Do we need a capital gains tax in New Zealand?

Talk of a capital gains tax (CGT) is back in the headlines.

It cropped up early in the year, as part of a Treasury briefing to incoming Minster of Finance Nicola Willis.

Among other things, Treasury noted our reliance on personal taxes and pointed to the lack of a comprehensive CGT.

Recent reports suggest it’s been discussed internally within the opposition as well.

Comprehensive is a key word, because we do tax capital gains in New Zealand, albeit on a very ad hoc basis.

The bright line test ensures capital gains are sometimes taxed on residential property, while anyone buying shares with the intention of resale must also be pay tax on any gains.

It’s hard to see a National-led government taking these hints from Treasury on board.

However, a CGT could be back on the agenda when we inevitably see a change of government.

Similar proposals haven’t gone down well in recent history, politically at least.

Former Labour leaders Phil Goff and David Cunliffe had a go during the 2011 and 2014 campaigns, without any success.

Jacinda Ardern then established a high-powered Tax Working Group in 2017, chaired by the late Sir Michael Cullen.

It released a comprehensive report some 18 months later, but even the popular Ardern couldn’t sell it to voters.

She ended up permanently ruling out a CGT, saying it wouldn’t happen on her watch.

We probably do need to have a look at our tax base.

Wage and salary earners seem to get whacked more every year, as personal income tax rates rise and inflation ensures the higher income brackets kick in earlier.

Meanwhile, untaxed gains from rising asset prices are one reason for our love affair with property.

That’s contributed to our extremely expensive housing market, and in turn rising inequality and many of our social issues.

As much as I’d like to see that change, I fear the politicians will get it wrong when it comes to the detail and implementation.

The proposal from Ardern’s working group was full of inconsistencies.

It suggested international shares be taxed in a different way to local stocks, and big fund managers treated differently to smaller investors.

There’s also the ongoing debate about whether you tax people when they eventually sell, or more frequently on the way through.

The former means delayed revenues for the government, while the latter means asking people to pay tax on gains they haven’t even realised yet.

Some assets can also be difficult to value.

Housing is relatively straightforward, while listed shares and managed funds are priced regularly (if not daily).

It gets much trickier for farms and agricultural land though, and harder still when it comes to private businesses.

It’s likely that any proposal would exclude the family home, as is the case in many other jurisdictions.

That’s an understandable compromise, although purists would still argue it dilutes the impact of a CGT.

I also worry about the possibility of unintended consequences on asset classes like shares and businesses.

That concerns me, as we need to push capital and savings toward those productive, job-creating parts of the economy.

Despite all of that, I’m open minded about tax reform.

I could support a CGT if it was well-constructed and at a modest rate.

In return, I’d expect an accompanying reduction in income taxes.

For me, that’s crucial for it to be a genuine rebalancing exercise.

It would shift the focus toward genuine income and cash profits, helping encourage better investment decisions.

Otherwise, a CGT is simply another tax on top of what we’re already paying.

That brings me to another likely bugbear the voting public will have with any proposal, which is how our money is being spent.

Many high earners and asset-rich voters are not opposed to paying taxes, or being taxed in a different (and sometimes less favourable) way.

However, they want that capital to be used wisely and effectively.

Unfortunately, poor decisions and frivolous spending choices in recent years have dented the credibility of our politicians.

That trust needs to be rebuilt before voters will entertain, let alone embrace a CGT.

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