Saturday, August 30, 2014

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.


Mike Butler said...

Beware the projected likely CGT tax take claims.

One Labour Party leader promoted a CGT that would exclude the family home which was estimated to raise $78-million in the first year rising to $2.27-billion by year 10. Greens co-leader Russell Norman in 2012 was claiming a CGT tax take of $4.5-billion a year.

In 2012 I tried to work out how one could get $4.5-billion a year out of residential property sales at that time.

A total of 59,473 houses sold during the October 1 to December 31 quarter of 2011. If 240,000 properties sold per year, to achieve a figure of $4.5-billion, the amount of tax paid on each property would have to be $18,750. If the CGT rate was 15 percent, and if $18,750 represented 15 percent of the average capital gain, that average capital gain would have to be $124,999.

BUT the family home is excluded. The 2006 census revealed that 66.9 percent of homes were owner-occupied.

THEREFORE, if two thirds of those sales were owner-occupied, one would have to get $4.5-billion out of the sales of 80,000 homes, or tax of $56,250 per sale, which, assuming a 15 percent tax, a capital gain of $374,999 per property.

HANG ON, that was about the median value of a residential property in New Zealand. Property price movements over that year were between minus 7.3 percent to plus 13 percent. With those price movements, it would take a very long time to get the increase in values to bring in that amount of tax. Norman’s figures don’t stand scrutiny.

The other unspoken reality is that if a CGT drives down property values (which it has failed to do anywhere else) a CGT tax take would diminish.

Chris said...

So those people who put their money into art and cars and stuff get away without paying CGT but if that same money was invested in a business where tax was paid and possibly other people employed, then, then when the business was sold CGT would have to be paid.
These exemptions show how unfair a tax like this would be.

paul scott said...

I am not accountant or lawyer.
I do not know how they get on in Australia and other places with CGT, but here in NZ it could be a costly nightmare to administer. And it could return poorly.
Some people say so costly that it is better to have a threshold , lets say $500,000, before tax sets in on home properties..
But then in New Zealand this would mean that Auckland, and North Island city people would pay all the capital gains tax. This is how it should be of course.

Here are some difficulties

1. What is the starting point cost of the asset. You can’t go back to 1986 for a family who have been in that home all along.
2. How do you value it. Rateable value is very flimsy, and challengeable
3. If family will be exempt, who is family. If we have a joint tenancy, or in common, who pays the piper if the couple split up. Is a daughter family in this case, even if not on title deed
4. What if the owners of the family home , leave after a while and rent out for a couple of years before sale.
5. What if you do capital improvements to the home
6. What if you add in your own family costs of labour for improvements

Any tax with exemption is a minefield, and I think that is why they were so hard line in GST.
except for personal sales, [ home ] and financial transactions. Can you see the lawyers and the
Accountants ready to vote Labour . .

Well we haven’t even started on family Trusts yet [ like Mr Cunliffe home ]
and maybe I leave that for another post.
Cunliffe could not really answer the PM on this issue, because he would be down the mine with methane, more later, next post ,
where’s Michael Cullen when you need him
Repeat I have no professional expertise just reading up over many years ,

paul scott said...

CGT and Family Trusts, and the David Cunliffe Family Trust

Family Trusts are quite straight forward in requirement.
A Settlor gives assets to Trustees who hold it in Trust for Beneficiary. These things must be proper and true

The trouble was that the business of actually gifting the asset was so complicated , and the deeds and so on, that everyone went to lawyers and Accountants.
These people then contrived incredible things like double blind trusts and basically :
• The Asset had not properly been given away
• The costs were enormous and
• the trustees did nothing
• the Trust was invalid, and
• The legal and accountancy profession people were often incompetent in this regard

Now the previous Labour Government worked with IRD to tighten things up, and make Trusts less attractive. And they succeeded . Try filling in your IR5 or whatever it is ,and you are going to sweat.

It was a good move by Labour, Trusts are stupid, and antiquated nonsense and it took me five years to see what was happening.
Each year the forms got more difficult . I think the tax rate is about 35% , which to a high income earner may be OK .My Family trust is not worth a tinkers arse..
Labour quite properly wanted to get people back to basics again.
Are you with me so far
But the voting block of people with Trusts is now not just Nat voters. Many hard working New Zealanders took this expensive course in the belief it would benefit their children, and that their assets would not be taxed, or taken from them.
That was the fundamental value for the sacrifice these parents wanted.
Now lets put the flame torch down the methane mine.

Will you tell us here Mr Cunliffe that you with your safe trust will now collapse the value of ordinary New Zealanders family Trusts . And if so why? And if so how?

Any CGT at all will result in resettlement of Trusts, exemptions, skullduggery, we will have a time and name new beneficiaries. I hope it happens, people will flock to me,
Repeat I am not qualified as Accountant or Lawyer
CGT and Family Trusts

Anonymous said...

many years ago, the government started charging land taxes on commercial property. At that time, my lease on my building included the clause that I pay all land taxes. Who then paid the tax. The end user. So now I am a landlord I guess I will have to put a clause in all my tenancies documents that the tenant will pay all extra taxes involved on the property involved when/or if CGT is introduced. Also, more tax collectors are going to have to be employed to police the new system. This would probably mean a loss against the tax collected.
In the end, we do have a user pays society don't we.