Editorial: Detail crucial to sell tax on capital gains

Labour Party leader David Cunliffe. Photo / Mark Mitchell

Courageous proposal is what the economy needs

David Cunliffe is letting Labour down on the detail of a capital gains tax. The danger is that his imprecision will let down the case for a tax that New Zealand's economy needs. The Labour leader has been caught in confusion on two details, first when the Prime Minister asked in an online debate whether houses owned by family trusts would be subject to the tax, and subsequently on its application to deceased estates.

Both complications arise because Labour wants to exempt owner-occupied houses from the tax, as it should. But what then happens, National reasonably asks, to homes owned by a family trust or inherited at the death of a parent? Labour has had ample time to resolve both issues, and others, since proposing a capital gains tax three years ago. Mr Cunliffe, who was finance spokesman and took credit for the policy at that time, should not have been floored in the debate or contradicting himself on the inheritance issue yesterday.

When asked on Wednesday how soon after a death would heirs have to sell a house if they were not to incur his capital gains tax, Mr Cunliffe said a month. Yesterday he back-tracked and kicked for touch, saying it was a detail that would be decided by an expert tax-designing panel. That at least is preferable to making policy on the hoof.

In discussion of a tax on capital gains it is essential to remember its purpose is to make real estate investment a little less attractive so that more of the country's savings might be available for productive ventures. A family inheriting a house are not making an investment decision unless they let it for rent. At that point its value could be registered for tax on the gain in value if it is sold. A register of rental property may be necessary to the administration of a capital gains tax.

Family trusts are more difficult. A trust removes sole ownership from an occupier who becomes its beneficiary. If there are financial advantages in putting a home in a trust, the beneficiaries can hardly complain if they are taxed as property investors when they come to sell. A trust-owned house could be exempt if it is the trust's sole residential property, but if the trust owns multiple properties it seems fair that a sale of any of them could be taxed.

It is a homeowner's choice to put the home in a trust. Those who make that decision can weigh up its liability for capital gains tax against the benefits of putting the house beyond the reach of potential creditors or a matrimonial property division or other risks.

Farms are another detail Labour needs to resolve. In the online debate Mr Cunliffe said farmhouses would be exempt but it seems the land would be caught. Labour should exempt farmland, too.

The party should make no apologies for making residential property its primary target. It is residential rental property that is distorting the economy, attracting excessive investment, sending house prices soaring beyond the reach of those on modest incomes, requiring high interest rates to prevent inflation, and causing the dollar to be higher than many exporters can bear.

The supposed "complexity" of a capital gains tax has been the reason it has been rejected by many tax reviews over the years. The present Government was happy to accept that view from a working group in 2010. Advocates of the tax should not be deterred. Wealth gained from income and interest can attract tax at 33 per cent, property investors would give up only 15 per cent on their gains on Labour's plan. It is politically courageous and economically responsible, but Mr Cunliffe needs to master the finer points.

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