Capital gains tax on realisation of assets proposed

Thursday 17th September 2009

A capital gains tax on realisation of assets, with the family home only partially exempt, has been put forward by two leading tax academics.

The two, Leonard Burman and David White, presented a paper to the Tax Working Group this week and to a public forum yesterday in Wellington.

Both argue a capital gains tax (CGT) on an accrual basis is economically elegant but politically unsaleable. They also suggest owner-occupier housing could be covered by a CGT, as it is in the United States, above a certain level.

They also recommend a form of modified grand parenting, where assets owned at the time a CGT takes effect are valued and any gain from that point is taxed. This was done in Canada in 1985 and, Burman said, worked surprisingly well, with few disputes.

"It was also a very good job creation scheme," he told the Victoria University forum.

New Zealand is something of an outlier in the OECD in not having a CGT, he said, and it leaves a considerable portion of the tax base uncovered.

"High-income people earn a much higher proportion of their income form capital gains," he said, and for equity reasons the tax base should be extended into this area.

"You have a superb tax system in a lot of ways, but not in this area," he said.

It is understood preliminary figures indicated a CGT, excluding owner-occupier housing, would net the government $1.5 billion a year; if owner occupied housing was included, the government would reap about $4 billion.

Pricewaterhouse Coopers tax partner John Shewan, who spoke in response to the paper, said although he recognises a problem for New Zealand policymakers, he is not sure a CGT is the solution.

If the main question is excessive investment in the property market, other countries with a CGT are not exempt from this syndrome, he said.

New Zealand invests around $600 billion into the property market and if owner-occupied housing is exempt - as has been suggested by several groups, including the Labour opposition - that takes out two thirds of the market.

There is still around $200 billion in investment property and Shewan said this is undoubtedly a problem.

"That produces, shall we say, a very disappointing return to the government for the level of investment... That is, a negative rate of tax of about $150 million."

However, there are likely to be other, better ways of focusing on that, he said, either through a land tax or wider and better enforcement of existing rules.

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