Opinion: Cathy Odgers picks apart the exemptions in the CGT for collectables, the family home, gambling winnings, family trusts and Maori land

By Cathy Odgers*

One of the funniest exemptions in Labour's Capital Gains Tax plan is that under "collectables".

Here's the policy:

Collectables, such as jewellery, antiques, artwork, rare folios or stamp collections and the like will be exempt from the CGT.

A CGT that included collectables would be intrusive, result in high compliance costs, and would not raise significant revenue.

It is important to note that if a person trades regularly in these items they will be subject to tax on the income from their capital gains tax as is already the case at present.

Advice from the Expert Panel will be sought on how to control any avoidance issues that might arise.

ACT supporter Jenny Gibbs lays claim to one of the most expensive collections of art in the country.
Apparently it "would be intrusive, result in high compliance costs and would not raise significant revenue" in applying CGT to any sales or CGT events (undefined precisely as of yet) occurring on her artwork.

I see a boom in valuable works of art from the CGT policy and Mrs Gibbs to celebrate her close shave with Labour's tax policy by investing in a Picasso.

The family home

John Key has already mentioned how silly this exemption is.

"Budget 2010 and Budget 2011 actually made it much more difficult for people to speculate in the property market, removing everything from depreciation right through to beefing up the capability of IRD to clamp down on those who do speculate in the market."

Mr Key said if Labour wanted a capital gains tax they should do it properly and excluding the family home cut out 80 percent of the residential market: "it's not going to work". 

For most New Zealanders the equity in their home is their biggest asset, they live in the home and will be tax exempted from capital gains tax when they sell it and move. The last estimates suggest around 66% of New Zealanders actually own their own home. This would mean we are only talking a possible CGT event for a third of houses.

I know people who have moved house 3 or 4 times in the past decade, pocketing tidy tax free gains of a few hundred thousand dollars a time from doing so. They can keep doing this as long as they are not buying for the intention of resale (a "trader" as Labour calls them here) and it is their primary property therefore worthy of an exemption.

The family home is somehow sacred, yet for example shares in a family business are not?

What may I ask is the difference?

Exempting the family home is purely a political decision designed to appeal to the Labour voting electorate. It encourages people to still pour money into property and profit from moving home if they wish, rather than for example investing in a small business which is then taxable if it doesn't meet the $250,000 exemption.

And in a blatant envy grab, the family bach is not excluded. Because you know, only rich Aucklanders own them.

Gambling OK, just not on the NZX

The following assets will also be exempt from the CGT:

·         Lump sum compensation (e.g. for redundancy, ACC or court awards)

·         Life insurance policy surrendered or sold

·         Winnings or losses from gambling

·         Medals

Here is an interesting one (well two here - I will post on life insurance when I have time). There is an exemption for winnings or losses from gambling. Why?

Surely gambling should be discouraged as a policy decision? Why is it so god damn awful to profit from the sale of your business or property which is then taxed but when take your money and stick it on the roulette wheel the winnings are tax free?

This is from the political party that wants to take GST off fruit and vegetables because it plays nanny state but here it is encouraging gambling as a form of investment in their policy design of CGT.

Why?

Have a look at Sky City every night. Labour could hold branch meetings in there. The gambling demographic are their electorate. It is another political decision.

But I ask what is the difference between placing $1,000 on a roulette wheel, and buying $1,000 in shares when you are Joe Punter and know nothing about the New Zealand stockmarket? Answer - nothing.

A crazy anomaly in the policy design.

The Hotchin exemption

Main residences in Trust

The Expert Panel in cooperation with the Law Commission will explore mechanisms to ensure a family home can be protected from liability without giving up the main residence exemption.

Some people will have their main residence in a trust in order to protect the asset from liability fromthings such as law suits, where the trust has no income and has no existing tax liability, rather than out of a desire to minimise their tax liability.  Our view is that people who wish to protect their main residence from legal liability (and have no other tax implications) should be able to benefit from the family home exemption.

I have completed plenty of prior analysis of the register of interest for MP's and many have family trusts for their primary home.

I am more interested here in the wording of the policy design.

This carve out recognises that trusts can be used "to protect the asset from liability from things such as law suits" but cannot be used for the purposes of "minimise their tax liability". Oh dear. So as long as taxes are not being tampered with the Labour Party has just recognised trusts are legitimate tools for asset protection. Hallelujah, thank you for coming finally.

I wonder how they would feel however about a certain family home being built on Paritai Drive? They may wish to have a looksie at this one again in terms of their anti-avoidance provisions....

Maori Land

By far the most generous of all possible exemptions in the structure of CGT is potentially that for Maori.

Multiply-owned Maori land is "unlikely to be appropriate for CGT coverage". What about multiply owned non-Maori land?

In terms of a CGT event, the definitions are not set as of yet and Labour have copped out not giving us anymore details as to how Maori land is to be covered with respect to CGT. They are throwing that over to the committee to deal with.

Interestingly Tariana Turia appears to have already come out against CGT. In doing so she has redefined the Maori Party definition of "struggle" and "wealthy".

Labour "thinks it's only wealthy people who have accumulated more than one home", she said.

"In actual fact, I know quite a lot of younger people who have become involved in understanding investment and own two or three homes as well.

"Most of these people have struggled to get their first home and then used their first home as collateral."

Turia said she was "ambivalent" about capital gains taxes, which should apply only to people who had "substantial assets". 

Anyone with enough collateral to own three homes surely has to be wealthy by a Maori Party definition prior to this confusion.

"They are people who are trying to build an economic future for their families."

Nice aspirational politics from Turia. Shamefully she very rarely practises what she preaches when it comes time to vote unless it is for her own benefit.

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*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.