By Frank Newman on 19th August 2014
Tax is one of the dominant themes of the election campaign. Both Labour and the Greens favour the introduction of a capital gains tax. Here are some of the critical details as we understand them from the Labour Party website:
Rate: The CGT will be set at 15 per cent with no indexation for inflation.
Gain: The tax will be applied to net gains.
Exemptions: The family home, personal assets, collectables, small business assets sold for retirement and payouts from retirement savings schemes, including KiwiSaver, will be exempt.
Implementation: The CGT will be forward-looking and only apply to gains accrued after implementation. Past gains will not be affected.
Point of taxation: The tax will be applied on realisation. In most cases this will be the point of sale.
Treatment of gains at death: Capital gains on inheritance passed on after death will be rolled over to the heir, and not payable until the gain on the asset is realised.
Trusts: “We will ensure trusts are not used as a means of avoiding a CGT.” There is no detail on how that would be achieved.
Capital losses: Losses can be carried forward and offset against future capital gains.
Treatment of traders: Assets currently taxed at the individual’s marginal or at the business tax rate will continue to fall under the existing regime.
Valuation: Property owners would be able to establish the value of their taxable property on the starting date of the capital gains tax regime by choosing one of:
- The most recent government valuation for rating purposes.
- The purchase price in a recent arm’s-length purchase, or
- A private valuation done at the owner’s expense.
The critical points of concern as we see them is the non-indexation to inflation so tax will be paid on illusory gains, and capital losses can only be carried forward against capital gains, so in effect an investor that makes a loss on their investment property or portfolio will lose the tax benefit of those losses.
There is much debate about the consequences, intended or otherwise, should a CGT be introduced. I believe the likely effects are:
- To avoid paying the tax property investors are likely to hold onto property longer.
- People will invest more money in their residence as gains made on the sale of the family home will be tax free. Private houses will become larger – this is the mansion effect.
- Rents are likely to rise as landlords factor in the CGT into their required rate of return calculations.