Admit it already in New Zealand we have capital gains tax
It is a common statement that New Zealand has no capital gains tax (CGT). But this is a misleading statement. It is more accurate to say that New Zealand does not have a global CGT, i.e. a tax that applies to any type of capital gain on any type of asset or financial arrangement . However, many New Zealanders would be surprised to learn that in fact few forms of capital gain are actually excluded from the tax net under our current tax laws.
Whether or not we think CGT is a good idea or not, the fact that New Zealand is not open about the fact that we have CGT in disguise misleads businesses and the public, leaves the matter open as a permanent source of political debate and leaves New Zealand New Zealand with a piecemeal system of capital gains taxation that is not fit for purpose.
It’s high time to be honest about what we have.
Evolution of discussions
Over the past few decades, a great deal of time and money has been spent on the many reviews and committees assessing the introduction of full CGT in New Zealand. More recently, the Labour-led coalition government set up a tax task force to consider whether a comprehensive CGT scheme should be introduced. These reviews have resulted in countless reports describing the many different reasons for having full CGT and the many concerns about the problems it might cause. The result of these reviews and committees has always been the same – no global CGT has been put in place. Despite this, the discussion continues at different levels by commentators, politicians and the public.
With the current economic outlook and next year’s election looming on the horizon, taxation, including in recent weeks the subject of a wealth tax (which is a form of capital tax) , is again on the discussion table. We also heard Revenue Minister David Parker talk about fairness in the tax system, which led him to announce a new “Tax Principles Act”, which he said would be drafted and enacted before the elections.
Changes in the law to tax capital gains
Yet calls continue to be made for the introduction of a full CGT in New Zealand and many commentators consider it a failure that New Zealand does not have one. But in reality, there isn’t much besides the net of capital gains. The expansion of capital gains taxes in New Zealand has happened over time by broadening the concept of income to tax a much wider range of industries and types of investors or investments than only 30 years ago. Capital gains tax now applies to a wide range of activities and investment types, including, but not limited to:
- Land dealers, developers and developers
- Financial arrangements
- Shares in foreign companies
- Cryptocurrency assets
- Land held for short periods.
The only type of property that, at least for now, seems out of place is the family home – but that home should be your primary residence and you should live there most of the time. If this is not the case, part of the capital gain on this property may be taxed when it is sold.
Confusion and missed opportunities
Failure to recognize the fact that we have a substantial network of CGTs in New Zealand leaves this open as an area of focus and confusion when it shouldn’t be. It would be more productive to spend time and effort reviewing what we have and improving it.
What we have is:
- Inconsistency in the reason why we tax different types of assets. For example, New Zealand taxes: – most assets depending on the purpose for which they were acquired – financial instruments (e.g. loans) depending on the nature of the instrument – land in depending on the identity of the owner and the length of time the property has been held – actions based on the location of the business
- Inconsistency in the Hourly to tax capital gains. The existing rules tax different assets at different points in time – some will only be taxed at the end (ie when they are sold). However, tax on certain assets will be applied while a person still holds the asset and the amount of tax will be based on a “paper gain” for which no income has been earned at the time the tax is of. This can cause financial stress for someone who has to pay tax on an asset they still own but have received no real gain because they then have to find the money to pay the tax.
- A lack of design features that are typically included in a full CGT system, such as rollover relief, which ensures that a change in legal, but not economic or effective, ownership does not trigger a tax event. Rather than a general relief provision applying to all assets, we have rollover relief provisions in certain rules (such as the clear line rules), which provide relief in very limited circumstances.
New Zealand has been stuck in a constant discussion about introducing a full CGT because we believe it is a cure for a wide range of our economic, social and political ills, but we do so without recognizing the reality that we already have an ad hoc CGT announcement on most assets and investments. These ad hoc CGT rules have led to a level playing field where people are taxed differently on the different assets they own. The current regime is incredibly complicated, with little or no consistency, leading to compliance bottlenecks.