Expert panel to sort out capital gains tax

Boats are not included in Labour's proposed capital gains tax. Photo / Supplied

Labour's capital gains tax would create numerous and difficult boundary issues in demarcating what is caught.

It plans to appoint an expert panel, drawn from tax practitioners, industry and officialdom, to advise on such issues.

The normal generic tax policy process, with its opportunities for consultation, will apply.

Farms will be included, but not the farm house where it is a family's principal place of residence.

Principal residences will be excluded, except to the extent they are used as the base of a business.

Small business assets will be excluded "up to a maximum of $250,000, sold for retirement, where the owner is above a certain age (for example 55), has held the business for 15 years and has been working in the business".

The current distinction between capital gains made by traders (including fund managers) and everyone else will continue to apply, with the former paying the full company or marginal personal rate and the latter the new CGT rate of 15c in the dollar.

Property kept mainly for "personal use or enjoyment" like boats or furniture will be exempt, as will collectibles such as jewellery, antiques, artwork - and stamp collections.

Payouts from retirement savings schemes like KiwiSaver will be exempt.

But gains on shares held directly will be caught by the tax, as will land (except in the case of the principal residence).

Inheritance will not normally constitute the realisation of a capital gain; the assets will be rolled over to the heir and not payable until the asset is realised.

Gains will be from "v-day" - valuation day, when the regime comes into force - and will apply to assets held then, not just to those acquired after then as in Australia.

Labour is looking to the expert panel to advise it on the practicalities of valuation.

But it likes the South African approach where taxpayers were provided with a choice of methods for valuation, some of which were relatively simple proxies for a full market valuation.

A separate v-day would be set for real estate in greater Christchurch, as defined by the Canterbury Earthquake Recovery Act, to reflect the fact that the earthquake might set the initial valuation levels unreasonably low.

Labour is keen that trusts should not be used to shelter assets from its CGT.

Gifting assets or transferring them into a trust would normally be a CGT "event", triggering the tax.

But gains on assets transferred between a couple in the event of a break-up would be rolled over and CGT not payable until the asset is released.

Capital losses could be carried forward and offset against future capital gains, but ring-fenced so that they can only be used for that purpose and not to offset income from wages or salaries, for example.

That is in addition to Labour's plans to introduce the ring-fencing of operating losses on investment properties, where for example the deduction of interest payments and other expenses exceed the rental income.

Those losses would only be able to be used to offset future taxable income from property, not other sources.

FOUR MORE WAYS TO RECOUP COST OF CUTS

While the focus has been on capital gains tax, the revenue projections from Labour yesterday showed it would not be until 2018/19 that it would cover even half of the tax cuts side of the package.

It is relying on four other measures to make up the difference:

* A new top income tax rate of 39c in the dollar for incomes above $150,000 (worth around $300 million a year).

* Ring-fencing tax losses on property investment, so they can only be used to offset taxable income from property (worth $265 million a year, it says, citing Treasury estimates).

* Anti-avoidance measures (another $300 million a year). This would be in addition to the revenue from the crackdown funded by additional money for the IRD in last year's Budget.

* Revenue from bringing agriculture into the emissions trading scheme in 2013 as Labour originally intended.

In 2015/16, the third full year of the new tax regime, Labour's tax cuts would cost $1.92 billion.

To finance that, a capital gains tax would yield $464 million, the new top rate, loss ring-fencing, anti-avoidance and emissions revenue another $990 million between them, leaving $466 million to be borrowed.