With Ardern leaving, is a capital gains tax back on the table?

Tuesday, 24 January 2023

Shoppers out on Ponsonby Rd were asked what they thought about incoming PM Chris Hipkins.

Incoming prime minister Chris Hipkins has repeated Labour’s commitment not to introduce new taxes during what remains of its current term in Government.

But, unlike Jacinda Ardern, he has not ruled out introducing a comprehensive capital gains tax (CGT) if Labour is re-elected.

A spokesperson for Hipkins explained he was not playing the “rule in, rule out game”, or at least not yet.

“Our policy will be released before the election. New Zealanders will go into the election with a very clear understanding of what our policy is,” he said.

* Forget a capital gains tax – what New Zealand needs is a tax on inherited wealth

A capital gains tax has long been argued over as a way of introducing more fairness and balance to investment taxes, particularly property investment.

* Jacinda Ardern keeps window on tax changes open, after locking door to CGT

PwC tax partner Geof Nightingale said since the commitment not to introduce a CGT had been Ardern’s call, “that political commitment has now genuinely lapsed”.

But Nighingale said it was unlikely it would be something that Labour put back on the table, given it campaigned on a CGT in 2011 and 2014 “and it didn’t work for them”.

Hipkins has indicated he is in favour of reforming the tax system to shift more of the burden of tax away from income tax on workers’ wages and on to “unearned” income.

He told TV3 on Monday there were “some New Zealanders who perhaps aren’t contributing their fair share”.

Jacinda Ardern’s resignation has released Labour from its promise not to introduce a comprehensive capital gains tax in future terms, but it would be more likely to do that in stages without calling it a CGT, says Geof Nightingale.

“If you work hard you should be able to get ahead. We need a tax system that recognises those who are really striving and putting in the hard yards feel the rewards for that,” he also said.

Nightingale said that if the Government wanted to use the tax system to ease the “cost of living crisis” for middle-income New Zealanders, then the obvious option would be to reduce the 30% tax rate on income between $48,000 and $70,000, or raise the threshold at which that applied.

But he also noted that would be expensive, so if a comprehensive CGT remained unlikely, how could it be paid for?

Revenue Minister David Parker appeared to hint an inheritance tax might be on his agenda last year, when he noted that French economist Thomas Piketty was a hero of his and had shown “it is certainly not the meek who are inheriting the Earth”.

Most countries in the Organisation for Economic Cooperation and Development have both a comprehensive CGT and an inheritance tax, the latter sometimes with high thresholds only that impact people with estates worth millions.

But Nightingale said that while he believed Parker would like an inheritance tax to be on the Government’s agenda, he doubted it would pass the political test.

“There doesn't seem to be majority public support for them despite their theoretical value, so I'd be surprised if that came out as the solution.”

Instead, Nightingale suggested the Government might choose to comb through the tax system looking for tweaks to pay for some relief for middle-income earners.

That could for example involve taxing a broader spectrum of capital gains by further tightening the “brightline test” on property investment, more rigorously taxing capital gains on share transactions, looking again at the issue of untaxed retained earnings in firms, and raising tax on trusts, he said.

“None of them would be huge in revenue terms, but along with a bit of economic growth they might be enough to allow some kind of rate cut at the lower end.”

Either way, Labour is going to need to overcome any reservations it has talking about tax, he believed.

“National has got a clear tax policy. The Greens haven’t got a final tax policy yet, but they'll clearly go for wealth taxes again and probably a tax on ‘super profits’.

“So Labour is going to need a tax policy and tax is going to be an election issue.”