Labour confirms capital gains tax on all but the family home

By Pattrick Smellie

July 14 (BusinessDesk) – Labour Party leader Phil Goff unveiled the worst kept secret in recent New Zealand politics by confirming a Labour-led government would introduce a flat rate 15% capital gains tax, unadjusted for inflation, on all assets other than the family home from April 2013.

It is promoting the tax and a range of other measures, including putting the top personal tax rate back to 39% for incomes over $150,000, as an alternative to the partial privatisation of state businesses promoted by the National-led government.

The first $5000 of personal income would also be made exempt from tax, and would likely be introduced in two steps in the first term of a Labour-led Government, Goff said.

The package also includes removal of GST from fresh fruit and vegetables, at an estimated annual cost of $300 milliion.

Describing the policy as a “game changer” for economic policy – and implicitly for Labour, which has polled poorly for most of the current term of Parliament – Goff said it was time for New Zealand to adopt a capital gains tax, which all developed countries have, apart from Switzerland and Turkey.

However, the capital tax would take 15 years to reach a “steady state”, collecting an expected $3.7 billion annually by 2028, according to “headline estimates” from the economic consultancy, BERL.

In the short term, the Labour package would increase government deficits between now and 2018, adding around $1.9 billion to total government borrowing over that period.

The package is highly dependent in the short term on additional revenue from a range of roughly calculated anti-tax avoidance measures, likely to concentrate on taxation of trusts and more effective collection of outstanding unpaid tax.

The package also assumes that agriculture will be brought into the emissions trading scheme, raising as much as $254 million by 2014, offset by new spending on research and development tax credits.

Exemptions from the proposed tax are few.

While the family home will be exempt, the family bach will not be.
Small businesspeople, including farmers, will be exempt from the tax on the first $250,000 of the value of their business, but only if they have owned it for at least 15 years and are approaching retirement. A 55 year-old threshold is proposed for this exemption.

Payouts from superannuation funds will also be exempt, although capital gains accrued in superannuation funds will continue to be taxed, as at present, since capital gains are already subject to tax for entities trading regularly in capital assets.

“Collectables” will also be exempt, as will be the family home on a farm.
All other assets will be subject to the tax, with potentially the most contentious issue being the striking of agreed valuations for assets at the time the tax comes in, when those assets are not sold for many years into the future.

Migrants from New Zealand will pay the tax also, although not on the family home and “and, buildings and business assets.”

With much detail still to be established, Labour says it will appoint an Expert Panel of leading tax practitioners and senior officials to refine the proposals.

However, Goff scoffed at widely made assertions that a capital gains tax is too difficult to implement effectively.

New Zealand was close to last cab off the rank for such a tax, and it was “nonsense to say that New Zealan can’t do…what a lot of other countries have done.”

(BusinessDesk)

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