Michael Cullen says legislate capital gains tax before election

Michael Cullen. Photo / File

Passing new capital gains tax legislation into law before the 2020 election is important to reduce the potential for political "mischief", the chair of the Tax Working Group says.

"It's important the legislation is passed before the election," said former Labour Finance Minister Michael Cullen.

"If you leave room for doubt about what it does, you leave room for mischief," he told the Chartered Accountants of Australia and New Zealand annual tax conference, in Auckland.

"The more gaps there, the more mischief there is likely to be and can come in this area."

The working group issued an interim report last month before a round of public consultation. It will deliver a final report to ministers next February.

While the government has promised no such tax reform will be implemented before the 2020 election, legislation allowing it to take effect at a later date can be passed before election day for later implementation if a Labour-led government is returned.

The 2011, 2014 and 2017 elections were all characterised by a variety of Labour Party strategies promoting a shift in the balance between tax on income and tax on capital gains, all of which were successfully attacked by the National Party.

In 2017, Labour promised to study the issue and go to the polls with concrete proposals that the voting public would be asked to endorse.

Cullen said the New Zealand debate over capital gains tax was affected by "a culture of peculiarity over broadly-based tax on capital income". In contrast, taxes on capital gains were an accepted feature of many other countries' tax systems.

The local debate was also hampered by the wrongly created impression that capital gains are not taxed now, when some are.

Discussing the introduction of a capital gains tax, when it already exists in a limited form, was "a very bad impression to give".

"It makes it look entirely new rather than shifting the boundaries", Cullen said.

It was also important to reassure people that a wider net for capital gains tax would not capture increases in value that have already occurred.

"It's a prospective tax, not retrospective. I can tell most of my fellow elderly limpers at the golf club that by and large they're going to be OK because they've already accumulated most of their assets," he said, delivering the speech despite a bout of chronic back pain.

He also warned against seeking tax system purity over reforms that still needed to be able to gain public support.

"No one ever got elected promising a capital gains tax in New Zealand," he said. "That's quite a big ask. If you've been too nit-picking and pure about being comprehensive … you really are at the point of the perfect being the enemy of the good and I think there has to be some reality injected into the discussion."

While there was much political "mischief and danger" yet to be had, he hoped the issue could be dealt with reasonably comprehensively and in a way that would settle the matter for a generation to come.

Cullen expressed concern that restructuring at the Inland Revenue Department left the tax gatherer with insufficient resources to implement major tax system changes. A phased implementation may be necessary since accounting firms and taxpayers would not gear up for change until they knew the outcome of the 2020 election, he said.