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PwC argues rebuilding the economy post COVID-19 should include tax reforms and addressing the 'elephant in the room' of capital gains tax

PwC argues rebuilding the economy post COVID-19 should include tax reforms and addressing the 'elephant in the room' of capital gains tax

Tax reform to broaden the Government’s revenue base and remove investment bias should be a key aspect of efforts to rebuild New Zealand's economy post COVID-19, PwC argues.

This is one of "seven planks to rebuild New Zealand" featuring in a report entitled Rebuild New Zealand, which the auditing and financial advisory firm has issued.

"In our view, this is not a time for timid policies as these will only lead to stagnation within the economy, greater loss of jobs and a much slower eventual recovery. Instead, the enormity of the post-COVID-19 economic crisis creates the so-called ‘burning platform’ for transformational change focussed around some ‘no-regrets’ objectives that New Zealanders as a nation need to pursue. We must all recognise that there is no simple return to the old ways, instead we have no choice but to adapt quickly to the new normal. Above all, we want to see an informed non-partisan debate around the key planks by which New Zealand’s economy can be rebuilt, better and stronger than before," PwC says.

To this end tax reform must be reconsidered to broaden the Government’s revenue base and remove investment bias from property, PwC argues. For too long NZ has relied on a tax base that's too narrow, PwC says, with most of the Crown’s revenue coming from taxes on income, either personal or corporate taxes, and by taxing consumption via Goods and Services Tax (GST).

"Most would agree that there is little scope to increase GST from its current level. To do so would severely impact those on lower incomes. Increasing income tax is likely to be counterproductive as it will hamper investment and economic growth. New Zealand’s rate of corporate income tax is already relatively high compared to many other countries, which impacts investment decision making by global businesses," PwC says.

"New Zealand’s taxation system has been subject to several major reviews over the last 20 years, notably the McLeod Review in 2001, the Victoria University of Wellington Tax Working Group in 2010, and most recently the Government’s Tax Working Group, which reported back last year. Despite all the work that has been carried out, there has been little in the way of fundamental tax reform implemented as a result of these reviews."

The "elephant in the room," as PwC puts it, remains a capital gains tax (CGT). Successive governments led by the National and Labour parties have declined to introduce a CGT.

"In our view there is now a greater need than ever to broaden New Zealand’s tax base so it relies less on taxing income. So is it time to look again at a simple broad-based CGT? In doing so, it is vital that the public debate on such a contentious topic is not skewed by interest groups or political motivations. New Zealand introduced a simple broad-based GST regime more than 30 years ago and it has been an enormous success. The same could occur with regard to a CGT," PwC argues.

"The debate on CGT would be very different if New Zealanders had a better understanding of the extent to which it would actually impact them during their lives; and also the trade-off that there might be an eventual trade-off between CGT and income tax. The distinction between income gains and capital gains is blurred and there is a lack of economic logic in terms of why the two forms of economic gain should be treated differently for tax purposes."

"Instead, what results is a biased investment regime in favour of non-productive assets such as residential housing where gains are not typically subject to tax. It’s also well understood that New Zealand’s tax system hasn’t kept pace with the digital economy, with a key issue being how to tax cross-jurisdictional businesses, which have scale without mass. Some steps have been taken to try to address this (e.g. GST on remote digital services) but there is a way to go. The question now is whether more direct action is needed?"

"Although the concept is not universally popular, any progressive tax system has the deliberate effect of redirecting resources (cash) from one segment of society (typically those who earn more or have more assets, and who are presumed able to afford to pay more) to another segment who are presumed to have less ability to pay and who may have greater need," says PwC.

"The Government is tasked with implementing this redistribution in the most equitable and cost-effective manner. There could be long term equity and economic efficiency benefits to be realised from rebalancing the tax system and, similar to the fiscal crisis in the 1980s that enabled the introduction of GST, the magnitude of the economic impact of COVID-19 and the Government’s fiscal response may provide a platform to overcome the political barriers to doing this."

The seven planks

PwC's "seven planks fundamental to rebuilding New Zealand’s economy" include:

1) Maintaining employment may require further support;

2) Stimulating real growth requires an honest conversation about what growth means and identification of the critical enablers such as good infrastructure;

3) Increasing productivity may include leveraging global investment or people and capital alongside significant structural changes in our economy;

4) Addressing intergenerational inequity may mean making some tough decisions;

5) Addressing tax reforms to broaden the Government’s revenue base, 5 remove distortions on investment decisions and create greater fairness;

6) We need to maintain focus on combating the climate crisis. And;

7) Partnering effectively by all elements of the public and private sectors to aid recovery.

On addressing intergenerational inequality PwC says the younger generation will inherit the debt burden associated with combating the COVID-19 health crisis, whereas the principal beneficiaries have been the older generations.

"We know that older people were most susceptible to suffering the worst effects of COVID-19, whereas young people were far more likely to recover. The intergenerational legacy of combating COVID-19 adds to a growing extent of intergenerational inequity that has become progressively ingrained within New Zealand."

Other key contributing factors include the universal national superannuation scheme, which successive governments have been reluctant to change.

"This is notwithstanding the arguments that the current scheme is becoming unaffordable, but also unnecessary in terms of its universality, especially given the age of entitlement has not altered for almost two decades, despite the fact that average life expectancies over that same period have increased by more than nine years," PwC says.

"This issue has been exacerbated by the limited enthusiasm that the same governments have had for encouraging private savings. While there is much to be admired with KiwiSaver, it remains a lightweight compared to the compulsory savings regimes in other countries, notably Australia. For example, many young people when joining the workforce end up with default KiwiSaver providers and their savings are placed in balanced funds whereas they may be better served by growth funds at this early stage in their lives."

"The New Zealand Superannuation Fund is a worthwhile contributor to our national savings programme, however, it too has suffered from the vagaries of government policy shifts around its funding," PwC adds.

Meanwhile, rampant house price inflation has created a society of "haves" and "have-nots" or the owners and the renters.

"Homeowners have generally enjoyed strong capital appreciation in their family home which provides a source of wealth accumulation, and for many constitutes their ‘retirement nest-egg’. On the other hand, for the renters, the goal of purchasing a home is becoming an impossible dream for many."

"There are other societies, notably in Europe, where freehold home ownership is far less prevalent and instead families occupy rented housing throughout their lives; yet it is an ingrained feature of the New Zealand way of life," says PwC.

"The Government may also need to revisit other policies, such as the fees-free first year of tertiary education, which does not appear linked to achieving quality outcomes; and the student loans scheme that burdens many new entrants to the workforce with high levels of debt. All of these issues need to be comprehensively addressed as part of reversing the trend towards growing intergenerational inequity, ensuring our society is fairer and the benefits of economic recovery and prosperity are shared by all."

Electrification push

In terms of the environment PwC suggests NZ's strength in renewable energy provides a significant opportunity to find ways to electrify parts of the economy that have traditionally relied on fossil fuels.

"New Zealand’s commitment to conservation, and the importance of protecting our biosecurity and unique biodiversity also mean that our natural environment must be a key consideration in our economic recovery. Recent Government announcements of the progression of Emissions Trading Scheme regulatory reform provide an opportunity for New Zealand to give teeth to a mechanism that has historically lacked bite."

"New national emissions budgets and caps on tradable emission units will also help the Government ensure that businesses internalise the cost of emissions within their finances and therefore support New Zealand’s climate change goals through day-to-day business. Through these measures climate change and sustainability can become integrated into everyday New Zealand business decision making so the country is well positioned to support economic, social and environmental wellbeing for future generations," PwC says.

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101 Comments

"Instead, what results is a biased investment regime in favour of non-productive assets such as residential housing where gains are not typically subject to tax."
Factually incorrect. If you start a business and then sell its share, your profit is capital gain and not taxable. So taxation is not the bias here. The real bias here is financing: the lenders have a very strong bias to lend against property (mainly because it is good collateral that even at worst of times offset some of the debt, if not repaid. You cannot use business assets as security in many industries as a lot of value of a business is from its intangibles that will worse nothing when business is loss making).
I do not have any problems with CGT, i agree that gains and income are pretty much the same and it does not make much sense to tax one and not the other. I support that tax should be on combined income and gains (after allowable deductions) at personal tax rates.
Having said the above, there is one particular issue with calculating "gain", specially when the asset is held for a long time. If you use "purchasing power" to calculate gain it makes a lot more sense, but that will results in smaller taxable gains.

Which is what's done elsewhere. Income from, say, property capital gains (as well as periodic short-term income - rent etc) are taxed, but mitigated by the rate of inflation.
If any income is taxed, all income should be taxed, no matter what it is camouflaged as.
By and large, a well-argued article.

Jacinda has ruled out a CGT while she is prime minister, so that leaves a pay-as-you-go tax on land or on the imputed return from wealth. Just don't create more unfairness between haves and have-nots by exempting the family home. Or if you do exempt the family home, then exempt the non-home-owner from ALL income tax till they've accumulated the capital to freehold a tax-exempt home themself.

Do not look in the rear vision for solutions. CGT was given the air. Reviving its discussion will undoubtedly create some employment by way of several new committees on top of committees etc. Probably better off stepping out of the box and start thinking like an entrepreneurial rather than the likes o an accountant.

Even better consider reducing expenditure and then getting better value, both with widen the budget surplus allowing debt repayment. Improving productivity is another productive area and removing obstructive regulation and their enforcers will encourage those who can do to do whilst making available the obstructers for something useful.

Wrong. It's long overdue in this country, will bring about some equity and fairness, and align us with 98% of the rest of the world.

The real bias here is financing: the lenders have a very strong bias to lend against property (mainly because it is good collateral that even at worst of times offset some of the debt, if not repaid. You cannot use business assets as security in many industries as a lot of value of a business is from its intangibles that will worse nothing when business is loss making).

Let's not forget the central bank imposed RWA capital regime favouring bank lending to residential property. This link tells the story.

Yes, sure, but that in itself is because properties are often (but not always) better collateral than businesses assets. This is easy to understand. The problem is not only this though. At least in theory, if your increased risks is paid by better rewards (i.e. higher interest rate), the bank preference should not be skewed to lending to property. But in absence of real economic prospect, this does not materialize. So the banks continue to lend to property.

So while it is obvious that allowing the credit flow to property with no critical assessment will have very bad social consequences (as experienced in NZ), i doubt that absence of such practice would have magically forced lending to business and productive assets. The real shame in all this is that despite such massive increase in mortgages, the supply of housing and its quality has not significant improved. Most of the money has inflated poorly built old houses without reinvigorating urban centers in NZ. In hindsight at least, the infrastructure building should proceed residential construction activities to make new constructions attractive and affordable, and prevent the value of existing houses to balloon out. Now, constructing new houses and neighborhoods and infrastructure (if done smartly and not overtly) are all very productive activities, temporary yes but productive nonetheless.

But in absence of such approach there will be a crazy demand for "established good neighborhood" for a myriad of real and imaginary reasons (e.g. good schools, transport, safe neighborhood, social prestige etc).

To give you an idea how nuts the NZ bank lending is ... I went into ANZ to ask if I could borrow against a holding of NZ Treasuries I own. Elsewhere in the world this would be viewed as the best asset out there to lend against ~ very liquid and AAA rated.

ANZ however told me they couldn't lend against the bonds, even if they were in ANZ custody and the best rate they could offer would be a mortgage against property I own. Absolutley insanity.

believer1980,

What you say at the beginning of your post simply makes no sense. Residential property is not typically subject to tax and that is a statement of fact. "your profit is capital gain and not taxable. So taxation is not the bias here". This is Alice in Wonderland stuff where words mean what you say they mean.

Why? capital gains in NZ are not taxed, regardless of their source. For example, when the previous owners of Trade Me sold their shares, their massive gain was not subject to tax. Similarly, gains from sale or a property are not taxed (unless bright-line test applies).
what about this is fantastical? The statements that not taxing capital gain has resulted in preference for property (as opposed to other types of investment) is factually incorrect. This would have been true if tax treatment of capital gains in other investment types were different to property (which is not).

If one buys an outstanding NZ Government bond issue below par the pro- rata gains to par redemption are taxed at one's income tax rate annually. Same applies to interim purchase and sale gains of said bonds and the difference between discounted purchase price TBills and par redemption.

I think there is a very distinct difference. Generally speaking, housing CG is achieved by sitting on your arse and waiting. Business CG is achieved by exactly the opposite.

That maybe true. But What I say is also true. Taxing capital gain is not biased in NZ (with maybe few exceptions) within the category of what is considered to be capital gain.

You are actually arguing to introduce such a bias on the ground that one is desirable (in business) and other is not (housing). I have no views on that as that is something which requires very comprehensive assessment.

Pretty much the opposite of the current skew is my argument.

:) mate currently there is no skew. You want a skew to be there, and you have your reasons for it. Good. But the absence of such skew (positive) does not mean that the current situation is skewed (purely from a taxation perspective) towards property.

Agree re: capital gains in NZ and it not leading to investment preferences.

No tax on capital gain imo is to encourage longer term investment.

Honestly the issue in NZ isn’t the taxation issues, it’s a productivity issue, large government issue, and lack of national savings, issue. The latter three drive all the issues in property you could ever imagine.

Banks play the game to the govt rules, and the govt rules say, lend, lend, and lend to property.

I still laugh when people wonder why NZ pays so much every year in interest costs. No savings

Just to be clear, what investment preference should be encouraged? Wouldn’t any capital gain on that preference then be taxed?

So start up a company and sell your property assets into it. Unless ALL capital gain is taxed, CGT is just an envy tax on residential property investors. I’m not against that, but not sure if it would be worth the effort. Didn’t really work in the UK or Australia. And applying CGT to KiwiSaver would be political quicksand.
PwC’s reasoning would put much more money into the bank accounts of high earners who would find various structures to minimise the CGT on the increased number of assets they would be able to buy, whether it be property, equities, art etc. Our top income tax rate is low by international standards already. And I really don’t see how one class of capital can be singled for tax. Compliance minefield, something PwC partners would relish.

"What about this is fantastical?" is that it is simply not true. As an owner of a variety of assets, including but not limited to property and a business (yes other things do exist) I can assure you that capital gains in NZ on several types of assets are most definitely taxed.

Lets have a fair CGT across the board, shares, property, cars, paintings,gold, businesses, any thing that has a capital gain, and all property should be subject to capital gain,, because let's face it when we buy our first home, we do it as an investment, too make money,,,, if a capital gain is introduced let's make it fair,,,,,,,,,

The tax treatment of the financing cost is also material. A first home buyer will make his interest payments out of tax paid income whereas someone whose business is the buying , selling and owning of property will claim his interest costs as tax deductible items. It would be unfair to (double) tax the former and the bright line test goes some way to dealing with the latter. Perhaps for assets traded over short time frames<3 years IRD could claw back interest deductions. For long held assets such as farms fairness would demand that the compound effects of inflation be first taken into consideration before calculating any potential taxable gain i.e. the "purchasing power" argument.

If the sale of the property is taxable all the more reason to allow a deduction for interest costs associated with holding the asset. Why should all gains i.e. rent and capital gain, be taxable but an interest deduction not allowed?

If you want FHB to claim deductions for their interest just make them pay tax on a deemed rent and any capital gain on sale.

So scrap tax on Term Deposits as well then? (that's the tax on tens of billions dollars worth of savings)

Taxation has two main objectives - (1) Raise revenue for general expenditure and (2) direct policy initiatives of the economy ( 'encourage' certain activities and discourage others). Both are touched on in the above.

The thrust of this article is that New Zealand needs to raise MORE income from a broader taxation policy to repay the debt we've collectively incurred, not less ( grant more exemptions and offsets etc).
So the easy way might be to remove interest-paid on any financing cost from the deductions allowable list?
It's only a matter of calculations after all. If you know you get taxed in X, Y and Z and get no deductions for A.B and C then we all just move forward with whatever the results are of those new calculations.

A lot of businesses will be in a loss situation and fail if you deny them deductions for financing costs. Why should businesses not be entitled to such deduction? How about just deny all deductions for wages paid to employees? Or deny all deductions for depreciation? The only explanation for such an unprincipled approach is a tax grab. May as well just increase tax rates.

Why should investors not pay tax on their income? Very strange approach especially given the article is looking at broadening the tax base not shrinking it.

There are always losers in any policy change. It's a matter of who they are, and whoever it is will think it's unfair.
The trick is to try to make sure it isn't you. ( and let's be honest, we've had heaps of notice as to which part of the economy the changes are coming to. Heaps.It started with a 'gentle' 2 year White Line test. And now it's only a matter of timing to 'broaden' the tax base)

Taxing a gain is a lot different from denying a deduction for expenditure incurred in deriving income.

just taxing capital gains on residential rentals ain't gonna cut it. All assets need to be on the table (e.g. owner occupied homes, commercial buildings, businesses) but that won't happen for the foreseeable future. At best bright line may increase from 5 years to 10 years... tinkering for spare change.

Why would owner occupied homes need to be in the argument? How are they deriving taxable income from this?

If you make capital gains taxable that would include all houses. Excluding owner occupied houses would be a political decision and would substantially reduce the tax take and encourage tax avoidance.

How and why?

Simple. Because unlike many other types of businesses, investors are removing a means of shelter from the open market. If you buy it, someone else can't. And given we have more people than we can house, the feelings of people who have absolutely creamed it at the expense of the rest of the country for the last two decades probably need to come a distant second for once.

If you are going to target a group you may as well be straight up about it instead of trying to hide it by butchering tax jurisprudence. A straight out $20k levy on all residential rental properties should do the trick. $12B in one swoop, covid 19 paid for.

See https://www.interest.co.nz/property/100565/statistics-nz-estimates-numbe...

How would I be butchering tax jurisprudence? We already accept this when we limit deductions for employees and allowing them for contractors. The tax legislation already has a mechanism to identify 'land rich' companies for applying a Bright-line Test. The tax code hasn't collapsed in on itself yet.

The employment limitation recognizes the lack of nexus between employment income and expenditure. The bright line test merely subjects some forms of capital assets to tax. Denying deductions where there is a nexus to taxable income is inconsistent with accepted tax concepts. I can't think of an example.

Someone who buys and sells property within short time frames could be deemed to be trading in that property and as such any gains should be deemed to be taxable income. Interest paid is a legitimate business cost and is presently tax deductible. The deductibility of that interest is a form of subsidy from the taxpayer to the trader. If the government chose to end that subsidy it would have the immediate effect of boosting IRD's coffers - CGT with or without BLT will not generate any income for IRD until properties subject to CGT were sold.

Why is allowing a deduction for interest costs a subsidy?

Is allowing a deduction for rental costs a subsidy to?

People who buy and sell quickly are taxed under the BLT, it is presumed that they are a doing it for the purposes of profit, i.e. a business. Therefore, interest is a cost, selling price minus purchase prices is Gross Profit. GP less CODB = taxable income. How is this a subsidy from the paxpayer?

By far the simplest and most economical solution with no loopholes to exploit or investigation to enforce.

Just put a minimum time limit on how long any property is held for - rentals or own home. Keep it the same.

1 year, 2, 5 - I don't care. Just make it simple for the people.

Has to include the family home as well to eliminate the mansion effect Australia suffers from.

But, but, but people will cry!

This simple time-based solution will easily catch all the owner-occupier flippers and "builder's own home/ change of circumstances" sellers.

Nothing wrong with wanting to profit from it but just pay tax on it and make the minimum holding time clear and THE SAME FOR EVERYONE.

12
up

This is a good piece.
Just do it. Sick of the debate.
Substantively, if not politically, It was a really stupid move by Ardern to dismiss it. That just shows she's become, very quickly, a master of politics, if not policy substance.

Yeah... you need a majority in Parliament which the Government didn't have when NZF put a bullet in any CGT. Political reality and the law unfortunately get in the way of your "just do it" approach. You should start up a political party "CGT - Just do it" (might want to check with Nike first), see how you go in September.

Fair points.
However, Labour and NZ First therefore need to be interrogated much more intensively by media / opposition, on how they are going to address these issues moving forward.
It's all very well to dismiss CGT, but if so, what is the alternative? Because let's be straight up here, things will HAVE to be done.
If you don't widen / increase the tax base, it will be services that need to be cut...

You left out the borrow till it hurts option. NZ has a ton of borrowing capacity and reckoning day can be kicked down the road for a decade or two.

For what it's worth I think there should be a comprehensive capital gains tax in NZ but I cannot see that happening in the next 2 decades even given the impact of Covid 19.

Yes, that's obviously an option. But clearly an undesirable one, especially for future generations...

Every option is undesirable for so somebody:
1) Pay more taxes - workers and wealthy
2) Cut services - beneficiaries, oldies, education and health
3) Borrow - Future generations

Unfortunately the boomers have the numbers and option 3 would likely suit them.

Yes they have the numbers now, that will start to change in say 10 years.
Politics is math! (?)

Government borrowing is all part of the neo-liberal narrative to make us believe that the government is financially constrained. As the government has now proved it can repay its debts at any time it chooses just by the means of quantitative easing and it doesn't need to run budget surpluses or tax anybody to do so. As Prof of economics Bill Mitchell explains here the entire thing is a sham and a subsidy to the financial markets.
Part one. http://bilbo.economicoutlook.net/blog/?p=45106
Part two. http://bilbo.economicoutlook.net/blog/?p=45108

HeavyG
Do your research first. Most ‘Boomers’ struggle along on a very low pension supplemented by meager savings, if any. Of the people I know, all who invest in property are aged between 35-55, who are gen x. I do not personally know any superannuitant, ie Boomer, who has an investment property, Baches, yes, but only a few and often owned and maintained by grandparents for their kids to use. Most definitely not an investment.
The demands and risks of residential property ownership, compliance, Bright lines and other legislative uncertainty, maintenance, and dodgy tenants, make it an absolutely bonkers investment for anyone over 65.
This Boomer nonsense is very trying, quite frankly. Almost getting to the point of hate speech.

"Just do it. Sick of the debate."

but of course you are ; you are losing it. So the logical conclusion is to just NOT do it.

Ah and your expertise is?????
Do you know better than PWC and many other economists?

What's your suggestion? Easy to throw stones at something without an alternative suggestion.

Continue to borrow like there's no tomorrow?

Cut back public services?

Increase income taxes?

All of the above?

Simple . Stop throwing money around as a drunken sailor.
Clear sunset clauses for current emergency measures.

Terminate Regional Development (SLUSH)Fund and the likes.
Abolish the Treaty "industry".

Freeze public sector hiring.

You really have no idea if you think those things are going to make more than a minor difference.

You really have no idea if you think CGT would ..

I don't see any facts in this comment. Or logic.

No mention of a Tobin type tax. Although corporate tax is relatively high it does seem to only come from a small section of companies, needs to be some way to collect in those whose accountants and trust advisors are THE most important assets to the company. Despite it going completely against my self-employed thinking I'd even say a tax on gross income wouldn't nessacarily be any less equitable than the current regime.
I'd just about jump at any system to simplify things to the extent of getting rid of WFF, accom supplement and the myraid other acronym add-ons to the current system.

Totally agree that a CGT is long, long over due especially on investment property.
Most importantly it is about fairness in our tax system.
The introduction of a GCT will not immediately inflate the government coffers but in the longer term it will do so.
As a past property investor I have made well over six figures in tax free capital gains and will likely make more in the future so I have no axe to grind in calling for it.
For me, a CGT would not be a disincentive to further investment in property - just as the current defacto Bright Line Test CGT isn't, and just as income tax on rental yield also isn't.
Note that a CGT is about fairness in the tax system and would have minimal affect on house prices so it is not about controlling house price inflation. I have no problem with a home being exempted from a CGT and losses on investment property being ring fenced just as those in the current Bright Line Test are.

Look for what is missing.

Big tech paying tax
APP ventures like uber, paying tax, avoiding employment laws.
Social media, paying tax and running in favour content.
Banks paying tax.

https://www.sciencedirect.com/science/article/pii/S1090951617303553
Abstract
This paper investigates the association between the Big 4 accountancy firms and the extent to which multinational enterprises build, manage and maintain their networks of tax haven subsidiaries. We extend internalisation theory and derive a number of hypotheses that are tested using count models on firm-level data. Our key findings demonstrate that there is a strong correlation and causal link between the size of an MNE’s tax haven network and their use of the Big 4. We therefore argue that public policy related to the role of auditors can have a significant impact on the tax avoidance behaviour of MNEs.

https://www.bbc.com/news/business-31147276
Accountancy firm PricewaterhouseCoopers (PwC) has been accused of promoting tax avoidance "on an industrial scale", in a report by MPs.

It is said to have helped hundreds of clients cut their corporation tax bills by setting up bases in Luxembourg.

By way of background, from trade publications.

https://www.accountingtoday.com/articles/pwc-sued-by-matalan-founder-ove...

The founder of U.K. discount retailer Matalan Plc is suing PricewaterhouseCoopers over claims he lost as much as 135 million pounds ($165 million) by relying on advice the accounting firm gave him when he moved to Monaco 20 years ago.

John Hargreaves says in a London lawsuit that U.K. revenue officials rejected his bid to take non-resident status and avoid most taxes in the country. He said in a court filing this week that he “placed his complete trust and faith” in PwC as his tax advisers during the period.

The lawsuit is the latest bit of unwelcome scrutiny for one of the so-called Big Four accounting firms, which have been bombarded with criticism over the quality of their auditing and advice in recent years. Earlier this month, the administrators of now defunct Carillion Plc asked for documents from KPMG to prepare for a negligence lawsuit against the accounting firm.

Around the turn of the century, Hargreaves decided to permanently move to Monaco and to become a non-resident in relation to his taxable status in the U.K. with effect from April 2000 onwards.

But several years later, HM Revenue & Customs decided the steps he had taken were not effective and that he was still a U.K. resident and thus remained taxable.

PwC, which is seeking to throw out aspects of the case, said in a statement it believes the lawsuit will ultimately fail. Hargreaves declined to comment. The Financial Times reported on the lawsuit earlier.

A large part of the case, which was originally filed in 2012, is focused on the loss Hargreaves believes he suffered when selling part of his shareholding in Matalan in 2000, the net proceeds of which amounted to 237 million pounds. He intended to sell the stake as a non-resident and PwC actively encouraged him to do so, his lawyers said at a court hearing this week.

If HMRC’s assessment of what Hargreaves owes in tax is correct, his loss in relation to that tax year will be around 135 million pounds, including interest to date, his lawyers said.

Good example of the kind of BS avoidance activity that is the common response to broadened tax bases. CGT on residential investment property could contain NZrs whacky obsession with housing but as the various tax reports have concluded capital taxes are fraught with issues and drive perverse behaviour such as that of Mr Hargreaves. I've been a reluctant participant in numerous tedious conversations about ways to avoid the capital tax regimens in other countries and would prefer we as a country instead placed more policy focus on our lousy productivity, dismally so in the protected public service. We seem to believe tax collection should be prioritised and place much less emphasis on productivity. While better targeted taxation will deliver some gains it is still just picking at the edges of our key underperformance factor.

No political parties will go for CGT.

All political parties knows that is just tax and labour also wanted to introduced but backed off for vested interest.

May be CGT could be trimmed / changed to a fixed percentage like 20% or 30% (instead of linking it to Income as a result ends up 33% plus)., Also can look at option of Short Term CGT (if sold within 2 or 3 years will be more tax say 20%) and long term CGT (if selling after 2 or 3 years will be taxed 20%) with one family home being excluded and CGT can be linked to inflation that will further relief and just along with capial expenditure done on the propoertt that helped in adding to the value can be allowed as deduction.

So many way but no Intent by any politicans for personal selfish reason.

Alternatilvely for Now till CGT is debated, government can put more checks and balances to enforce BLT like sellers selling house have to sign a declartion if they own any other property be in joint name or in independent name or in trust account or in compamy account Just like buyers have to fill the form for OIO.

QUESTION IS DOES ANYBODY WANT CGT OR EVEN BLT TO BE EFFECTIVE.

If even a $1 earned in anyway has to pay Tax why is it Housing where people ard making millions not taxed (BLT is a toothless tax supported by No intent by government/IRD to dnfirce). Again as tax policy ard people who have vesred biased interest will never go for it as they are the type of people who makes heap by exploiting and avoid paing any Tax.

Now is the opportunity to JA to go for it in some way or never as introducing now will not be U turn but need of the time(though earlier also).

taimaiakka0
Introduction and increases in GST did not bring about falls in government.
Agree with you regarding progressive upping; after all that is what happened with GST - 10% then 12.5% and now 15%.

Correct but fear of losing vote / power is a deterrent.

Can argue the percentage of CGT but is just and prevelent in all countries except NZ and may be one or two more.

If many fearful of CGT why not of BLT as argument is that we have BLT so why theed of CGT.

Argument could also be if one say BLT = CGT than why be worried about CGT. Reason is everyone knows that BLT does not serve the purpose it is suppose to and is for deliberate reasons by government and IRD.

Time to reset.

taimaiakka0
"fear of losing vote / power is a deterrent."
For the majority, the most significant amount of CGT will apply to investment property. However investors are well, well under 50% of the voting population.
It has been Labour's policy for some time; although it wasn't specifically part of their maifesto in 1997 their committed to implementing "a Tax Working Party" recommendations was and that most likely was to include a CGT.
The Greens were of the opinion that "they wouldn't deserve to be re-elected if it did not implement a CGT".
The stumbling block to a CGT being introduced this term was simply Winston and his links and appeasement to big businesses.
I hope that Labour (and Greens) can govern alone and pressure is applied from their constituency for an introduction of a CGT - the reason I will vote for them this time.

I think the current COL are a go-for-broke, kamikaze govt who've been playing it safe to curry favour and win votes.

However, post-election, watch the gloves come off and all the promises rescinded (Jacinded).

I would put money on Jacinda going down in history to once and for all bring in CGT in NZ.

She's got one more term in her, what difference does it make to her, she'll be off soon and on to her UN job, made a Dame or whatever...

In 3 years when the costs of all this spending start to really affect people Labour will be - predictably, unceremoniously dumped. You watch.

I'm calling it now: Jacinda's bringing in CGT.

PwC and pretty much anyone who looks at our tax system, get's it. Our tax system is the main cause for low productivity, go nowhere, low oppourtunity economy. It skews all money towards residential property specuvesting instead of pushing money into industries and markets where we will all benefit from the wealth created. Any government who fails to recognise this is a bunch of pandering populists who seem to think we can either borrow our way to wealth or immigrate our way to wealth. Neither of which work and both build massive problems.

The time to change the tax system to favour productive investment was 20 years ago, but better late than never...

Correct why put money in business or anything when can get tax free earning/profit from housing.

Infact in last few years many mom n dad have shut their business and have gone to become a builder based on equity of the their existing house for tax free profit. Hopefully if panademic ends in house prices falling by even 10% to 15% (Most likely will) will have problem unless have deep pockets and if it falls futher it will be bloodbath.

'why put money in business or anything when can get tax free earning/profit from housing' ...... 487k owners of small businesses disagree with you. Tax incentives rarely feature as a key incentive to start a business. If you are going into business for tax efficiency reasons you will fail.

So PWC thinks taxation, taking money out of the economy and from ordinary people is a good way to ensure economic recovery? Yeah right!

If taxing people owning multiple property (As no tax on first family home) and that too when tbey sell and make hundrex if thousands if not million is foul than how does someone earning just $5000 or $20000 justify.

Understand many in NZ have been making heaps tax free will be upset as wher else in the world will you make tax free millions.

May be not in current form but some sort of tax is must and when argument for not imposing CGT is BLT so why not just change the name of BLT to CGT with anyone selling within existing 5 years.

Many who argues that we already have BLT knows how ineffective BLT is or why the resistance to CGT if CGT = BLT.

If absence of CGT was such a wonderful thing for people that allegedly pour money into res. property, how come we have a no end to shortage of houses.

That's easy.
Because house's do not or at least have not depreciated with age. The fact you could buy a thirty year old house for not much less than new and three times what it was originally bought for why would you bother with construction of new.
The idea that old run down uninsulated dumps actually have any value is completely ridiculous. The fact they do makes putting money into new builds a waste of time.

To be fair, and I many years (20+) ago used to own a small number of rental properties, there was always a CGT in place that taxed the return on investment properties when they were sold. I don't see why this isn't being enforced now, although i thought it was as I have seen articles to suggest this. I am concerned about what is described as the family home for people who only own one home.

Despite what a few say, people who own only their one home don't derive an income from it. Any 'value' placed on it is meaningless until it is put on the market AND sold. On those grounds there should not ever be a tax on the value of a home. Investment properties however? That is a completely different story, and they should be full taxed, as their value is a part of the asset backing of a business.

would they tax the home you live in if you were just upgrading?

Interesting question - I do know people who have literally done that. Bought an absolute hovel and lived in it while they ripped it apart and did it up, sold it to up grade, and repeated until they had accumulated enough to buy a house they did not need to do up. Most though, once started couldn't stop and kept doing it even once they'd built up considerable equity. So i think there needs to be a turnover period? But I do recognise to do what they did there is an awful lot of work in it.

Sorry Murray, too many loopholes with your proposal for people to avoid paying.

It's got to cover all types of property.

Just put minimum holding-period, even if it's at a differential rate, ie 5 years for own home, 10 years for investment property.

Theo, wouldn't the dif rate be the other way around?

No.

Taxation doesn't pay for government spending. The government spends first by creating new currency, money is then later taxed back and cancelled again. Beardsley Ruml, chairman of the New York Fed said this in 1945, "Taxes for Revenue are Obsolete"
https://en.wikipedia.org/wiki/Beardsley_Ruml

Any tax would have resistance specially CGT.

Need a leader to introduce and if cannot do now will be never.

No point in arguing for or against as even people who are against knows the truth but self interest prevents them from accepting the truth.

No one tax can solve all the problem but we still have Income Tax so why not CGT. In fact Income Tax affect even person struggling on low wages and CGT will only affect people making profit in hundred of thousands. If taxing minimum wage earner is justified how come taxing million in housing not a justification by any standard. CGT may not be the the only solution but is one of the solution for fairer tax system.

'we still have Income Tax so why not CGT' .... the mind boggles at that line of reasoning. Making a tax system 'fairer' where approaching 50% of the population pay zero income tax (after transfers) presents obvious challenges as you can't get more 'fair' than nothing. Perhaps your plea for 'fairness' then is that the 25% or so who pay two thirds of the income tax collected by IRD should have their taxes levied more evenly across everyone in this group, given it is they who own most assets. Or maybe you are advocating welfare transfers be increased and this group should pay more overall tax. If so it's not then as purported that each group should pay a 'fairer' amount of tax; it is simply that higher earners should have more of their income and wealth confiscated.

More Money for Large Tax Accountancy Firms. Obviously this will lead to a more prosperous and productive New Zealand. /sarc.

Even the Cullen CGT Tax Promotion Group found that it was cumbersome, wasteful and unfair, requiring lots of $$$ for accountants and not a lot for government. If you want to force capital elsewhere and stop entreprenurial activity dead, then it's a great policy, comrade.

The argument should be about tax reform to generate wealth, not tax reform to destroy wealth creation by redistribution to non productive bureaucrats and accountants. The safety net can only be strengthened in the long term by wealth creation. Otherwise we just follow Argentina.

1) Maintaining employment may require further support;
- reduce income taxes and offset them by environmental taxes.

2) Stimulating real growth requires an honest conversation about what growth means and identification of the critical enablers such as good infrastructure;
- Govt makes up about 40% of the economy. Require all government spending (local & central) to go through proportionate cost benefit assessment

3) Increasing productivity may include leveraging global investment or people and capital alongside significant structural changes in our economy;
No - increasing productivity means dismantling the oligopolies in the NZ market (eg supermarkets, building supplies) and either breaking them up or regulating their returns alongside regulation of returns by monopolies

4) Addressing intergenerational inequity may mean making some tough decisions;
- The age superannuation is collected should be tied to life expectancy

5) Addressing tax reforms to broaden the Government’s revenue base, 5 remove distortions on investment decisions and create greater fairness;
- Capital gains tax (or even wealth tax) is needed but the horse has bolted on property prices.

6) We need to maintain focus on combating the climate crisis. And;
- add environmental taxes

Here we go again. I will ask a series of questions on how CGT may work or not.
For instance if you buy a rental for $500K and sell it for $600K 10 years later, but spent $50K on upgrades plus your own time do you pay tax on the $100K or $50K gain. And how do you charge for your time doing some of the upgrade?

$50K, and no, you can't bill your own time. It would be pointless to because otherwise you'd need to return that as income under your own name. This is all pretty basic stuff.

It should be $600000 minus $500000 = $100000 and should be less capital expenditure on house and should also link it to inflation (So $500000 should be raised as per inflation for calculation).

I'm not saying they are wrong but PwC are going to have a massive revenue stream should CGT be introduced.

Advisory work both locally and foreign inward investment and annual return fees would provide a chunk of fee income.

A land tax is probably fairer and easier to implement.

Next question. Granny goes into a retirement village and rents out the family home of 40 years. Her home then becomes an investment. She needs more care and medical support. To pay for this she needs to sell her old home/investment but gets hit with a massive tax bill.
Is that fair?

Yes

BigDaddy. There is a lengthy list of questions. These complexities are why successive tax review committees have reached similar conclusions ie the cost benefit argument is not compelling. I've observed the extreme lengths aussies and others go to in seeking to minimise capital taxes. The energy and time applied to this avoidance activity is astonishing and has done little to dampen property values. Our much smaller, less diversified and lower productivity economy does not have have the same freeboard to accomodate the perverse capital allocation decisions that capital taxes can drive.

Next question. A couple own a house to live in. They split up and each buys a home to live in. Now there are two family homes. Is one going to be taxed, or both or neither?
And another question. What happens if a couple buy a house and live in it. They have the chance to work overseas for some years and rent the house out. It is now an investment. After many years they come back with two kids, and their house is now too small. They want to sell it and buy a bigger home. Are they going to be liable for CGT?
If so would that be fair?

Is it fair to pass 85% Debt to GDP to the generations to come ~ this is the forecast for 2023 by the Treasury.

Ans. Prob not so we need to raise taxes.

So whether the granny needing care pays it, the couple who have prob been in Asia paying 15% income tax pay it or you or I pay it, SOMEONE and EVERYONE needs to pay.

Point I made was not for CGT btw it was for an annual property tax. If you cant afford it then you downsize. Works in large parts of the US, should work for us too.

Start off with 10bps and move it over a decade to 50bps. Fairest way to fund society.

That anyone wants to voluntarily pay more tax mystifies me.
But you didn’t answer the question which says a lot.
Next question:
Three brothers own a house. Two of them live in it as their home and one did but has moved away so it’s an investment to him. They want to sell.
How do you calculate CGT on the sale assuming that the two brothers own it in a trust and the other owns it in a company?
Note: these are typical of the sort of problems that a CGT will create. A gold mine for accountants, a nightmare for the owners and a never ending fight with the IRD.
The one thing I can guarantee is if a CGT is introduced it will mean that people will never sell (as is the problem in Australia) or add the cost onto the price or through the rents.
Then of course is that a CGT also will apply to the sale of businesses, shares, farms, orchards, sections, art collections, vehicles, and so on.
With the current recession only a few months away, it is more than likely that properties will sell for less than their purchase price so the IRD will be refunding or crediting incomes flat out.
Be careful what you wish for.

We agree CGT is always a cash cow for accounting firms and avoided by those rich enough to pay for tax planning.

So what about a land tax ? And I like the idea of a 25bp stamp duty too.

We need tax revenue streams which contribute without being overly burdensome to implement and very hard to evade/avoid.

Incidentally it was good news Google has altered its transfer pricing model so its paying local tax. This is another massive source of revenue we should explore. Starbucks, McDs, Petrol Stations, Amazon, I'm sure they all at the double dutch and using brand payments to avoid local corp tax.

A land tax on top of rates will price even more people out of the market back into rentals which will end up as higher rents. Maybe the answer is to remove GST off basic foods to help the deserving poor, and raise it to 20% on everything else thus giving people choices on what to buy and what not. In Australia the revenue is bolstered by a viscous Stamp Duty on property sales which forces people to stay on too long in their homes to the detriment of the younger generation.

Well done there for persevering, Big Dad. I think it is well worth it. Too much of the "journalism" is just pap propaganda these days and people need real examples from real life. Personally, I think a 5% import duty on all imported goods is a possible way of generating more tax revenue and re-balancing the economy. "Free trade" is a banker's wet dream.

These things go in cycles. The pendulum has passed an extreme and has started to move back. Now comes the rise in speed of the pendulum. The politicians these days are just students with little experience in the private sector, rarely at a high level. This is sad, experience cannot be gained by observation, you have to get down in the dirt.

1) Workarounds for property disposals per an RPA are easy.
2) Yes.

All of that .. OR... You could Spend Less

Yes, and we need to find more work for PwC.

Next question: What would have happened if a family bought an apartment after a full CGT was introduced, then rented it out to family (such as to their children who are attending university) in the interim?. As is common, the family intended to use it as a place to retire into at a later date. This was not their “principal residence” under the proposed rules. Later in life, due to ill health or other unforeseen circumstances, they are unable to move in and wished to sell? They would lose a third of their capital immediately, and possibly become a burden on the State. Is that what was intended by the introduction of a CGT? Is it Fair?
****
The great unwashed think that CGT is for the wealthy.No it is not. It will affect everyone from the poores to the wealthiest, and most like the former.

PWC's suggestions are obviously aimed to benefit themselves and their best clients being the people in governments and multi-nationals, not our risk takers and workers.
They want us to give our savings away to them, instead of investing in our own property. When their companies and markets fail they have already had their feast and we take the losses.
My advice...don't be fooled, don't let them have control over your wealth.

The more I read this rubbish, the more I feel a sense of bewilderment. How can a tax paid on the capital increase when something is sold save the nation? Say there is no capital increase, or very little, as seems likely if the new normal involves low growth and a static population? Tax has been an evolutionary process, and as is the wont with natural selection, those that work have survived. Income tax, consumption tax and property tax, ie rates. Simple, effective and fair if the settings they are applied at are so. I would argue that at the moment, those who need to spend most of their income are disadvantaged by those settings, ie the poor pay too much and the rich pay too little. But residential Property investment is a problem, but probably best introduced by a front end tax, such as stamp duty, rather than a retrospective one, which would be next to impossible to budget for on a long term basis.

Introduce a stamp duty as the uk call it in , a small tax whenever you buy a property, most people upsizing or downsizing have made profit on there property's , put it at 3 % , first time buyers would be void of this tax, this would be fair to all the population that has made profit from property

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