Budget 2014: Why a capital gains tax will be off the agenda

Capital gains tax (CGT) has become a major policy difference between the two main political parties in the lead up to this year’s election but it’s unlikely to get any air time in the budget.

On the one hand, National has clearly given further consideration to a CGT, given comments from the OECD that it’s missing from our arsenal of taxation tools. Still, it hasn't firmly rejected it.

On the other hand, Labour has endorsed its intent to implement a full CGT regime, likely to be based on policy from the last election.

You can expect to see a standard CGT at a concessionary rate of 15% (to deal with the effects of inflation), exemptions for the family home, a likely grandfathering of assets being exempt, if they were acquired before implementation date, and taxation only on realisation. 

If CGT is such a critical weapon to the collection of taxation (which all governments desperately need, including New Zealand’s) and an integral part of market place policy, the question remains: Why isn’t National keen to implement it, starting with this year’s budget?

National has considered the trade-off between the additional complexity to the tax system, the range of quasi-CGT regimes already in place (certain land transactions, international tax regimes and financial arrangement rules, to name but a few) and the deferred nature of any potential additional tax revenue collected. It has concluded a full blown CGT regime is not needed.

Despite the policy purity, it’s widely recognised a CGT will only raise revenue of any substance after an estimated at 15 years. One should also read between the lines; until Inland Revenue’s first mainframe computer system is finally upgraded, such a significant policy change would likely be the last straw to a full collapse of the current computer system.

From a Labour perspective, one should also read between the lines. Despite not publicly stating this, CGT is a socialist tax that aims to tax the wealthy who own capital assets. 

It is, apparently, the panacea for the Auckland housing crisis, in that it will tax all the land speculators (despite the fact that true land speculators are already taxed under the land provisions of other tax acts) and transfer investment into productive assets.

Negative impact
The disturbing feature of a CGT policy, which has not been aired by either party, is the negative impact it will have on market behaviour and transactions.

New Zealand is clawing its way out of the economic doldrums. Confidence is high, taxes are being collected and a surplus is being promised in the budget. The last thing needed is an almighty hand-brake on the markets. 

A CGT would result in people holding on to their assets, given their preferential pre-CGT status. Assets would not be sold until the owner really wanted to quit and shift protected assets into CGT-affected assets. 

This would result in a nationwide shortage of supply in the housing market, as people hold on to property, most likely resulting in higher house prices. 

However, it may lead to an increase in the availability of rental properties, which may have a short term benefit to those looking for accommodation.

Despite Labour stating a CGT would shift resources efficiently into productive assets, businesses would also be subject to CGT. This would either be levied on the owners of the businesses that are bought or sold, either directly or indirectly on the shares, and on businesses themselves that buy and sell business assets.

Productive assets would therefore also be hit and the same market slowdown would hit productive sector transactions.

And finally, the negative impact on the ease of tax administration should also be acknowledged, given the significant rewrite of the rules and the increased complexity and lack of understanding that would result.

There will be a time and a place for considering the introduction of CGT. However, the negative impact on markets, business and a fragile economy means now is not the time. So don't expect to see any spectre of a CGT in this year's budget, or any time soon (pending election results later this year).

Greg Thompson is national director and partner, tax, at Grant Thornton New Zealand