It has been interesting to see the capital gains tax (CGT) debate flare up again.

In my view the timing is perfect, as we’re as far away as possible from the sound bite-driven, overly politicised environment of an election year.

In March, the International Monetary Fund (IMF) expressed its bemusement at the highly politicised left/right split in New Zealand’s discourse on a CGT, in its latest country report. The IMF note that the debate doesn’t split down these lines in other countries and its thinking is that a CGT could help incentivise productive investment, increase the progressiveness of income tax, and help address long-term fiscal challenges.

Then in May the Organisation for Economic Co-operation and Development (OECD) issued its latest survey on New Zealand, commenting, “Most capital gains from shares, owner-occupied residential property, and land are not taxed. To ensure the tax system is not overly distorting saving and supporting broader growth, capital gains taxation reform should be done as part of a wider review of tax settings for saving.”

Reliance on income tax

In the ensuing media coverage, we highlighted that it’s crucial to ask questions about the sustainability of our tax base, and the risks posed by a shrinking ‘real’ income tax pool due to an ageing population and changes in the work landscape and technology.

The fact is that more than half of New Zealand’s total tax is collected from individuals paying income tax. While that proportion has grown by 4% since 2008, this group of individuals is shrinking as our population ages. Additionally, the take from GST – which lower- and middle-income earners pay more of as a percentage of their income – has risen from 18% to 25%.

Overall, we have a group of people that is growing smaller paying an increasing amount of the tax take. There are very real challenges to the sustainability of our tax base that we need to address.

What a CGT could look like

In speaking to the media about a CGT, CA ANZ New Zealand tax leader John Cuthbertson FCA made some key observations.

The first was that New Zealand needs an informed discussion about the appropriate mix of taxes and who bears the tax burden; and that this discussion should extend to consideration of a CGT.

A second observation was that any CGT would need to be on a realisation basis because that’s the only way many people can pay the tax, given they’re asset rich and cash poor.

Further, Cuthbertson said that a bells-and-whistles CGT may not be what we need. A pared back version that does the basics well may provide the best outcome. Currently, some capital gains are being taxed under our Income Tax Act but many are not. This has created confusion among taxpayers and inefficiency in collection.

There’s a trade-off between providing simplicity and certainty, and incentivising the type of investment and productivity New Zealand needs on the one hand, and persevering with a compromise which is complex and compliance heavy, requiring specialist input. Ongoing conversations about CGT should bear this in mind.

At this stage, we’re continuing to develop our thinking on broader tax reform, including a CGT, as increased demands are being placed on New Zealand’s somewhat fragile tax base. We need to ensure our overall tax system is equitable and sustainable. CA ANZ will be ready to lend our expertise to the conversation for the good of all New Zealanders

Take away

Look out for an update on CA ANZ’s advocacy work in the next issue of Acuity or keep up to date by accessing our policy submissions here