'The CGT and intergenerational wealth'

Opinion: Cathy Odgers (Cactus Kate) picks apart Labour's CGT plan and what it means for intergenerational wealth

14th Jul 11, 10:03pm by Cathy Odgers

By Cathy Odgers*

The first problem I have with Labour's Tax Policy is the implementation clause which is very fundamental to the process.

Here's what Labour says in its policy released today.

The CGT will be forwarding-looking and only apply to gains accrued after implementation. Past gains will not be affected.

The transition will involve a ‘valuation day’, or ‘v-day’, whereby all capital gains prior to v-day are tax-free; those after v-day subject to tax. This approach was taken by Canada, the United Kingdom and most recently, South Africa (which undertook a detailed study of international practice to inform its policy design decisions).

This approach avoids penalising people for investment decisions they made during a period when there was no CGT. It also does not disadvantage other people (especially younger people) or create lock-in incentives or avoidance opportunities by exempting future capital gains on currently-held assets.

Australia’s approach of grand-parenting increases ‘lock in’ and complexity by creating avoidance opportunities through shifting value from post-CGT to pre-CGT assets. This has in turn increased the complexity of the Australian scheme.

The Expert Panel will provide advice on the implementation and operation of a valuation day system, including issues such as pragmatic valuation methods for assets not easily valued. The final approach adopted will need to be practical and flexible, such as the South African approach where taxpayers were provided with a choice of methods for valuations, some of which were relatively simple proxies for full market valuation.

Labour have happily called this V-Day. Which has connotations of course dating back to World War II. Ironically it is the baby boomers already cashed out who will suffer least among the Labour CGT regime especially with the property and asset price rises in the past decade.

There is even a baby boomer exemption for tiddly sized businesses:

Small business assets, up to a maximum of $250,000, sold for retirement, where the owner is above a certain age (e.g. 55) has held the business for 15 years and has been working in the business, will be exempt. This means that those who have saved through investing in a small business will not be negatively disadvantaged.

Newsflash for Labour, if your small business (tradespeople?) is worth less than $250,000 then chances are you won't be selling it to retire at 55 will you? Again this is a waffly carve out that confuses the purpose. They do not wish those who have "saved through investing" in a small business to be "negatively disadvantaged". Saving or investing? The financial illiteracy in this paragraph is extraordinary, right up there with a Hanover "investor".

In other words, the burden of CGT is going to fall on those of us young enough to accumulate assets from this V'Day. It will not fall substantially on our parents as their unrealised capital gains have been earned prior to V-Day. CGT pits those who wish to be millionaires against those whom have already taken their capital gains out from the pie and are now planning to invest elsewhere.

Apparently Labour do not wish to be "penalising" people for investment decisions made when there was no CGT. Problem with this language is that it is penalising people for investment decisions by inference when there is a CGT.

I also say what investment decisions? There are so few exemptions and moreso very unusual exemptions, that investment decisions must surely stay the same as before. Property driven.

In the past many groups have looked at CGT and decided it might be a good idea, then nothing specific has been done in New Zealand. Take for example in 1987 when ironically again Don Brash and his team reported to Sir Roger Douglas about the Brash Report "Comprehensive Tax Reform and Possible Interim Solutions June 1987".

Our own strong preference would be a comprehensive capital tax on all capital gains (where income or capital) properly attributable to New Zealand residents at an internationally competitive rate (perhaps 25-30%). We believe that most taxpayers would readily accept the tradeoff between a much more comprehensive definition of income for tax purposes, and a lower tax rate. The tax regime would need to be pragmatic and simple to operate rather than theoretically pure. It should be flexible and adaptable, to cope with a rapidly changing business environment.

Here capital gains has been discussed but only with a trade-off of lower taxes. Again remembering giving politicians the option of new taxes is like leaving alcoholics overnight in a brewery.

Members of that committee included Brash, Paul Bevin, Dr Robin Congreve, Dr Geoff Harley, Dr Keith Sutton and Arthur Valabh.

Let me focus on one of those committee members, Dr Congreve who has an estimated wealth now of around $110m. Good on him. As a lawyer he didn't earn such a princely net wealth billing time. No, his investment interests were private equity and real estate. Would Dr Congreve for example have been happy paying 25-30% of his wealth in capital gains for every deal? I doubt it. How many of that committee live in million dollar homes and have a spare home that would have been subject to CGT if it was around when property prices in Auckland skyrocketed?

Then we have the show-boating Gareth Morgan (and to lesser extent his successful entrepreneurial son Sam) harping on about capital gains and how they didn't pay a cent when Trade Me was sold. Morgan Sr. has written ad nauseum about CGT. Problem is I don't see a large cheque from Morgan to the NZ consolidated fund for any voluntary taxes. No, he would rather donate directly to charities of his choice. And why is that? Because Morgan doesn't trust the government to even spend his charity dollars better than he can. Yet he wants other people to happily part with CGT on the sale of their own Trade Me's.

Even in my twenties when I wasn't earning enough money to have any assets, I voted aspirationally, therefore I look at where I want to be and consider how I want to be taxed when I get there.

Labour's CGT punishes young people trying to get ahead and it encourages voters not to vote aspirationally but to vote on the basis of envy of their neighbours and peers. It pits those who wish to be millionaires versus those who already have substantial cashed out assets.

Capital Gains Tax is Labour's way of dividing the country into those who have aspirational goals versus those who wish to take away the wealth of others because they have either achieved their own goals or worse still have none in the first place.

=====================

*Cathy Odgers is a lawyer based in Hong Kong who blogs as Cactus Kate. She is an ACT candidate in the November 26 election. Here's her philosophy on tax.

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39 Comments

by Kate | 14th Jul 11, 10:25pm 1310639114

So ACT will be soon to announce a grandparented/retrospective comprehensive capital tax on all capital gains (where income or capital) properly attributable to New Zealand residents at an internationally competitive rate (perhaps 25-30%).

Great, when that happens we can all take her and ACT more seriously.

by steven | 15th Jul 11, 7:04am 1310670294

Fat chance (on ACT).

I am surprised its taken Labour this long....NZ has just about the most biased tax system in the OECD. Which is interesting because if its so "pro" business where is the positive result in terms of NZ's GDP? there is none is there....so why has Labour been so slow?

Personally I think you have to tax everyone but do it as low as possible so ppl have disposable income, without that excess in the mass of ordainary ppl your economy will not prosper....

regards

by Vanderlei Luxemburgo | 14th Jul 11, 10:56pm 1310640992

Nice to see some analysis from unconventional quarters. I don't agree with a lot of what she says, but , well, freedom of speech and all that .

Its a pity she comes across as being so ruthless and heartless with her little digs at those further down the rung than she is. Compassion is a beautiful thing.

I think she's a good example of a major issue we have in society - that very bright and hardworking people such as Odgers devote their considerable intellect to figuring out the optimum seating configuration on the Titanic, rather than McGyvering up some kick-ass escape boats out of renewable materials.....

Anyway good luck cathy. I doubt you'll get in with that toxic slug brash in charge, but at least you're giving it a (sadly misguided) red-hot go.

As for the policies, of course there are holes in them. Any tax regime designed by politician will have holes - that's politics. Will it make me vote for them? Probably not. Bring back the McGillicuddys.

by Roadhouse Blues | 14th Jul 11, 11:01pm 1310641260

I have to roll up my sleeves here Bernard, forget about the injustices in the detail for a moment, the basic idea that people should pay CGT is sound. As you point out why should the Morgan's and Dr Congreve's of this world be able to create wealth without paying tax?

Also why should property investment be able to enjoy capital profit without paying tax on it.

The only real issue you/we have with CGT is that the proposed system would treat Baby Boomers as if they are lord and master. They're proposing to eat our cake infront of us and they think we are so stupid that we don't know who pays for the ingredients, cooks the cake and cleans up after them.

Actually while I vote for CGT (though not in the current proposed form), I find that the whole CGT is a bit of a smoke screen - if either Labor / National / Green / Act, wanted to get rid of our debt problem all they have to do is means test pension payments.

by Kate | 15th Jul 11, 7:28am 1310671715

means test pension payments

Exactly, just like Australia.

by Ms de Meanour | 15th Jul 11, 3:36pm 1310700994

Well, the good Lord would certainly agree with you!

For whosoever hath, to him shall be given, and he shall have more abundance: but whosoever hath not, from him shall be taken away even that he hath (Matthew 13:12).

by Roadhouse Blues | 15th Jul 11, 3:52pm 1310701940

I would have thought that the good lord was referring about faith. He who have faith in abundance shall be given but whosoever hath not, everything shall be taken away.

The bible has loads of passages on the evils of hoarding money and possessions in this world and Jesus in his own example of thrift is the supreme example of how to live.

by Alex13 | 15th Jul 11, 4:05pm 1310702737

interest.co.nz - "Helping you make financial decisions" :-)

by Ms de Meanour | 15th Jul 11, 12:12pm 1310688738

if either Labor / National / Green / Act, wanted to get rid of our debt problem all they have to do is means test pension payments.

Got the figures to show that?

by Roadhouse Blues | 15th Jul 11, 12:36pm 1310690172

Is more a statement of frustration than of fact Ms de Meanour as I have never seen anyone produce the figures but why should financially mobile retirees receive the pension, this is the question I ask you?

Do you know in America who the biggest group of government welfare beneficiaries are?

If you thought it was the 9+ % of people on the unemployment benefit you'd be wrong.

If you thought it was the people receiving government food stamps you'd be wrong.

Yet people look down on these groups.

The number one beneficiaries of government money are in-fact bankers who have received trillions of dollars in bank rescue packages yet the top bankers continue to earn millions of dollars in bonuses each year.

Makes you think doesn't it.

by Ms de Meanour | 15th Jul 11, 1:07pm 1310692073

p>
It's certainly true that some recipients of NZS are rich, but most are not (if you are really interested to know, the Ministry of Social Development provide figures in their Household Income Report). So you wouldn't save very much by giving NZS "only" to those who are not rich.

Further, means testing creates incentives to do exactly what you do not want people to do - spend everything as soon as they earn it, not work, not save, cheat, lie about their assets or find loopholes to hide in. So it invariably requires a complex and expensive bureaucratic monster to administer, enforce and monitor.

So, while a single flat-rate pension available to all over-65s regardless of their wealth does create the unlovely spectacle of public money being given to millionaires instead of to children in poverty, it may actually be more efficient than a more targeted benefit.

by philthy | 14th Jul 11, 11:17pm 1310642267

I hate it when people try to pretend to be for something. But then find some picky little thing about that isn't exactly how they would do it, so then they are totally against it.

Rubbish you aren't for it in anyway Cathy, be honest and admit.

by scarfie | 14th Jul 11, 11:19pm 1310642340

The problem with the allegation of intergenerational theft is the assumption that they will get away with it.

by Roadhouse Blues | 14th Jul 11, 11:28pm 1310642932

Oh, they always get away with it Scarfie

by bob | 14th Jul 11, 11:49pm 1310644178

Until they die - then presumably the wealth will pass on to the next generation, government or somehow dissapear.

by Bernard Hickey | 15th Jul 11, 8:46am 1310676368

Bob,

People are living much longer these days. Those assets may not pass to the next generation until the next generation is in their 70s.

Meanwhile they will have lived their lives either in rentals or under a crushing debt load.

cheers

Bernard

by 28_29 yr old | 15th Jul 11, 4:51am 1310662286

CGT pits those who wish to be millionaires against those whom have already taken their capital gains out from the pie and are now planning to invest elsewhere.

This was my point the other day I was making with Nick Arrand. If we are going to have a capital gains tax then make it on everything and those who have already cashed up their property portfolio should also be taxed, if fair is fair.

by Nicholas Arrand | 15th Jul 11, 9:13am 1310678038

As you know, I have NO problem with that, 28_29 yr old! Tax it all....family home included..the whole lot. But that's where a Capital Tax may be a better alternative, as it's an annual collection on everything, (home & cash etc,) not just a terminal one. But at least CGT is a starting point, even if it just turns out to be a talking point to wake the populace up!

by LloydM1 | 15th Jul 11, 7:15am 1310670954

It will end up on everything don't worry about that.

by iconoclast | 15th Jul 11, 1:15pm 1310692550

Bernard Hickey: Over a period of 12 months you have consistently argued that the genX and genY generations will suffer under a crushing debt load and the BB generation hold all the assets, and yet you have never produced any evidence to support those allegations. Why? Why do you hide behind provocative generalisations? There have been a number of contributors here who have stated they owned a number of investment properties and acknowledged they are genX. Yet you consistenlty maintain the rage. A simple task would be to enquire of David Wedderburn the PI political lobbyist for an analysis of his membership. If more than 80% of his members are BBs you may prove your point. But at least make the effort.

by LloydM1 | 15th Jul 11, 1:18pm 1310692713

The problem is that we are discussing all the wrong issues here. It's not intergerational theft it's sovereign nation destruction using govts to destroy wealth , whether they know what they are doing or not. Until people get their head around what's really driving all this then they simply can never understand !

by Your Landlord | 15th Jul 11, 1:33pm 1310693582

Great point iconoclast. But for Bernard to address it he might have to blow the marketing line he uses for this website so we shouldn't expect a reply to you.

I think Bernard is perhaps a grouchy child of the mid-sixties who is looking for someone to blame for his own perceived relative non-success. Making allegations against some group or another is his mode of operation.

If it's not bad Baby Boomers, it's bad bankers, or bad econimists, or bad...

The list will only grow.

Who will be next? One thing we do know...there will always be the monster in the dark to attract people to Bernard's website. And those who fear the monster will gather here with him too.

by Ms de Meanour | 15th Jul 11, 2:34pm 1310697285

Here's the Retirement Commission, drawing on findings by Statistics NZ:

In general, young adults had the lowest median net worth, while the middle age groups (50-64 year olds) had the highest median net worth. Those who were 65 or older had a substantially higher net worth than young adults, yet a lower net worth than the middle age groups.

by Wolly | 15th Jul 11, 2:36pm 1310697418

And what did that load of blather cost us?.....why are we funding this 'retirement commission'? ....is this not another example of the waste....is it not a 'department' that needs to be axed?

by Ms de Meanour | 15th Jul 11, 3:06pm 1310699194

Well, a previous poster asked for evidence for Bernard's constant assertion that the baby boomers hold all the wealth, and there it is.

You don't think that Government policy should be informed by analysis of authoritative actual data (as opposed to journalistic anecdote and popular prejudice) or independent research?

You don't think the provision of independent and unbiased advice about how to manage personal finances is a good use of public money?

by iconoclast | 15th Jul 11, 3:21pm 1310700063

"And there the evidence is". Really? Is it? The statistical data given are averages, not gross numbers. There could be 100k (50-64) 500k (30-50) and 200k (young adults under 30). If a (50-64) started their young-adult life purchasing a family home with a mortgage and over the rest of their life did nothing but pay down the mortgage then their NET worth as a (50-64) MUST be more than it was when they were a young adult just starting out. So how is that inter-generational theft? And how does that prove the (50-64) group holds more assets (as a group) than the younger groups? It doesnt.

by Ms de Meanour | 15th Jul 11, 4:12pm 1310703172

Oh well, I tried to help! Hopefully it's earned me a brownie point or two from Bernard at least ... ;-)

by Your Landlord | 15th Jul 11, 2:46pm 1310697971

What a startling finding by the Retirement Commission!

As one gets older, one gets richer.

Wow, we learn't something from them didn't we.

by iconoclast | 15th Jul 11, 1:20pm 1310692827

The Real Estate fraternity know who the bulk of the PI buyers are. And the banks know who they are financing. Even Olly Newland could give you some anecdotal evidence.

by iconoclast | 15th Jul 11, 2:14pm 1310696091

There's another genX and counting

Property investor David Whitburn has more than $1 million equity in his property portfolio.

http://www.interest.co.nz/opinion/54423/opinion-high-earners-fleeing-australia-would-pay-even-more-tax

Note: Thats $1+ million net equity - not gross assets. Wonder how much debt he's carrying.

by Belle | 15th Jul 11, 2:46pm 1310697998

The sheer brilliance. The CGT is on farms and livestock. Neato, I get a tax cut. I dont ever sell my farm, but weekly I sell livestock. 15% tax sure beats 30 odd. Clearly this cant be right... can it? Or do the dimwitted loonies in the labour party, not realise I already pay tax on livestock?

by Mark Hubbard | 15th Jul 11, 2:51pm 1310698315

I'm thinking, Belle, this means that Labour will be ditching the Herd Scheme, so everyone will be on NSC.

by Belle | 15th Jul 11, 3:14pm 1310699655

Hi Tribeless, I work under the NSC, pay my taxes, I dont get it.... The comment was tongue in cheek, as I believe it would only apply to those who sold up their farms. Or could they want 15% over and above what I already pay? The problem is Tax has largely become impossible for the average joe to understand. We have to employ accountants to figure out how much to pay. So instead of paying just tax, we pay tax and the accountant. If they made it simpler and we did away with the accountant I could afford to pay more tax.

by Virginia | 15th Jul 11, 3:15pm 1310699717

I should think over all the years the different Goverments in Power have seen that the N.Z citizens pay their taxes; well and truly in some form or another; in fact most are taxed to the hilt the I R D are not stupid; even if; Dr Morgan; is getting off scotch free !! I hope I get a bite!

We seem to have taxes for this and taxes for that and if that wasn]t enough the present Goverment put up the G.S.T Tax; no problem to them and then unless they are a marvelous goverment; waste it; or give themselves the high price cars to drive around in. all this tax talk is; a waste of time better to get the young and old ones in good work schemes that make them happy and they are doing constructive things with their lives and having some satisfaction.That is far more healthy.

by LloydM1 | 15th Jul 11, 3:52pm 1310701929

Where do people on this site believe all this waste is taking us ? When we talk about waste are we thinking about the details of what waste consists off & how it effects our everyday lives, how it's affecting the elderly on fixed incomes ,the middle class the working class , the the future generations & the sovereignty of Nz.
Quite alot to think about with such a simple word eh

by Kunst | 15th Jul 11, 4:43pm 1310704993

I’m only reading today and find it quite amusing, because everyone is talking about millions of money, while most nations don’t have a lot or any at all.

It’s like planning for a holiday with a $ 200’000.- mortgage - in 2011 - just a stupid thing to do.

by LloydM1 | 15th Jul 11, 4:52pm 1310705547

Hope it's not making you windy today Kunst.

by Kunst | 15th Jul 11, 9:48pm 1310723293

Lloyd - no today I’m relaxed – no wind – corky, through and through - like the guy here - go to Eric 5:20

http://www.huffingtonpost.com/2011/07/14/lizard-man-mauls-south-carolina-car_n_897476.html

..and then just klick on politics - read some of the articles and it "decorks" you on the other end of the body.

by LloydM1 | 16th Jul 11, 1:16am 1310735783

Yes indeed. Politics has been taken apart & the yanks have been run over something evil. There are a number of sites to keep abreast of internal action of all types in America et al, & I check up daily because if they go down , they go hard and we all go with them to some depths. There is plenty of wrong things happening over there & to some it makes sense, others not.
We get what we get , it's all up to what degree people can work out something's gone off the deep end.