Tax Working Group members Craig Elliffe and Robin Oliver discuss the challenges of creating a comprehensive Capital Gains Tax that excludes the family home

Complex and complicated. These two words featured prominently in talks on Tuesday by two Tax Working Group members on the potential introduction of a comprehensive Capital Gains Tax.

Auckland University professor and tax specialist Craig Elliffe and Robin Oliver, a tax advisor and former IRD deputy commissioner, both spoke at an Auckland University Business School conference on options for tax reform contained in the Tax Working Group's interim report.

Both spoke on or about the taxation of capital income, and the challenges of defining the family home which the Government has said must be excluded from any comprehensive Capital Gains Tax that could be introduced.

"Politically our terms of reference exclude that [the family home] and so there isn't much point in talking about it," said Elliffe before doing exactly that.

"The family home will not be taxed, but it raises all sorts of complex issues which we are trying to deal with," Elliffe added, noting these issues include if a family has more than one home, how to deal with non-New Zealand residents, and if the home is being used to generate income and is thus a business asset as well as a private home.

"So there are complex issues to do with apportionment and those are matters in which we have to deal with the detail," Elliffe said.

'When you come to legislate for it, it becomes more difficult'

Oliver said the Tax Working Group is looking at how to legislate for the family home having decided they don't like the Bright-Line Test definition, partly because it's for a limited period of time.

"Everyone knows what the family home is, but when you come to legislate for it, it becomes more difficult. We looked at the Bright Line Test definition of a family home. We didn't like that and that's partly because the Bright Line Test is for a limited period of time, two years initially [and] now five," said Oliver.

"Basically we redesigned the definition of what is a family home."

Firstly, he said it is a place where one lives. However, Oliver acknowledged people can live in more than one place. For example, someone might own an apartment in the city and also have a country home and live between the two.

"So it [the family home] must also be the centre of family interests. If you've got two homes your family home is where the family is centred," said Oliver. 

A couple can have two family homes & they can be owned by trusts or companies

In addition the Tax Working Group has decided there can be only one family home per person, but a couple can have two family homes. Non-NZ residents are not allowed a NZ family home "because how can this be a home in New Zealand if you're not even a resident," Oliver said.

The Tax Working Group has, however, decided to allow a family home to be owned by a trust or a company.

Oliver joked that the Tax Working Group had thought about defining what a family is but decided this was a no go area.

Then there's the scenario of a home "mainly" being used as a family home, but also - for example - for Airbnb rental accommodation, an office, or if a granny flat's included.

"We are looking at options around this area. For example, if the home is mainly used as a family home you can treat the whole thing as the family home even though you rent it out on Airbnb. But we are attracted to something like the Canadian rule that says you cannot get any deductions related to the costs of that home that you are treating as a family home - no deductions on Airbnb income, no deductions on home office expenses," said Oliver.

And in terms of a granny flat; "If granny is paying rent that could cause some Capital Gains Tax issues."

"We are looking through these issues. They are quite complicated," said Oliver. 

Meanwhile, Elliffe also discussed the advantages and disadvantages of taxing capital and said Tax Working Group members "are on the spectrum," meaning they have a range of views on capital gains tax.

Advantages include increasing revenue and improving fairness and integrity of the tax system. Disadvantages include it being complex.

"Let's be absolutely blunt about this. It's complex, it's going to be a heavy cost to bear. It could lead to the possibility of reduction in the overall level of savings and investments in the economy. But to the extent to which it's possible in terms of the design, we have tried very hard to minimise the compliance costs and reduce the distortionary effects," said Elliffe.

He said the Tax Working Group is "actively considering" both the option of an extended tax on realised gains, and a risk-free rate of return method that would deem a notional return from assets.

No adjustment for inflation

Income from the realisation of assets would be taxed at the person's usual marginal tax rate with no indexation for inflation. But losses would be available for immediate offset against other income, said Elliffe.

"[There's] no principled reason to include an adjustment for inflation. You might say 'that's terribly harsh. You're taxing me on that notional gain, not on the real gain because of the effect of inflation.' But the reason that we've reached that conclusion is we don't inflation adjust any other forms of income, and why should we only index income from the sale of capital assets when other income doesn't receive that compensation, [and] nor do you make the adjustment on expenditure either."

Assets that would be taxed include residential property (excluding the family home), baches and holiday homes, commercial and industrial property, agriculture property, business assets including goodwill, shares, and collectively owned assets - such as managed investments, KiwiSaver, PIEs, superannuation funds, and insurance.

The Tax Working Group's final report is due out in February. The Labour Party wants legislation enabling any comprehensive Capital Gains Tax settled on to be passed before the 2020 election meaning it would require NZ First's support. Changes wouldn't, however, come into force until April 1, 2021.

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76 Comments

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If the family home is exempt it's a mistake. More money will flow into the family home than otherwise would to create very expensive upmarket suburbs as is the case in Australia. If there were no exemptions then everyone would have skin in the game.

Exactly my thought. As long as there is an enabling range of house values so buyers can move up the price range then it’s logical that money will divert to large owner occupied homes.

Well, it's only rich pricks who own more than one property and that is what this is all about. It's a waste of breath talking logic to a progressive, all they want to do is hate.

Seems there's a fair bit of hate in your own comment.

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It just highlights the farcical nature of this whole process; start with a predetermined outcome and then put together a working group to validate the idea and work through all the really crap elements of said crappy idea.

At no point do you change track despite how disjointed, inefficient, or distortionary the process and recommendations become.

So desperate is Cullen to get his hands on other people's money, we're now apparently seriously considering deemed returns on any and all assets. Paying tax on assigned income that isn't realised is wrong.

Sorry. Where in this article or the tax working group's mandate is direction to tax unrealised income?

In the preliminary TWG report released a couple of weeks ago the TWG members discussed at length their deliberations concerning the unrealised profits method - it's just not mentioned here

True...But that was just a discussion on overall avenues for reform though, right?
The direction from the government is squarely that a CGT is preferred. There is absolutely no political will to pursue a 'wealth' tax - it's just within the scope to make a CGT easier to push over the line.

This is sad. Just make it any property that has ever had one cent of tax loss applied. Nice and binary.

"But losses would be available for immediate offset against other income."
Good news! Although it is poor grammar to begin a sentence with "But".

This is literally the first I've read of that being the case; every other discussion had capital losses ring-fenced and only able to offset other capital gains in future.

Tax avoiders dream. Time to get out the white board marker and start dreaming up "arrangements";)

Got 15 rentals, time to form a family with 15 adults.

Don't cry for me Argentina.

Wait till we see how farms which are a family home are treated ? Lot's of fun.

Any CGT will provide a black and white issue for the next election and forgetting the elegant theories will be much disliked by many voters. Particularly including Kiwisaver funds where the whole tax treatment has been well established now for many years. Change at your peril !!

If the current team are re-elected any CGT will probably be reversed by a subsequent National government.

The whole exercise just became a wasted space when the family house was excluded - thus breaking the first law of taxation - universal and low rate. Also should be simple to administer.

A universal as in universal land tax meets more of the objectives - mainly incentivising investment in productive investments vs the house next door which while some individual may prosper - the nation cannot !

If the current team are re-elected any CGT will probably be reversed by a subsequent National government.

No it won't. Do you already forget the GST rise under National? This bloated civil servant/welfare/pension state has an ever increasing appetite for tax. Once again, Nationals actions are almost exactly the same as Labours - mass migration and raising taxes.

If you are going to exempt one asset class, then an allowance needs to be made for those who don't own that asset. If not, that asset is 'overvalued' . So..if they have to exempt the home, give every tax payer the equivalent tax exempt value on whatever other investments they might have.

To costly you say -- you bet!! But this just demonstrates the true tax benefit for those who own homes.

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"We don't inflation-adjust for any other type of income"

Wow, the total failure of successive Govts to address bracket creep induced by inflation is now not a bug from poor governance, it's a feature. Words fail me.

It always was a feature. This is what states do.

I have had a few discussions with people on this site in regards to the issues with tax bracket creep. Unfortunately, almost all look with the blue/red filter, and assess adjustments to the inflation induced tax bracket creep with political filters. It would be rather nice to see a party put forward a proposal to have the tax brackets adjusted annually to match inflation. I can dream...

"In addition the Tax Working Group has decided there can be only one family home per person, but a couple can have two family homes" So a family will need to own 3 properties to be captured - and that's before corporate envelopes and Trusts are used.
By all means redistribute the tax burden, but surely the most effective way to do this is via the income tax scale so there is a direct benefit to low wage earners. Otherwise, my expectation would be any additional tax raised via wealth taxes would be wasted by bureaucrats

This is where you start getting into awkward territory about "who actually pays tax in NZ".

What if the "family" has 2 kids? Can they have 4 homes as long as none of them are rented? e.g. a couple of baches, a suburb home and city apartment.

Yesterday David Hargreaves wondered if by changing the LVR's the RBNZ "knows something that we don't".
Could this be another thing 'they know' is coming; it's all done and dusted and we are just going through the process of 'softening the citizenry up' so they aren't caught unawares?
Could be!

Capital Gains Tax will not be brought in by this Coalition Government as they won’t be in power next term.
Winston doesn’t like the jealousy tax and National will repeal it anyway.
It will be political suicide for this government and they damn well know it!
Why don’t they just call it what it is, a Jealousy Tax!!!
Just because labour politicians are not successful financially then they just want to shaft people that are, end of story!

Is a tax on personal services income also a jealousy tax?

If not what is the difference?

The person is making money either way e.g. works 40 hours a week for a year to make $100k vs buys house for $400k and sells a year later for $500k making $100k. Why is it only the worker who has to pay tax on their $100k gain?

Indeed.

Income tax is a jealousy tax driven by the jealousy of those who lack the skills and nous to earn a high salary. They expect money to be taken off those who can earn a salary, and given to them in the form of benefits and subsidies.

I thought property investing was bullet proof. Nothing can affect it , even governments. Obviously it is not immune to outside influences as evidenced by you panic. Eight more years of Labour as National implodes.

Gordon, our investing is bullet proof!
Offer still stands young man!

If you were a serious (or dare I say, honest) investor you would know that no investment is 'bullet proof'.

"If you earn NZ$100,000 from going out there and having a job, and you pay tax on it, well fair enough. If you earn NZ$100,000 from buying a property, well you probably should pay tax on that – fair enough." - John Key, rich-lister jealous of a few Christchurch houses.

Feel the burn!

The family home exemption is a mistake on several levels.

Most importantly, it puts yet another disadvantage on renters.

Name a single country that has capital gains tax on the primary residence? If you hate capitalism so badly why don't you try Venezuela?

In case you hadn't noticed the state provides the security for capitalists to thrive its only fare they pay the same rate as everyone else who is working. Exceptions equal tax avoidance.

You're getting close to the truth here - social democracy is a way of distorting the market so a few state backed capitalists can benefit unfairly - see fletchers, fonterra, chorus, landlords fed on accommodation supplements, etc.

This has nothing to do with a proposal to tax the family home,

The poster-child of socialism called the US of A has capital gains tax on the primary residence. There is an exemption on the first $250k but the tax exists.

Though the capital gains tax rate is only about half the income tax rate.

If they insist on a CGT that's what should happen here. An exemption threshold, as it's ridiculous to exempt multi million dollar homes Exempting the family home is just a tax break for rich people living in Auckland and Queestown who have the majority of their wealth in their homes. Investors outside those areas who have had to be more diversified, will get punished by a CGT due to having proportionally less in their homes and more invested elsewhere.

MID on your primary residence in the US - you can deduct mortgage interest expense from your income. I expect that is considerably more beneficial than any CGT on the residence will cost you. Also the US has a high CGT threshold and any capital improvements are deductable as well.

.. conveniently committing the fact that they also have a mortgage interest paid exemption from income tax , which more than offsets CGT on family home , and some

Is this an argument for investment properties to attract CGT? If interest can be claimed then CGT is ok?

Rubbish. The real disadvantage to renters is the failure of Government to regulate the property investment market. A CGT on the family home would not achieve one jot of difference, other than possibly forcing some people out of their own homes into the rental market to be fleeced by parasitic landlords. Renters need to be taught to understand the consequences of their choices. i have seen many articles from economists discussing the relative advantages and disadvantages between buying and renting a home. Very few of them put a lot of weight in a high demand market, greedy landlords and a lack of regulation of tthe rental and property investment markets.

A fair proportion of renters chose to rent so they could "live" now, while a few chose to buy and forewent "living" which was largely the message behind those economists articles. Guess what? Having a choice means accepting the consequences of that choice. Some of the recent renters are there because they had no choice, and parasitic landlords are locking them into a lifecycle of poverty, unless they are fortunate enough to be in a well paying job. The consequences of the failures of a series of Governments. Tax the increase in value of the family home will not change this at all!

Complex. Complicated. Difficult

Extend the review. Another couple of months. Another $200,000. Why do they make it so complicated? A number of countries including AU, US, UK already have Capital Gains taxes with exemptions. How did they define the family home. Cut and Paste.

Yep NZ is different, gotta do it the complicated way

Australia uses software to manage family trusts to distribute the attribution of assets across the beneficiaries. They've already done it. Nothing hard about it

I don’t think we want a tax system like Australia’s. The only people wanting that are accountants.

Accountants have to convince people it's worth a fee for them to work out. If people are pissed off about paying the tax, the accountants usually cop it, not IRD, and they still have to find a way to make money on it. It'd be great if everyone could stop speaking for accountants.

I agree. I suspect the "complexities" touted are really about tracking property in family trusts, which opens a huge can of worms because trusts are poorly managed and poorly reported to IRD. Essentially a vehicle for the wealthy to hide their wealth. They really should be outlawed in my opinion. At the very least there should be a public register like companies have.

The TWG need to raise the white flag and accept that TOP has it sorted.

....by taxing imputed rents? Yea. Nah.

"and the challenges of defining the family home which the Government has said must be excluded from any comprehensive Capital Gains Tax that could be introduced"

Really should be,

"and the challenges of defining the family home which the Government has said must be excluded from any Clayton's comprehensive Capital Gains Tax that could be introduced"

'Let's be absolutely blunt about this. It's complex, it's going to be a heavy cost to bear. It could lead to the possibility of reduction in the overall level of savings and investments in the economy.'

Let's do this !

The argument against indexation for inflation is extremely weak. "But the reason that we've reached that conclusion is we don't inflation adjust any other forms of income." Well, duh. The income from your job, for example, is paid weekly/fortnightly/monthly. Inflation isn't an issue. What if you buy some gold bullion and hold on to it for 20 years? When you come to sell it, it may be worth ten times as much in nominal terms, yet the price may have only kept pace with inflation. You're going to be taxed on that capital "gain" and come out much worse off.

Yes you have to wonder how they come to that conclusion. It makes very little sense in the real world. Imagine if you bought a house 50 years ago for $10k and it was now worth $500k, you would pay tax on $490k. Just stupid really.

Imagine if you put it into term deposits and you were taxed of the full amount of gain

The UK abolished indexation for capital gains (then called taper relief) in 1998 as it was too complicated. Australia removed theirs in 1999.

Tax Working Group is "actively considering" both the option of an extended tax on realised gains, and a risk-free rate of return method that would deem a notional return from assets.

  1. Define the upper and lower bounds of the RFR.
  2. Define Asset
  3. Define the Valuation Method per asset class
  4. Define the Valuation Frequency

Smells like the FIF regime, transplanted domestically - which is a deemed return on easily defined assets with an easily definable market value. But nothing would be Easy....except the rivers of OPM flowing into the hungry coffers of an activist, idealistic, and cash-strapped Gubmint.... for Our Own Good, mais naturellement...

There is a really simple, super effective, dynamic, just and graceful solution to all this. Land Value Tax.

It is ironic that we already pay on such a basis our rates. Many people moan about rates and how they are spent, but we still keep paying them.

Is it really that simple? How do you value land fairly? Is the value based on what the council will let you do with that land? Can you get a big tax spike if the council changes what you can do?

They really have to account for inflation don’t they? If you buy a house and sell it 40 years later, a huge proportion of the capital gain will be inflation. Your house may even be worth less in real terms than when you bought it but you would have to pay loads of tax. I’m all for taxing the real capital gain but this is rediculous.

"...creating a comprehensive Capital Gains Tax that excludes the family home"

That's a clear contradiction, if it excludes the family home it's not comprehensive and it will lead loopholes and complications

A capital gains tax that excludes the family home already exists in UK, Australia and Canada. Shouldn't be too hard to learn from them rather than re-creating the wheel.
https://www.ato.gov.au/Calculators-and-tools/Capital-gains-tax-property-...
https://www.gov.uk/government/publications/private-residence-relief-hs28...
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/...

And yet Australia still had runaway house prices. So did Canada. Really makes you think...

Back of the Envelope TAX Please !! Will the TWG make taxation simpler or harder to calculate? Sounds like it's going to add more complexities, sad. Accountants and those who can afford their services sound like the real beneficiaries here.

Let's introduce a set of tax rules so complex you can drive a truck through them. It appears that the members of the Tax Working Group should be replaced.

There is also an issue with the home being capital gains exempt but having a home office would no longer be a tax write off. This is a deliberate anti-small business move. How many people will end up building a separate office just to work around these ill-considered rules? This will just increase the misallocation of capital.

Wonder how much the TWG has been paid to discover that things are complicated???

Assets that would be taxed include residential property (excluding the family home), baches and holiday homes, commercial and industrial property, agriculture property, business assets including goodwill, shares, and collectively owned assets - such as managed investments, KiwiSaver, PIEs, superannuation funds, and insurance.
Tax Kiwisaver??PIES.
Other countries do EET for retirement, we do TTE(if you don't believe GST is a tax, TTT if you do)
So we are looking at TTTE or TTTT or my names Taxinda??

All assets should be subject without exclusion. Anything other than that will drive inequality. What is the Government's objective here? Tax fairly to decrease inequality? Or to instead maintain inequality or drive it even further?

A dp

Taxinda one, rest of NZ nil. Where's Winnie when you need him?

Its the government's own fault for limiting the scope of the TWG.

"Let's be absolutely blunt about this. It's complex, it's going to be a heavy cost to bear.up with a complicated capital gains tax"

We could have had a simple land tax on everything, full stop, and then reduced income taxes and marginal abatement rates to ensure the poorer weren't affected.

Yes please

That would make sense though. It has to be complicated enough to baffle all of the Government's MPs all which not cutting taxes that impact the poorest people the most.

I know the overriding theme here is that people are successful because of applied skills and decision making (they're clever!) but this is interesting
https://www.forbes.com/sites/adigaskell/2018/04/02/what-role-does-luck-p...

"...Whilst the wealth was distributed broadly in accordance with real world observations, this wealth did not appear to be distributed according to talent. Indeed, the wealthiest individuals weren't anywhere near the top of the talent pile.

So what was responsible? Well, it appears as though it was pure luck. The team ranked the individuals in the experiment according to the luck they had experienced during the simulation, and the correlation between the amount of luck and overall wealth was clear, with the luckiest clustering near the top, and the unluckiest clustering near the bottom..."