Tax specialists warn over intricacies of capital gains tax

Trusts and inheritances offer some scope for tax changes, an expert says. Photo / Supplied

By RNZ

Tax specialists say a broad capital gains tax may go some way to address the tax system’s imbalances, which favour the country’s most wealthy families but would be no easy thing to design and implement.

The Inland Revenue report covering 311 high-wealth individuals showed their effective tax rate was less than half that of median-income households, once working for families and other tax breaks were taken into account.

The report highlighted that the use of trusts and wealthy people’s investments in assets such as land allows them to accumulate wealth while managing their income.

The tax director at Baker Tilly Staples Rodway, Andrew Dickeson, said the fact 67 per cent of the richest used trusts suggested there was possible scope for action.

“So perhaps there is something there that could be done looking at trusts in more detail, or perhaps they might look at inheritance because many overseas jurisdictions have inheritance style taxes.

“It really comes down to how you want to tax and where you want to tax ... there’s no silver bullet, no country has come up with the perfect way of ensuring fairness, and there are some taxes where the compliance cost is greater than the revenue raised by it.”

Dickeson said there were clear arguments for a comprehensive capital gains tax, which the report established, and New Zealand was in “an absolute minority” by not having one, but he cautioned they could get messy and complicated.

“But the broader you make the regime the harder it is to design loopholes and you can broaden your tax base, but you will also increase compliance costs.”

What to tax and what to not

KPMG tax partner Rebecca Armour said the report has clearly put a capital gains tax to the fore in the tax debate.

“You have to decide what’s in and what’s out .. do you include the family home, how do you measure and value assets before the tax start date, one of the real challenges is whether it’s on realised or unrealised gains.”

She agreed that changing tax thresholds or creating higher tax rates for the super-rich did not address the essential issues of fairness and equity.

“The report is published as a high-wealth research paper but feels much more like a capital gains tax analysis.”

Meanwhile, Robin Oliver, a former deputy commissioner of IRD and now the head of the tax advisory firm OliverShaw, said the IRD report did not have the necessary data and made too many assumptions to be useful in helping form good tax policies.

“It is therefore likely to paint a misleading picture of our tax system making it seem broken when it is not.

“Our tax rules are fair in that the rich do pay tax in New Zealand and in general a person’s tax increases as income increases even if income is more widely defined than it is under our income tax legislation.”

Oliver’s firm released its own report recently on whether high-income earners were paying a fair share of tax, concluding they paid their fair share when measured against statutory rates, but had the flexibility to minimise their effective tax rates.

- RNZ