Frank Newman: CGT winners and losers

 This week I conclude the discussion about Capital Gains Tax (CGT). A number of countries have capital gains taxes as part of their revenue raising regime, so one does not have to extend the imagination too much to see the effects should it be introduced here.

There is an inescapable truism in tax policy that no rational person, and few politicians, would dispute: Money flows into the area of least tax. For this reason good tax law is simple (GST for example). The problems start when exemptions appear.

Under the proposed CGT regime a number of exemptions have been added to make it more appealing to the electorate: the family home and personal assets like yachts, cars, artwork, and other collectibles.

It's into those areas that the money would flow, and the result is what's called the “mansion effect”. Houses will be become larger and have more features: swimming pool, tennis court, cinema room, bowling alley, basketball court, pistol shooting range, etc; and cavernous spaces will be furnished with over-priced works of art and collectibles.

A second reality is that landlords are not the privileged aristocracy as villainised by some politicians. Most have one rental, which they subsidise from their work income. They also put up with the hassles and sometimes vile behaviour because they want to have something for their retirement. It's quite conceivable that landlords in this situation will say "to hell with this" and sell up, and put their equity into a mansion of their own. That will leave an accommodation gap which taxpayers will have to fill.

A third reality is some homeowners will become recidivist home buyers and sellers. Buy, live in it for a while, sell and buy something better, sell and buy something better and so on. A whole new set of rules will be needed to regulate this activity - to the applause of lawyers and accountants. Valuers will also be cheering. There will be a huge windfall at the time the CGT is introduced and a significant income stream into the future. These experts will no doubt be called upon to sort out a huge range of issues, including matrimonial disputes, which will have yet another dimension to untangle.

A further reality check is that CGT does not actually make housing more affordable. Australia has a CGT (albeit different to that being proposed here) and house prices have continued to become less affordable.

So how much tax revenue will it actually raise? Based on Labour's own projections it will raise about $2.5b in year 10. Most would come from property investors and farmers. That may seem like a lot but it’s actually only about 3% of the total tax take. I suspect more would be generated by strong economic growth policies via the existing tax regime. 

The real question one has to ask is why is it being introduced here? Is it just politicians playing politics or is there seriously a problem that this will address?  In my view it’s politicians playing politics.

What it particularly frustrating is the continual reference to the CGT being a tax on speculators. Here is the actual position: A speculator would (should) be paying tax on their capital gains already because they made the investment with a resale intention - it's the law as it is now. The same applies to anyone who buys an investment asset with a resale intention: shares, art, antiques, a business, etc.

The main problem with the existing law is determining whether the buyer had a resale intention. Clearly a taxpayer is going to argue no. However it is not that simple because in tax law the onus of proof falls upon the taxpayer not the IRD - the IRD does not have to prove their case, that burden falls upon the taxpayer. Collection of the tax payable by speculators is not a matter of law - it’s a matter of enforcement.

The problems of a CGT have been widely discussed over many decades by various expert panels. In 2001 the McLeod Committee concluded, “We do not consider that New Zealand should adopt a general realisations-based capital gains tax. We do not believe that such a tax would make our tax system fairer and more efficient, nor do we believe that it would lower tax avoidance or raise substantial revenue that could be used to reduce rates. Instead, such a tax would increase the complexity and costs of our system.”

Perhaps some of our MPs really are tax experts and know better than those with a high degree of specialised knowledge about our tax system. Perhaps not.

So who are the winners and loser? The winners are: lawyers, accountants, valuers.

The losers: Investors and farmers.