Terry Baucher says it's time for a comprehensive capital gains tax because the current system is delivering 'haphazard' and inconsistent outcomes

Terry Baucher says it's time for a comprehensive capital gains tax because the current system is delivering 'haphazard' and inconsistent outcomes
Terry Baucher wants New Zealand to bring in a capital gains tax before the current non-system does even more damage.

By Terry Baucher*

“New Zealand’s current approach to taxing income from capital is inconsistent....New Zealand is one of the few OECD countries that do not have a separate capital gains tax.  Nevertheless, the [Income Tax] Act does tax specific capital receipts.  Although there is often a policy rationale for each instance in which capital gains are taxed, this incremental approach lacks an overall coherence and creates uncertainty.”  (IRD Policy Advice Division and Treasury “The taxation of capital gains”, September 2009)

“It’s a ****ing omnishambles.”  (Malcolm Tucker, “The Thick of It”, frequently).

Putting aside Malcolm Tucker’s inventive profanities, I find it hard to escape the conclusion that “omnishambles” best summarises the current approach to the taxation of capital gains in New Zealand. 

In my last column I highlighted the unequal treatment of foreign superannuation schemes relative to residential investment property.

Income and capital gains of foreign superannuation schemes are taxable, whether it’s under the new regime applying from 1 April 2014, or the foreign investment fund rules prior to that date.

By contrast, capital gains from disposals of investment properties are usually not taxed.

But, as the IRD quote at the start of this article indicates, capital gains ARE taxable in certain circumstances.

In fact, there are nine sections within the Income Tax Act 2007 which specify when disposals of land represent income. Thanks to the IRD’s Property Compliance Programme, a considerable number of “investors” in South Auckland are currently becoming intimately acquainted with these provisions, and paying mightily for the introduction. 

So that’s all good then?

Not really.

The problem is that several of these charging provisions contain words and phrases such as “purpose”, “intentions”, “undertaking or scheme”, “not minor”, or “significant expenditure”.

With the Inland Revenue and the Courts not willing to set empirical definitions, the result is haphazard to say the least.

$50,000 might be considered “not minor” and the resulting gain taxable in one case, but $100,000 in broadly similar circumstances might be deemed “minor” and tax free in another.

Each situation is different and often the final call may come down to a crucial bit of evidence about a person’s “intention” or how long and hard they are prepared to argue the point.

As a consequence advising on the tax treatment of land transactions is difficult.  “It depends”, is not really the advice someone wants to hear (or pay for), but often it is the only possible answer. 

Back to foreign superannuation schemes. Last week the Finance and Expenditure Committee reported back to Parliament on the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Bill. Very little has changed from the original proposals.  

The changes to the taxation of foreign superannuation scheme transfers have broadly been accepted by tax advisors as a pragmatic solution to a difficult issue even if the issue has been made more problematic in the absence of a capital gains tax (“CGT”).

I’m possibly an outlier on this matter but in my view there are a number of difficulties with the changes.

Firstly, the proposed schedule method, under which the amount taxed rises with the length of time the scheme has been held. At first sight this appears to be a quasi-CGT.

However, the schedule method incorporates a deemed interest factor which, according to the IRD, is required “to account for the use-of-money benefit that a person receives by not paying tax annually.”

The result is that for long term holders 100% of any amount transferred is taxed.  Such an outcome is neither a tax on income nor a CGT, but a capital transfer tax. 

There is an alternative “Formula Method” which taxes the person based on the actual gains while they were resident in New Zealand.  But this method is complicated and also incorporates an interest charge. 

Secondly, as I highlighted in my last column, the proposals results in unequal treatment for New Zealanders

A person transferring from an Australian superannuation scheme to a KiwiSaver scheme may do so without penalty.

However, anyone transferring from a non-Australian superannuation scheme will trigger a tax charge even if the transfer is also made to a KiwiSaver scheme. It’s perhaps understandable (though not logical) if the tax treatment of a migrant differs from someone born in New Zealand.

However, it’s absurd if a brother and sister both born in New Zealand and both with the same amount of foreign superannuation accumulated during an OE, incur differing tax treatments on transfer because of the origin of that foreign superannuation.

Yet this is a deliberate outcome of the proposals. 

Finally, these changes will prompt holders of foreign superannuation schemes to consider transferring their schemes to New Zealand. However, taking such a potentially significant step seems to me a case of allowing tax considerations to override investment matters.  

Ultimately, the proposed treatment of foreign superannuation schemes is another example of how the present “incremental approach lacks an overall coherence and creates uncertainty”.

In my view this is no way to run a tax system.

Unless we are to adopt a completely different approach to taxation (such as that proposed by Gareth Morgan), I consider a formal CGT applying across the board to be the best way to avoid the inconsistencies noted above.

It would also be fairer by removing the uncertainties around when a transaction may be taxable.

Yes, there will be complexities involved, but the majority of OECD countries have a CGT in some form, so New Zealand can draw on their experiences when designing its own.

Tolerating the present situation is simply allowing an omnishambles to continue.

It’s time for a comprehensive capital gains tax.

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*Terry Baucher is an Auckland-based tax specialist and head of Baucher Consulting. You can contact him here » 

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9 Comments

A Capital gains tax- sure as long as it is low enough that the fees paid to people like the writer to avoid it will not be worth it.
A better answer would be a land tax - low simple , unavoidable.
 

Totally agree. If we must allow non-residents to own land, we could even have a higher rate for them.
The beauty of a tax on the unimproved value on land is that no amount of lawyers and accountants can help the owner to avoid it. It also has a strong element of social fairness that has been pointed  out by many political economists in the past.

Interesting question put to David Parker the other day: does the public understand that a capital gains tax will impact sales of shares, businesses and farms? His response: yes, it's been widely publicised.
 
With all the focus on property at the moment, I think the public don't understand how comprehensive a capital gains tax is. For instance, my brother in law sold his car yesterday and got $800 more than what he bought it for 3 years ago. He's not a car trader, yet he'd be tax paying under a CGT.

The Tax system is very much an omnishambles. So is the Government, Bureaucracy and the entire State Service.......
The problem of power is how to achieve its responsible use rather than its irresponsible and indulgent use — of how to get men of power to live for the public rather than off the public - Robert F. Kennedy
 
The Omnishambles is present due to all the past and present people who have had the power but used their power irresponsibly and indulgently.
Getting the people of power to live for the public rather than off the public requires strict adherance to the documents that make up the constitutional framework.......
 
Taking a leaf out of the feminist movements bra-burning exercise could be very liberating.

You are a Terrible Guy for those people living on renting houses, if Capital Gain Tax is used, IRD gets more money, the property owners (holders here - not sellers) will increase rent (rather than increase the price of the property), even we assume the price level of the houses will not increase, or goes down a little, lots of us still cannot buy, and will pay more for rent, life will be worse.
The result will be complex, but the direct impact will be on the family who are renting houses, simply say transfer their rent to IRD (just like GST-buyer paying.  Capital Gain will finally be paid by buyer & renting family unless the houses more than population - by now no one country's houses more than the population - even there is one country like that, the builders will suffer the losses). 
If you are IRD, needs more fund, that would be Ok. But please give our poor family some space to living, no one wants to sleep on the road...
If you are not IRD, please study the basic rules of Taxation...and use your power to talk, I beg you.

1) your title, contents, and conclusions are terribly 3 different things, how did you link them together in above one article? Magic!
2) Tax specialist? Why not do tax plan for clients? Why talk economic and policy topic here? Some sort of incorrect logic will impact tax planning work or not?
3) Labor Party talked CGT years ago, lost some voters' support (I assume the party orignally wanted them to support - but quoted opposite opinion)
4) Labor Party needs a person who fully understands the impact of any new policy... 

"By contrast, capital gains from disposals of investment properties are usually not taxed."

Investment property is taxed.  It's in the IRD rules.
long term assets (eg property) that are purchased for one function (renting out, self use) that are disposed off, do not attract tax, iff the market price has moved with the property value.  
If any asset was bought as stock for resale at profit, it is taxed.  If not, it is not.

As explain hundreds of times to greedy people like TerryB.  Any such attempt to push costs on to price settors, will simply be "trickled down" to those who can't avoid it (the renters)

Merry Xmas Terrible Guy and TerryB, wish you would not loss your current job for sending above blooded Artical. And hope no one would send any blooded wrong topic here with a very funny finger picture.

Bloody finger is still here, terrible artical is still here, what time you change your job to here to puff your bloody policy (puffery to the impact of the change), damange the NZ's market and morst poeple's life?