How businesses are affected by Capital Gains Tax will depend on how much it redistributes the tax burden, Greg Ninness says

How businesses are affected by Capital Gains Tax will depend on how much it redistributes the tax burden, Greg Ninness says

By Greg Ninness

The Government’s expected statement next month on whether it intends to introduce a Capital Gains Tax (CGT), and if it does what form that could take, will probably be the most hotly anticipated announcement of its term.

The Government has a wide variety of options to choose from when formulating its policy, ranging from not introducing a CGT at all, to introducing a partial tax on some assets only, such as investment properties, to a comprehensive CGT which includes assets such as shares.

If a CGT is introduced in some form, one of the most important aspects for businesses to focus on will be the degree to which it redistributes the tax burden and how this affects consumer behaviour.

From the beginning, it was the intention that if a CGT was introduced, the extra tax raised would be offset by tax cuts in other areas.

This was noted in the Tax Working Group’s (TWG) final report to the Government, which stated, “The Government has asked for suggestions for how that money could be used to reduce taxes so that New Zealand’s total tax take doesn’t increase.”

So the intention was that what the Government takes in CGT with the right hand, it gives back with the left, most likely in the form of cuts to income tax.

The TWG’s preferred method of cutting income taxes was to raise the bottom threshold of income tax.

At present, the first $14,000 of a taxpayer’s income is taxed at 10.5%, with income from $14,001 to $48,000 taxed at 17.5%, $48,001 to $70,000 taxed at 30% and income above $70,000 taxed at 33%.

The TWG has proposed increasing the bottom threshold from $14,000 to $22,500, which would mean income up to $22,500 would be taxed at 10.5%.

That would mean anyone earning $22,500 a year or more would be better off by $595 a year.

For a couple where both earned more than $22,500 a year, their household budget would be better off by $1190 a year.

People receiving NZ Superannuation would also benefit from this change.

Although people on high incomes would also receive this benefit, they could be worse off overall, because they are the ones most likely to be hit by CGT when they sell assets such as investment properties or shares.

To the extent that people on higher incomes are the ones most likely to own assets that could be hit by CGT and lower income people are less likely to own them, the overall effect is that people in higher income brackets are more likely to end up paying more tax overall, and those at the other end of the scale will end up paying less.

On top of that, the TWG has recommended that if the Government introduces a CGT, it should also increase payments to beneficiaries.

When looking at the effect all of the above could have on the economy, it could increase retail spending on essential items such as food and clothing, but decrease spending on luxury goods and services.

So retailers such as supermarkets and their suppliers might do slightly better if a CGT is introduced, while purveyors of luxury cars and yachts might not be so happy.

And because lower income people are more likely to spend all of any extra money they receive through higher benefits or lower taxes, the overall effect on the economy could be slightly stimulatory.

So when the Government does announce its intentions in regard to CGT next month, it’s not just individual taxpayers that will be taking a keen interest.

There will be many businesses that will count themselves as winners or losers from CGT, whichever way the Government decides to go.

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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41 Comments

Let's vote this government out next year.

I will vote for the party that promises a Binding Referendum on whether we want a Capital Gains Tax or not .

I'll give you a thumbs up, but it will likely be the only one you get on this site. I think you already knew that.

Yes - democratic vote - you must love living here X and having the power of the vote.

Clowns in current government would not even be let to government a village in China.

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Yes, only children of former dictators or their officials can Govern in China. Qualifications are over rated anyway, right?

I think some of us here might disappear into the woodwork....if we tried to point out that obviously one cannot Dictate what others would do....in bringing a dictatorship to our "Fair Lands" .

. ...nor even listen to what was writ...for that matter.

Bad enuff with what we have got...thanks very much.

They may be Amateurs here...but at least some of em are our Amateurs....if ya get my point..

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But... why are you living in NZ rather than China, given the CCP is manifestly superior and delivers superior results than does democracy?

Results not actually as good as advertised in the state news sources?

Yeah, they are the "As seen on TV" of governments. Paid advertorial. Get a free set of steak knives. Results may vary (esp if you are not Han Chinese).

Gosh yes X, imagine a women in Power in China...imagine the chaos!

Tibetan Women better still.

With Taiwan husband (or wife)

You're right - they're not corrupt enough, not repressive enough, and won't fabricate enough statistics.

Thanks for reminding us that - as bad as our politicians are - things could be worse. We could be red china.

Okay.. just need a decent party/coalition to replace them. So can we do better than Nat/Act please.
At this point in time neither Nat/Act or Lab/Green are getting my vote.

To misquote Abraham Lincoln -Government of the clowns, by the clowns, for the clowns shall not perish.
Have you considered the Mccillicaddy Serious Party?
Before you snigger - remember their defense platform was to remove NZ from world maps therefore meaning overseas invaders couldn't find us. And now 20 years later NZ is indeed disappearing off world maps as giant international corporates leave us out. We can now shift all our defense staff to the nearest local council.

They were also proponents of the great leap backwards policies. Didn't they disband some years ago when the realised the government of they time had implemented all their polices.

Good to see you redcows - am I to assume you have returned to interest.co because you have time as the cows are a bit quicker to milk now we can walk between the blades of grass? personally I am waiting for some politician to come and declare a drought so it rains the next day

Personally I'll wait to see the actual government position on this before judging it - so far we've just had 'independent' recommendations. I suspect the final position will be scaled back significantly from the recommendations, and I'd be supportive of a CGT with a lower rate or some inflation adjustment, and ideally Kiwisaver exemption (possibly supported by contribution limits to avoid people pumping $100k a year in to exploit the tax status).

Wait and see.

A freedom we have, and the mainland area does not.

Perhaps I am missing something but to me it is obscene that someone with 10 or so properties sells one and makes a couple of hundred thousand dollars in capital gain and pays NO tax while a worker saving for a first home has to pay 33% tax if he is earning over $70,000.

I say a capital gains tax is essential for equality but it should only apply to non-productive enterprises such as non-owner occupied residential property. Not farms, business's, shares etc.

A great deal of money from property investors is being poured into the propaganda campaign against CGT

Nothing obscene whatsoever!
They are running a business just like anyone else, and if prices go up then so be itjust as if they go down they have to wear the loss!
Perfectly legal and just because someone hasn’t bought a rental property doesn’t mean the person that has should be penalised for providing shelter for someone!
The jealousy thing is so prevalent in this country, and let’s face it, it will,always be rampant!
Do you think that Politicians should get such a great superannuation payout for life and cheap or free air travel?
that is not FAIR but we won’t hear about that from Ardern and Robertson because they have no problem being on the gravy train!

At least the politicians will be paying tax on their super income. It's not unreasonable to ask property investors to pay tax on what is a major source of the income for their businesses.

Perhaps I am missing something but to me it is obscene that someone with 10 or so properties sells one and makes a couple of hundred thousand dollars in capital gain and pays NO tax while a worker saving for a first home has to pay 33% tax if he is earning over $70,000.

I say a capital gains tax is essential for equality but it should only apply to non-productive enterprises such as non-owner occupied residential property. Not farms, business's, shares etc.

A great deal of money from property investors is being poured into the propaganda campaign against CGT

A good article, that points the possible benefit (or not) to business of tax redistribution

What the article ends up suggesting is not that far away from a classic Sumptuary Tax.....

When looking at the effect all of the above could have on the economy, it could increase retail spending on essential items such as food and clothing, but decrease spending on luxury goods and services.

I've always looked sideways at the apparent necessity for urban hairdressers to drive a double-cab 4WD ute as opposed to a Renault Twizy, so perhaps this CGT version could have legs? After all, a Sumptuary Tax is levied on primarily moral or religious grounds, so should fit the predilections of Dis Gubmint to a T. Or an S.

What about a Poll Tax, a Usury Law and better yet, a Window Tax? Should prove a vote winner, just like CGT....

Ah, I can hear it now:

The Greens:
"We need a Poll Tax to discourage breeding amongst the vulgar, racist, lower classes in order to reduce greenhouse gas emission from breathing and farting".

The Peters Party:
"We need a Usury Law to protect people from credit card sharks and loan sharks".

The Labour Party:
"We need a Windows Tax to encourage more thermally efficient houses and stop people having more square metres of windows than what we've got".

Am I being a tad over harsh?

"To the extent that people on higher incomes are the ones most likely to own assets that could be hit by CGT and lower income people are less likely to own them, the overall effect is that people in higher income brackets are more likely to end up paying more tax overall, and those at the other end of the scale will end up paying less."

Funny, that doesn't stop anti-poverty campaigners saying GST is regressive because it takes up a bigger portion of lower income earner's available income, even though higher earners overwhelming incur more GST by virtue of spending more.

Not really a fair comparison. Low earns will pay less in CGT both in absolute and percent of income terms than higher earners. With GST, low earners will pay a higher percent of their income than high earners, even though the absolute value is of course lower.

It's not a fair one, but it's true. A well-heeled boomer is going to cope a lot better with inherited assets taxed at 33% upon disposal than someone a mortgage and a lower income. They're both going to get taxed at the same rate though. Oh, and one still gets to get free money regardless of if they need it or not.

If you have significant inherited assets, you're probably not scraping away at the bottom of the ladder. CGT won't apply to the main home, so it only really affects those who are earning enough that they are able to invest the surplus in shares or property.

I'll certainly be paying CGT if the recommendations go through, but that's fine. When you're doing alright, you suck it up and accept it's going to someone who needs it more than me. It's not going to put me or anyone else in poverty - it just means those making big gains don't get to keep all of it.

All well and good, but if I'm using proceeds from an inherited property to pay down a mortgage on my family home and otherwise living on packet noodles to keep my head above water, I still pay the same rate of tax as someone who has 15 investment properties and is flicking one on to buy an Aston.

Isn't the CGT only payable on the change in value since the owner occupied owner carked it and isn't there a provision to allow the will beneficiary to move into the property and negate that? Sounds like a non event to me. If I'm incorrect in my interpretation there's going to be a lot of death bed selling going on. It would be nice to pass away in the family home, but I'd rather sell up and cark it in hospital than reduce my children's inheritance. Maybe there's a reason that we'll be voting for/against CGT and euthanasia at the same time.

I am not convinced that a capital gain on business is fair or workable. The TWG statements imply this is universal. However i feel that to be fair consideration must be given as to how the business generates revenue or value.

For example take an individual who establishes a business making and trading a good, be it a widget software - what ever. He is then required to put considerable effort into developing his product, marketing it, and selling it. Through this process he will need to accomodate the business, develop the infrastructure to achieve those gains. Success here invariably requires extremely hard work, very long hours, not a little nous, usually considerable debt that may not ever end, and often a healthy dose of luck. If someone shold rock up and offer a large sum to buy the business for a good price, would a tax on that effort be fair.

On the other hand someone who makes their business based on buying up others, and stripping out different parts, or reworking them, simply to sell them on at a profit (Hart for example) does plan to profit from capital gain. Thirdly, someone who buys a house, rents it out to cover as much of his costs as possible, but essentially banks on continuing and increasing market demand and with not much effort can reap significant rewards clearly does intend to gain from captital gain. Farmers too fall near to this group.

and then the question is what if they sell at a loss? Is the Government try to feast off the stubble of a crop that has already been harvested?

All businesses run by owner operators need hard work, long hours especially in it's infancy, debt, a degree of business nous etc. Until you have walked in their shoes, you are not in a position to say that a tax on your effort would not be fair, but the same tax on someones else's effort in building a business, is - whether they be a young farmer or not. If a business is acquired with the intention of selling for profit within a specified time (was 10years for farmland last I heard), capital gains is payable - even now. Whether that Rule is applied stringently or not, maybe be open to debate.

As far as I'm aware, for at least the last the last five years, nearly all overseas shares are subject to unrealised capital gains tax. This is irrespective whether you trade or hold for investment purposes. Comparative value (CV) requires an opening balance, a closing balance of the share price plus income and you are taxed on that. There is an alternate choice to CV, the DDD (Dumb Dunne Dividend tax). A tax on nearly all overseas shares of 5% of either the opening or closing value, forget which. Losses on overseas shares can only be ring fenced with other overseas holdings. Perhaps a tax expert reader could comment further or clarify.

I'm not an expert, but I can correct a couple of details. Firstly, I understand this only applies if your holdings are >$50k (at cost I think rather than current value). Secondly, 5% is the deemed rate of return which is what you pay tax on, i.e. a 33% tax payer pays a 1.65% tax rate on their holdings.

I'm not an expert, just a peasant taxpayer, but I'll have a go.
Broadly, if you hold >$50k overseas shares (FIFs = Foreign Investment Funds = outside Aus/NZ) you can choose between 2 main methods of paying CGT:
CV (basically paper profit) or
FDR (deemed return = 5% of holdings at start of year).
The calculated return is defined as income and normal income tax rates apply.
The reality is more complicated but you get the idea.

In return, you pay no tax on dividends, and can buy and sell as you please. The minimum return you can make is 0 (no tax refund on losses). And the maximum is 5% (if you choose FDR method). This has been the system for, hmm a long time definitely more than 5 years (12?). It's not perfect but in the odd year that returns are >10% it feels OK :-)

Surely a CGT will make us more house mad? A bigger family home becomes a much better home for capital than anything else. So our best businesspeople are incentivised to bugger off somewhere more friendly and we all end up deeper in debt to our Aussie banker overlords. Oh, sorry, I forgot, that is intentional, as it makes us more dependent on our patrician socialist politicians for crumbs from the table.

It absolutely will. It's just another tall poppy tax that will accomplish the opposite of what its proponents want.

Mansion effect is the obvious outcome with house price to income ratios rocketing up again. Seems to be it has to be comprehensive CGT or not at all. Comprehensive would at least allow the tax base to be broader and fairer, but the coalition doesn't have the balls to do that anyway, so envy tax it is... Lolly scramble vote grabbing in reverse.

I enjoy direct investment in NZ companies, closely following their fortunes etc but sadly it seems that'll be coming to an end as the comrades CGT incentivises us to liquidate our holdings in NZ inc. We already live in an upscale home but looks like we'll be forced to join the build a grotesque mansion every three years set. Our kids will also no doubt welcome the bank of mum and dad low interest mortgages allowing them to trade up, funded through ex sharemarket cash, and we'll be paying a bucket load less income tax but it feels kinda sad really, like losing an old friend.