Capital gains tax - what the dissenters said

Wednesday, 20 February 2019

Three members of the Tax Working Group have penned their own paper on why they think the rest of the working group have got it wrong on a capital gains tax.

Tax Working Group chairman Sir Michael Cullen has rustled up a majority for a package of tax reforms that would include a comprehensive tax on capital gains.

But three of the 11 members of the working group made it clear they did not agree, arguing the extra hassle wasn't worth it for the 'relatively low' amount of extra revenue the tax would raise.

'New Zealand's current tax system is relatively simple and efficient', they said.

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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 'minority view' said in places that it represented BusinessNZ's view, but that this was supported by Hodge and Oliver.

It said that the compliance and administrative costs of a capital gains tax (CGT) and its impact on 'efficiency' would outweigh any gains in terms of increased tax, 'fairness perceptions and possible integrity benefits'. 

'Business must take risks and be encouraged to experiment with new ideas and methods. Entrepreneurship and experimentation should be encouraged and not penalised.

'New Zealand's tax system should not impede this,' they said.   

The comprehensive CGT the working group was proposing would harm innovation and be likely to 'distort investment decisions', they said. 

The dissenting view is likely to provide useful ammunition for political opponents to a CGT, such as the National Party, which will be able to claim that even experts do not agree.

Cullen said in September that he was 'surprised and pleased' the working group had been able to produce an interim report that month that they could all live with, saying few issues were 'black and white'.

While he warned again in November that unanimity was never going to be realistic in its final report, he said objections among the minority who did not back its plan were 'mainly about some aspects of how you do it, rather than whether you do it'.   

But the difference of opinion expressed in the minority report appeared wider than that.

Hope, Hodge and Oliver agreed there might be a case for taxing more gains from investment properties, saying there was evidence rental home owners were relying on tax-free rises in house prices to make their investments stack up.

But they said that could best be achieved by tightening existing rules such as the 'bright-line' test. They also agreed with officials that a capital gains tax would push up rents.

The three also clearly opposed taxing capital gains on land, businesses and shares.

Valuing business assets that would be subject to a CGT would be costly they warned.

'It can be seen from the rules the group has designed that there will be complexity, high compliance costs and inconsistent rules and these are characteristics of many overseas capital gains systems,' they said.

Kiwis could be left better off owning shares in foreign firms than in New Zealand companies under the proposed new rules, they said, while 'foreigners owning New Zealand shares would mostly have no tax increase'.

'The outcome is clearly adverse.'

The three were also concerned a CGT could be 'risky' for the Government if the value of assets such as local shares fell, because of the tax credits that would generate.   

'It is BusinessNZ's judgment, shared by group members Joanne Hodge and Robin Oliver, that the disadvantages of the comprehensive capital gains tax rules developed by the group outweigh the advantages and the proposed rules should not be implemented,' they concluded.   

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