advisers.

“The aim is to come to conclusions. We haven’t yet and we probably never will and the reason for that is we can’t agree,” he said. 

The group is led by former Labour Finance Minister Sir Michael Cullen and members include Oliver, former Bell Gully tax partner Joanne Hodge, Business New Zealand chief executive Kirk Hope, PwC partner Geof Nightingale and Council of Trade Unions economist Bill Rosenberg.

GoodReturns publisher Philip Macalister gave BusinessDesk a recording of Oliver’s speech.

“We will try to reach agreement. We may or may not do so.”

The group’s terms of reference specifically exclude them from considering applying a CGT to either the family home or the land beneath the family home and that takes about 42 percent of the average household’s wealth off the table.

Another 14 percent of household wealth is invested in fixed interest investments, which are already fully taxed.

So that leaves rental property, about 13 percent of household wealth, KiwiSaver, and retail investment in shares able to be considered as being subject to a CGT.

“The sad fact of life is we don’t own much stuff,” Oliver said, adding that most of these assets are accumulated by people saving for retirement.

The first design issue is whether to tax increases in capital accruing each year, much of which isn’t realised, or whether to wait until a capital increase is actually realised before taxing it.

But “the reality and theory are not the same thing. Our job, as I see it, is to design not the theory but the practicality” so that people will know how a CGT would impact them.

Oliver said Israel tried the accrual method for about a year and Italy for about a month before abandoning it.

Then there’s the question of how a CGT would fit with the existing tax system.

For example, capital gains are currently taxed only if a person or company is in the business of, say, buying and selling shares, or buying and selling properties.

If the government decided to levy a CGT on capital gains from owning New Zealand shares, they would probably have to also change the current regime of taxing investments in overseas shares under the Fair Dividend Rate (FDR) regime.

If it kept the FDR regime for foreign shares, that would tilt the playing field in favour of foreign shares and encourage disinvestment in New Zealand shares.

As well, the current Portfolio Investment Entity or PIEs regime, taxing group investment vehicles, was designed on the assumption that New Zealand has no CGT.

Leaving the PIE regime – in which income is taxed either at the individual’s tax rate, if it’s below the 28 percent company rate, or capping the tax paid at 28 percent if the individual’s top tax rate is 33 percent – unchanged, would similarly encourage investment in PIEs rather than investment directly in New Zealand shares.

“People have differences of views on most of these issues,” Oliver said.

The group has also been charged with producing a tax revenue-neutral package.

“We were told we were not allowed to look at any increase in any tax rate whatsoever” and it isn’t allowed to touch the benefits and transfers system, including the Working for Families scheme, Oliver said, and that limits what the group can achieve.

All these limits have been imposed for one reason. “It’s politics. It’s well known that the Labour Party has different views on a CGT within its caucus,” Oliver said.

How retirement savings should be taxed remains an open question for the group.

Oliver said the impact of inflation on retirement savings is one of the things that worries him the most.

Most retirees are looking at living about another 30 years, meaning retirement saving generally starts 70 years before it’s needed.

Even with 2 percent inflation, that means the value of the first dollar saved halves every 35 years and so it’s worth only 25 cents 70 years later.

And yet retirement incomes are still taxed as if that original dollar was still worth a dollar, Oliver said.

Unlike other countries, New Zealand provides few incentives to encourage retirement saving. The main incentive is the 50 percent tax credit on the first $1,043 saved and that doesn’t apply beyond the age of 65.


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