OECD call for capital gains tax

Wednesday, 5 June 2013

New Zealand should bring in a capital gains tax on property, raise the pension age in line with an ageing population and target Working for Families payments more tightly on the working poor, according to the OECD.

The lack of a capital gains tax exacerbates income inequality in New Zealand because much of the income at top levels was in the form of capital gains, the Organisation for Economic Co-operation and Development said.

The lack of a capital gains tax also reinforced the bias toward 'speculative housing investment and undermines housing affordability', the OECD said in a report made public today.

But the Government immediately ruled out a comprehensive capital gains tax on all assets, including the family home.

In a wide-ranging set of recommendations for New Zealand, the international agency also points out that the Government's tax take from the petroleum sector appeared low by international standards and it should 'remove tax concessions for petroleum exploration'.

The OECD report shows the average Government take in oil was slightly more than 40 per cent of profits, the fourth lowest among more than 40 oil- producing countries.

The OECD also recommends 'permanent (bank) deposit insurance' and higher capital requirements for banks that are 'too big to fail'.

A bank deposit insurance scheme would help reduce the risks of a run on a bank.

And the fact that a deposit insurance scheme was adopted in 2008 during the global financial crisis may lead to the expectation that a similar policy would be brought in during a future crisis, the OECD said.

But Prime Minister John Key said the Government had no plans to change the rules on capital gains taxes.

'We do have a capital gains tax in New Zealand . . . I haven't fully read the [OECD] report, I've seen a brief summary of it and it makes a number of different recommendations but you know at the end of the day, look, I don't think we've actually got a tax problem in terms of revenue in New Zealand.

'We're back on track to be in surplus but actually also have debt at very low levels by OECD standards,' he said. Latest Treasury figures, out yesterday, showed government net debt at 28.7 per cent.

The OECD said the largely Australian-owned banking system was 'in good shape' and well supervised 'but rising house prices could pose risks to financial stability'.

And a recent OECD international report shows New Zealand house prices are the fourth most-overvalued among member countries, when prices are compared with local wages and rents. House prices in New Zealand were about 23 per cent overvalued compared with incomes, but 61 per cent compared with rents.

An IMF report last month said house prices were up to 25 per cent overvalued in this country.

New Zealand is among a handful of OECD countries where house prices are over-valued but prices are still rising.

'Economies in this category are most vulnerable to the risk of a price correction - especially if borrowing costs were to rise or income growth were to slow,' the OECD said.

House prices have risen about 8 per cent nationally in the past year, but about 13 per cent in Auckland and Christchurch.

But Key was not sure a capital gains tax would work to address overvalued housing.

'I just don't know whether that would really work because I mean in reality the sort of capital gains tax I think that they're proposing would exclude the family home, so that's three-quarters of all housing.

'So then you get to the next issue about those people that buy rental properties, well, they're actually subject to capital gains tax today if they buy that property and sell it in a pretty short space of time,' he said.

Such investors might initially plan to buy to rent a property out, and therefore claim they are not subject to capital gains tax, but if they sold quickly 'in reality the IRD look very closely at that', Key said.

RECOMMENDATIONS

Capital gains tax on property to make the tax structure more efficient and fairer.

Raise the pension age in line with an ageing population.

Target Working for Families payments more tightly on the working poor, by lifting the upper income thresholds.

Lift KiwiSaver minimum contributions.

Introduce bank deposit insurance.

Remove tax concessions for petroleum exploration.

Source: OECD