Paul Drum: No capital gains tax? Just you wait

The Tax Working Group's polling showed capital gains tax was uppermost in respondents' minds. Photo / Getty Images

COMMENT: As anticipated the Tax Working Group's interim report does not lock in a rock-solid recommendation for a capital gains tax (CGT). But there will almost certainly be one come the final report.

Common sense and the 40-plus page appendix on the issue contained in the report strongly suggests a final CGT recommendation, including extensive detail on its implementation and scope, will be there in time for all political parties to fine-tune their tax policies ahead of the 2020 election.

The Tax Working Group's own polling shows it is an issue for voters. Asked which tax issue matters most, more respondents opted for a CGT than any other tax problem, including funding retirement.

Their online questionnaire also revealed an appetite for change. More than 1400 respondents said major change was needed, compared to 1008 opting for "small change" and 849 ticking "a complete overhaul". Less popular options were "no change" and "something else".

This suggests the conditions are right for a once-in-a-generation opportunity to have a discussion with community engagement, especially with the business community, on what a fairer tax system will look like.

At its most basic, the discussion will have to confront the issue of equality. Someone on $100K pays a big chunk of that in income tax. Someone else who books a $100K capital gain by flicking a capital asset, bought and sold within months, pays zero tax. Where's the equity in that?

But the discussion will also centre on the design features. How much capital gain will be taxed? The interim report does not warm to any discount like in Australia where half of a capital gain may be tax free, with the remainder added to the taxpayers' income and taxed at the marginal rate. This needs to be explored more fully.

The report reiterates the family home and land under it is sacrosanct but what other assets will be subject to a new regime is another question. In fact the report suggests a definitive list of assets could be developed.

It's also important to point out that at this stage, this is no lay-down misère. Everything is still up for grabs, which is why it is so vital the community engages with the Tax Working Group over their preferences for a fairer tax system.

One notable feature of the report is the further consideration of using tax to improve environmental and ecological outcomes, including water pollution and abstraction.

This is also a complex issue but one that needs to be addressed.

There are a number of recommendations regarding retirement savings, including removing the ESCT in certain circumstances, and reducing the PIE rates for KiwiSaver funds — but with a further consideration of the overall taxation of savings to be considered in the TWG's final report next year.

Also, as predicted, there are no recommendations to change the GST, to remove the imputation system, reduce the company tax rate or change the tax rate for Māori authorities among many other things.

These interim report "no change" recommendations are important for business and community confidence, and reinforce the view that, while not perfect, New Zealand's tax system is relatively robust and fit for purpose.

The Tax Working Group also deserves to be commended for achieving an important milestone and bringing much needed clarity to what are complex issues.

The interim report and supporting documents will serve their purpose well by encouraging further consideration and input into their final report recommendations.

All of these issues are up for discussion and I'm going back to our more than 2000 members of the accountancy profession to get their feedback and, on their behalf, provide further input into this process.

- Paul Drum is head of policy for CPA Australia.