Capital gains tax a hot election topic

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:

1. To avoid paying the tax property investors are likely to hold onto property longer.
2. 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.
3. Rents are likely to rise as landlords factor in the CGT into their required rate of return calculations.