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Capital gains tax no panacea for tax fairness

Apart from capital gains tax nod, Tax Working Group’s final report provides some recommendations to boost investment and reduce compliance costs for business

Wellington, 21 February 2019 – The Tax Working Group’s final report released today supports the introduction of a capital gains tax (CGT), as well as providing some recommendations on how the tax system could better support business by boosting investment and reducing compliance costs.

While there was no consensus amongst the group in support of a CGT, the majority’s recommendation for taking a more comprehensive approach to the taxation of capital gains was firmly bedded in the notion that it would increase the fairness of the tax system.

But Deloitte tax partner Patrick McCalman warns that a CGT is not a panacea for tax fairness.

“At one level, there is an attractiveness in the argument that a ‘buck is a buck’ and everyone should bear the same tax burden on every dollar earned. However, when one delves into the detail of the design, other issues of fairness emerge,” says Mr McCalman.

“For example, is it fair that property could pass on death without an immediate CGT cost, while gifts made during one’s life would be taxed? For family businesses, wouldn’t it be more productive to be able to pass assets from generation to generation before death,” he says.

“Accordingly, we need to be cautious as to how much ‘fairness’ a CGT will introduce. It may simply change where the ‘unfairness’ is perceived to sit within the tax system, creating new tax exemptions that would distort where investments are made.”

Complicating matters further is the political dimension. And MMP only exacerbates the political difficulty and increases the likelihood of whatever ultimately sees the light of day being less coherent from a policy perspective.

Mr McCalman concludes it would be a shame to focus solely on its CGT recommendations when the TWG final report also presents a range of options to better support the productive economy.

“The TWG makes recommendations in other areas such as building depreciation, seismic strengthening, blackhole expenditure and loss continuity, where the tax treatment of such items is currently resulting in over taxation of New Zealand businesses,” says Mr McCalman.

“With New Zealand’s corporate tax rate now heading toward being one of the highest in the world, dealing with these issues would be welcomed by New Zealand businesses,” he concludes.

You can read Deloitte’s full article on taxing capital gains and view our TWG final report “at a glance” infographic at www2.deloitte.com/nz/twg-final-report.

ENDS


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