In October, the Labour coalition was voted into parliament under the leadership of Jacinda Ardern, who became the world’s youngest female head of government.
Jacinda proposes wide ranging changes for New Zealand, from improved healthcare to free tertiary education and strict environmental policies. She has also moved swiftly to establish the Tax Working Group (TWG).
Chairman of the group is Sir Michael Cullen, Helen Clark’s former finance minister. The TWG is going to review the integrity of New Zealand’s current tax system and ensure everyone is paying their fair share. They will not consider changes to income tax or GST rates, nor the introduction of an inheritance tax. To state the obvious, the TWG will focus on whether a Capital Gains Tax (CGT) should be introduced.
This represents an opportunity for NZ to have a robust discussion on what Kiwis believe should be taxed. Big picture. Should we be taxed on income from personal exertion and business trading (as we broadly are now), or should we be taxed on the change in our wealth over time (excluding, say the family home)? If a CGT is introduced will there be a reduction in other taxes so that there is no net change in our collective tax burden?
Although there is no specific CGT regime in NZ, the Income Tax Act does already contain multiple provisions that essentially tax ‘capital gains’ as income. For example, section CB 12 taxes gains derived on certain land subdivisions and developments and section CB 6A taxes residential property (excluding an individual’s main home) that is bought and sold within two years. The TWG will consider whether these provisions go far enough or whether a broader CGT regime would improve our tax system.
Politically, there appears to be a focus on land and catching rental/investment properties and second homes, while excluding the ‘family home’. But how will this be achieved? Will the current ‘main home’ exclusion be sufficient, or will this exclusion need to be more robust in the face of wider capital gains tax rules?
We can look abroad for guidance as a CGT regime is enforced in over half of the countries in the OECD, including The United States, Australia and the United Kingdom. In the United Kingdom an exemption exists for a ‘principal private residence’, but there is considerable scope for tax planning if families own more than one private property, for example, a house in the city and a couple of baches. Court disputes arose to determine what is the ‘main home’. The British rules also cater for making an election to ‘choose’ the main home, which could be applied against two properties simultaneously, in some scenarios.
Although a key focus is likely to be property, there will also be the challenge of whether other assets should be caught. Should we tax by ‘inclusion’ specifically naming each asset class, or should a CGT be all encompassing, with exclusions for some assets? For example, the British regime applies to all assets, with an exemption for ‘chattels’ sold for less than GBP6,000. This excludes individuals selling personal items on Ebay.