Tax Working Group interim report says work on capital income 'not yet complete' but gives two options; group is not recommending either wealth taxes or land taxes

The Tax Working Group Interim Report as expected makes no recommendation on a fully fledged capital gains tax - but the group has ruled out wealth taxes or land taxes.

It is, however, considering 'vacant land' and 'empty house' taxes.

The Group said its work on capital income is not yet complete.

The Interim Report sets out two potential options for extending capital income taxation: extending the tax net to include gains on assets that are not already taxed; and taxing deemed returns from certain assets (known as the risk-free rate of return method of taxation). Feedback on these options will inform the recommendations in the Group’s Final Report in February 2019. The Group is not recommending the introduction of wealth taxes or land taxes.

This is the statement released by the group:

The Tax Working Group is updating the public on its progress and thinking with the publication of its Interim Report today.

Chair Sir Michael Cullen says that the Group has conducted a wide-ranging review in order to assess the structure, fairness, and balance of the tax system. The Group has also brought a broad conception of wellbeing and living standards to its work – including a consideration of Te Ao Māori concepts and perspectives on the tax system.

Thousands of New Zealanders – including iwi, businesses, and unions – have engaged with the Group over the past months. “The thousands of public submissions have given us a clear indication of the key challenges and opportunities for the tax system,” says Sir Michael.

“We see clear opportunities to improve the balance of the system by introducing environmental taxes, while measures to increase tax compliance would increase the fairness of the system. We have also identified important issues regarding the treatment of capital income in the tax system.”

The highlights of the interim report include:

-      The taxation of capital income. The Group’s work on capital income is not yet complete. The Interim Report sets out two potential options for extending capital income taxation: extending the tax net to include gains on assets that are not already taxed; and taxing deemed returns from certain assets (known as the risk-free rate of return method of taxation). Feedback on these options will inform the recommendations in the Group’s Final Report in February 2019. The Group is not recommending the introduction of wealth taxes or land taxes.

-      Environmental and ecological outcomes. The Group sees significant scope for the tax system to sustain and enhance New Zealand’s natural capital. Short-term opportunities include expanding the Waste Disposal Levy, strengthening the Emissions Trading Scheme, and advancing the use of congestion charging.

-      Housing affordability. The Group has found that the tax system is not the primary cause of unaffordable housing in New Zealand, but is likely to have exacerbated the house price cycle. The Group’s forthcoming work will include consideration of the housing market impacts of the options for extending capital income taxation.

-      GST. The Group is not recommending a reduction in GST, or the introduction of new GST exceptions. Instead, the Group believes that other measures (such as transfers) will be more effective in supporting those on low incomes.

-      Business taxation. The Group is not recommending a reduction in the company rate or the introduction of a progressive company tax. The Group is still forming its views on the best ways to reduce compliance costs and enhance productivity.

-      The administration of the tax system. The Group has identified a number of opportunities to improve tax collection such as increasing penalties for non-compliance as well as recommending a single Crown debt collection agency to ensure all debtors are treated equally. A taxpayer advocate service is also recommended to assist small businesses in disputes with Inland Revenue.

Sir Michael says that extending the taxation of capital income will have a range of advantages and disadvantages. The Group is still weighing up these issues, and will come back with firm recommendations in its Final Report in February 2019.

“Extending the taxation of capital income will have many benefits,” says Sir Michael. “It will improve the fairness and integrity of the tax system; it will improve the sustainability of the revenue base; and it will level the playing field between different types of investments. Yet the options for extending capital income taxation can be complex, resulting in higher compliance and administration costs.

“We have made some good progress in setting out the main choices and options – but there is still a great deal of work to do before we provide our Final Report in February.”

The Group’s Final Report will provide full recommendations on all of the issues examined by the Group, including the rates and thresholds for income tax.

“The Group will be mindful of the distributional impacts of any changes it recommends in its final report. It also recognises that some people may need time to transition to the new arrangements.

“It’s also worth pointing out that any extension of capital income taxation would apply from a future date, and would not have a retrospective element.

 “Everyone on the Group believes we have a unique opportunity to improve the tax system. We are all determined to deliver recommendations in February that will make a positive difference for New Zealanders,” says Sir Michael.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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60 Comments

"..extending the tax net to include gains on assets that are not already taxed; and taxing deemed returns from certain assets...consideration of the housing market ....of the options for extending capital income taxation."

It's not a tomato! It's a red fruit....

“It’s also worth pointing out that any extension of capital income taxation would apply from a future date, and would not have a retrospective element.

Buy now or forever pay your taxes on investment property bought after this comes in.

Palmy still a sound investment with prices still below costs of serviced land, building, developer margin - get your 6% yielders while you can and not worry about capital gains tax if you sell in 5+ years

Maybe. But who is going to buy it from 'you' if there is a tax penalty after it comes in? It could be equally argued, "Sell now or get caught with a taxable asset that the next buyer will have to factor the cost of tax into the purchase price" ?

Who cares real investors ideally never sell - favourite holding period is forever.

"In either case tax would only apply to assets bought after the tax came in, Cullen said, rather than assets they already owned.

It was "hard enough politically to get anything like this over the line" and retrospectively collecting capital gains tax on past activities would be "sure and certain death" for anyone who tried, he said.

"..tax would only apply to assets bought after the tax came in.."

Precisely. Tax isn't paid by The Asset; (Assets can't write out cheques!), but by the 'owner' and whoever that is after D Day, they will have to factor that into the price they pay. to buy it...

If 'you' bought a used car car, that after today you had to pay a Disposal Tax of, say, $5,000 on it that the current owner didn't, wouldn't you want to factor that future cost into what you pay today? Sure, you can run it until it stops, but at some stage - you will want to sell it!

Personally if I was forced to sell I'd give rentals a Reno to appeal to first home buyers and target that market. Owner occupiers don't pay this tax and pay a premium for nice paint job etc so always would look to sell to them to get best price

"... to appeal to first home buyers and target that market. Owner occupiers don't pay this tax "
But ...you..woulkd be the seller to the FHBers's? YOU pay the tax. What the FHBer does with it in the future is up to them. If they don't factor into the purchase price the likelihood that they too may have to pay the tax, they have been let down by whoever advises them. Regardless. Whatever the present owner sells it for; if it's a secondary, or more, property, they will be up for the tax. Buy more now, by all means, because at least you are aware of what might be coming! ( That's why this release has come out|? So no-one can say "Why wasn't I told!")

I don't pay this tax on property bought before this law comes in (likely mid next year earliest) - currently all mine bought before 5 year bright line also so not under that either - And as stated before, I never intend to sell therefore no capital gains tax will ever be paid by me on these properties as the law when bought can only tax these if the intention was to sell for a profit which it never was - happy with my yields.

Your argument was around the next buyer pricing the property at a discount based on the fact that if they buy after this law change then they may be caught by this tax regardless of holding period or intention when buying - I am saying that owner occupied property has been excluded explicitly by labour so they will not need to pay tax and so will not discount the purchase price in view of tax - And if a first home buyer ever factored such things in as far a possibility of future tax changes I'd be amazed - Much more concerned with the paint job imho which is great as paint is cheap.

If 'you' bought a used car car, that after today you had to pay a Disposal Tax of, say, $5,000 on it that the current owner didn't, wouldn't you want to factor that future cost into what you pay today? Sure, you can run it until it stops, but at some stage - you will want to sell it!

Right. Tax policy in Japan created the user car export industry.

While i support capital gain tax, i really dislike taxing deemed returns approach to it. A capital gain is a gain when it is realised (e.g. upon sale), unless the market for the asset is so liquid and the asset is so homogeneous that you can be very confident that the deemed value of your asset is the same as the market value. In reality very few financial assets have these characteristics. So the deemed value is very inaccurate and unreliable basis for calculating tax.
Another obvious issue is the mismatch between the cash needed to pay the tax on unrealised capital gain and when (if ever) the cash inflow from gains is actually received.
Just tax gains when they are realised. Simple and fair. do not create complex, and potentially unfair methods for taxing because your are obsessed with "deferred taxes".

Of course the problem with that approach is that it encourages people to never sell.

How many people will never sell an asset, because they have to pay tax on gain? This is significantly over plays the significance of tax for such a decision. To enjoy the benefit of a gain, you have to first realise it. Otherwise, you are sitting on ever expanding pile of gains that you will never be able to enjoy. To me this is like to purposefully running a business at a loss (thus losing your capital) because you can claim a tax credit for your losses. While some may do that, it does not make any economic sense whatsoever.

I refuse to go to work because I'll have to pay tax on my earnings.

What happens in this scenario:

You buy a city house for $500k and live in it for 5 years. Wife gets pregnant and you decide to buy in the suburbs. You sell your townhouse for $600k due to inflation.
You buy another house for $600k.

There is no change in your financial position yet you are liable for tax on $100k of gains. In effect it's working as a stamp duty.

Apples and oranges.

There is a definite change in your utility.

Most likely the primary home will be exempt. That's how it works in the UK, if you rented the original home out after moving you'd end up paying CGT as a proportion of how long it was rented vs total time you'd owned it.

Cullen was talking about this on RNZ this morning. Basically you would carry that into the next house you buy (assuming you are selling to buy another same same asset). Some sort of deferal scheme from what I remember.

An extension of the existing tax net to cover the sale of a wider range of assets; or
taxing "deemed returns from certain assets" or "risk-free rate of return" approach, although Cullen said "no one does that" because taxpayers could struggle to pay tax on unrealised increases in the value of assets covered by the regime.

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=121...

Doesn't sound like they are going down that path?

My only problem with the deemed value proposal is if it is only applied to property bought after the law change. You'd have two sets of investors, with those late to the party paying a tax each year which existing investors do not have to pay. A case of the older generation pulling up the ladder behind them.

Taxing hardworking productive citizens redistributing that to landlords, land bankers, boomers on super and dysfunctional baby farms. There will be some minor changes but the tax burden on hard workers will remain high. It's more of the same; Robbing Peter to pay Paul and then telling Peter he is lucky to be able to buy a shoe box apartment.

Australia is looking sunny.

There was a boomer on here the other day complaining that the banks weren't giving his ilk a high enough return on their term deposits. Maybe the banks should increase the interest rates on mortgages for people under 40 so they can simultaneously increase deposit rates for over 60's.

you should perhaps take a look at how banks use the money that is deposited in their accounts. None of the term deposit rates adequately cover the banks behaviour presents, or comes at all close to the amount of money the banks make on them, or covers the risk associated when the banks consider the money you placed in their accounts as theirs, not yours.

Its a free market, you can park your money in lots of different places.

Money leant on deposit is the bank's money, not yours. You are merely an unsecured creditor. It is a common misunderstanding.

Yup, and that needs to change.

Thank god for no land tax. A tax on income is one thing but taxing something that you've worked and saved for just because you own it is repugnant.

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It's repugnant that my hard work is taxed 33% while a guy like Gary Lin pays next to nothing on his 20 properties. He admitted his motivation for buying property is to fulfill his all day World of Warcraft game addiction and his first purchase was funded by his daddy.

The tax working group believes you should be happy about this. Why aren't you happy with the working group prioritising non-productive activities in our economy over benefiting every citizen?

As a society we pretend that the betterment that flows to Gary Lin from the community and infrastructure around his properties is not any sort of income. In reality, he's receiving an increase in wealth from the efforts of others around him.

And it's those surrounding him who are constantly asked to bear the tax load so that he doesn't have to pay tax on the betterment he's receiving.

I agree however thats more an issue of our money creation system not our tax system. I don't like any tax but if you have to tax, make it on when you actually earn/realise money.

I strongly disagree. A tax aimed at discouraging profitable activity is far more damaging than a tax aimed at discouraging land banking.

I appreciate that sentiment however it is really a tax based on compulsion - trying to force someone to do something in particular with an asset they have bought. No doubt they would have paid tax on the way to saving for their purchase only to be then forced through more tax to use it in a particular way.
I think everyone's real gripe is with our money creation system, whether they realise it or not is another thing. That is the biggest part in speculation and all the things we don't like with property.

The idea would be to introduce a land tax and use the proceeds to reduce income tax. All taxation influences behaviour, the decision is on what you want to discourage. My favourite taxes are a land tax to encourage productive use of land (probably with environmental carve-outs e.g. zero rates for native bush), and inheritance tax as there's no time I'd rather be taxed than after I'm dead.

It might be a little much to say inheritance tax discourages dying, but at least it helps to encourage the next generation to stand on their own two feet and not rely on the parents dying to sort their finances out.

Hi mfd. I know the idea would be to offset income tax which is a laudable goal in itself, I am still unable to overcome the compulsive nature of it. I believe we do have the right to own something and do with it what we please (within reason) and not be perpetually taxed on it especially when we pay tax in our persuit of it. It comes down to freedom and private property for me.
Tax is an ugly thing but I still maintain it would be best to tax only when we make/earn money if it has to be done. A land tax gives far far too much power to government over our private property. Same with inheritance tax, you have worked and been taxed to get to where you are so you should be able to choose what happens with your money. You can give it to the government if you choose when you die but most people who advocate an inheritance tax won't as the thought is not coming from an altruistic place.
As far as forcing the next generation to stand on their two feet, if you wish to do that to your children good for you and you are free to but again, please don't try and force that on anyone else.
I hope you can see the moral issues I'm bringing up as I can see your "best use" argument. It comes down to how much power and how many rights your willing to cede to another entity and in this case it's too much.

I can certainly see your perspective on the land tax issue, although I would note that council rates are essentially a land and property tax and haven't brought the world to an end.

Inheritance tax, again you could reduce income tax so that you could in theory have a larger inheritance to pass on, compensating for the chunk the government takes. Alternatively, you can have faith in your kids and spend up while you're alive. Then the government takes its cut through GST. Again, I would love to pay less tax while I'm alive and more once I'm dead and no longer care.

Rates atleast are directly for a service as opposed to a generic tax and they don't have a compulsive effect.
Inheritance tax is just another redistributive tax, taking from one to give to others. For what you said about spending it all before you die - it's your money you should be able to do whatever you want with it
Long story short, once you have been taxed once you shouldn't be taxed again. Finally, I want everyone to pay less income tax, that would be ideal.

And who doesn't want to encourage standing on one's own two feet in a meritocracy, eh?

Personal freedom, individual responsibility.

Surely only those who want to discourage social mobility as they're currently somewhere above the average Joe. If only it were as easy as giving the kids some cash and then everything will be OK.

http://time.com/money/3925308/rich-families-lose-wealth/

"70% of wealthy families lose their wealth by the second generation, and a stunning 90% by the third, according to the Williams Group wealth consultancy."

Much better to pass on a good education and an understanding that they need to make their own way in the world.

What meritocracy? You only have to look at the current government and PM to see NZ isn’t a meritocracy. If my children stand a bit higher than others because I didn’t blow my wealth on smashed avo then I’ll be happy.

Who is arguing that the status quo is a meritocracy? That's not this comment thread.

Some of us are making the argument for it in the future. If you're not that keen or don't want your kids to have to compete on the strength of their own merits alone and stand on their own two feet, that's another matter.

This just sounds like a rehash of a report from the 70s. The bit where they suggest increasing tax on flared trousers gives it away.

Cullen was part of the problem under Aunt Helen. Did anyone expect anything different than a copy-pasta?

While we've been discussing or mocking the working group the government has asked the working group to consider inequality.

https://www.stuff.co.nz/business/107131315/capital-gains-tax-would-have-...

what about %99 tax on capital gains?

Isn't a "deemed return" CGT functionally the same thing as a wealth tax?

Quite a neat linguistic trick, isn't it? The answer would depend on what assets are subject to the CGT. It might just end up discouraging certain investments, which could be fine if one of your goals is to reduce house prices.

Haven't read the report but it sounds like the TOP party tax ideas, both the environmental taxes and the deemed rate of return on capital taxes.

I expect we'll see TOP putting out a press release in response to the interim report soon.

What is that giant sucking sound I hear? Is it money fleeing to Aussie shores? Surely not.

Invest in Aussie, live in New Zealand? The new sales line to wealthy Asians? It could work quite well for all concerned. More jobs filling shelves and changing beds and serving drinks. What about the well paid jobs, you ask? Oh, they are in Australia, you say, we don't want those rich pricks here, you say. Yer gotta love the Kiwi Way.

Buy an apartment in Brisbane. Great investment.

Cullen was the instigator of the FIF regime which is possibly the most difficult to apply and fills the pockets of a few accountants while completely ignored by many.

True comment, although it's not a wise strategy to ignore tax obligations.

On the other hand, my accountant has proven well worth the investment.
But the rules are still a dog.

No land tax or wealth tax, nor gift or death duties is a surprise to me given some of the talk. CGT is no surprise at all, but they haven't nominated the rate or said what will happen to the brightline test... hmmm

I have heard a proposal to set the cgt rate at 33 percent which as most people know is much higher than elsewhere. The result will be far fewer houses for sale. And the COL will definitely be losers as a result. The amount of tax payable will mean investors will have less money to invest after settlement and payment of cgt. Outcome will likely be that investors will not sell the property, they will feel they can avoid the tax by not selling the property. Therefore fewer houses will be available on the secondhand market which of course includes near new homes. The market will be screwed, or at the least skewed. Keep up the good work COL.

Buy a nice dwelling on a large subdivisable site and live in it. Tax free. Thanks COL.

I think this group has been a complete waste of time. I would have thought the goal would have been for fair and equitable broad based tax, that was difficult to escape, easy to collect and resulted in the same total tax take.
Any new taxes need to change our investment focus away from non performing asset speculation and encourage creative/ innovative value added businesses.

A broad based asset tax with the total removal of PAYE and a reduced GST would be a winner, (as my accountant slashes his wrists). Then the money you earn you keep, non of the interest deductable, every thing is out in the open, the incentive to earn not speculate.

The 15 percent GST rate is already too high so yes it should be reduced. Then hey presto, houses will be affordable again :)

NZ is already very highly taxed nation. GST is far to high, its regressive but the hard to avoid bit is attractive to the IRD, also people do the collecting for IRD.
Dropping PAYE and letting people keep %100 of their earnings would make a lot of things more affordable but I'm not sure how we get out of our 550 billion of debt?

My tax is going up at a local level, my local council took an extra K off me, the regional council has hit me for %20 and they are borrowing 50 million each. The worse thing is they appear to be totally incompetent. Lets leave money in people pickets not the governments.

I think that all common taters would do well to actually RTWT before torturing Yet Mo' Electrons.

I have.

There's a lot to digest, a lot to ponder on, and perhaps some evidence that the authors may have even read some threads on this August Site. The dissertation on GST rates is one example.

The danger in blather and witterings, of which this 'ere thread is full, is that TWG authors come here for some Enlightenment and Feedback, and see - well - judge fer yerselves......