Frank Newman: Tax Working Group report

Yesterday, the government's Tax Working Group (TWG), headed by former Labour Finance Minister Sir Michael Cullen, presented its first Final Report. Pretty much what they said they would deliver was delivered so the government now has an "expert" report to justify their campaign to introduce a capital gains tax.

The key points of the TWG recommendation are:

• Capital gains on the sale of investment property would be treated as income and taxed at a taxpayer's marginal rate of income (which in effect will be 33%).  This is higher than the 15% rate Labour campaigned on, and would be the highest CGT rate in the world.
• As an offset, income tax will be reduced by extending the 10.5% tax rate band, which is expected to deliver an income tax cut worth between $420 and $595 a year to the majority of taxpayers.
• Investment asset values would not be adjusted for inflation. In effect tax would be payable on gains that are not "real".
• The family home, personal possessions and artwork will be exempt.
• Investment values would be taken from the date the tax comes into effect, which would be 1 April 2021. That would require all investment assets to be valued.
• In some cases there would be "rollover" relief, for example where the seller of a business reinvests in a similar business.

What was a surprise is that three of the 11 member group have written a minority report expressing their opposition to the group's recommendations. That is no small thing to do, as they are now unlikely to be considered for appointments to any other working groups, which is lucrative work if you can get it. Most people simply zip their lips to stay on side with the powers that be, rather than go out on a limb. Plaudits to the three dissenters, but they should not expect to see their names in the New Year's honours list, at least not while Labour is in charge.

The dissenters are former Bell Gully tax partner Joanne Hodge, Business NZ chief executive Kirk Hope, and former Inland Revenue deputy commissioner Robin Oliver. Their key point is that they believe the compliance costs and disruptions to the tax system can't be justified by the "relatively low" amount of extra revenue the tax would raise.

In their report they state "the costs of extending the tax base clearly exceed the benefits...As additional asset classes are included in the capital gains tax system, the issues become more complex and there is an increasing need for exemptions and exceptions which are intended to reduce lock-in impacts and compliance costs, but can cause the reverse. Including business assets (such as goodwill and other intangible assets) and shares leads to complexity, high compliance costs and inconsistent rules characteristic of many overseas capital gains tax systems. The need to value business assets such as goodwill on introduction date is one illustration. Valuing such property is likely to impose high compliance costs on businesses."

Speaking on Radio New Zealand, Robin Oliver stated the compliance costs to value business assets "will easily cost over a billion dollars".

The billion dollars will be paid by business owners and no doubt gladly received by accountants and the army of so-called "valuation experts" who will invariably emerge to provide "made to order" valuations. It will be another racket (like the Resource Management Act) created entirely by senseless government regulation.

When it came to taxing shares Robin Oliver said New Zealanders who invest in New Zealand companies would pay more tax than foreigners investing in New Zealand companies. "The obvious conclusion is New Zealanders will own less New Zealand companies and more foreign companies, and foreigners will own our companies".

That outcome is ironic given Labour has banned foreign ownership of houses. It seems it does not mind foreigners owning NZ businesses. 

The trio summarised their position as follows. "Our current tax system is relatively simple and efficient. It does not overly stand in the way of the type of experimental behaviour we shall need to see more of in the future. In our view we would be better off amending some current rules (residential rental homes) and enforcing existing rules better."

They said the cash economy alone was leaking about $850m a year from the tax system.

The glaring flaw in the Tax Working Group’s proposal is that Labour promised a CGT would shift capital away from unproductive assets like housing into productive investment like businesses. The TWG proposal will do exactly the opposite.

Prime Minister Jacinda Ardern has confirmed that it remains the government’s intention to bring forward legislation for any tax changes before the end of its current term, but coming into effect after the 2020 election. This, she says, will give electors the chance to factor the CGT into their voting preference. 

That's nonsense. General elections are not a yes or no vote on a single issue. In any case, Labour may not gain a majority at the next election but still be in a position to pass the CGT legislation. In 2017 NZ First selected Labour as the government, even though it gained just 37% of the vote.

The CGT should be a referendum issue to be held at the same time as the 2020 election. Only then would it be a "fair" indication of public support. 

Frank Newman, an investment analyst and former councillor on the Whangarei District Council, writes a weekly article for Property Plus.