Were NACTs planning CGT themselves?

Written By: - Date published: 4:15 pm, July 16th, 2011 - 113 comments
Categories: brand key, capital gains, election 2011, labour, national, spin - Tags:

A week ago, Chicken Little Key said capital gains tax was going to “put a dagger through the heart of the economy”? Now, Key’s been replaced as point-man on the issue with Bill English and the line has been downgraded to “it’s a hodge-podge”. The dominant complaint from the Right, including English and Don Brash, is that Labour’s CGT isn’t comprehensive enough. Was NACT planning a full CGT including the family home?

That’s a pretty funny complaint when you think about it: ‘you’re addressing a problem but not going far enough, therefore, we oppose doing anything at all’. The Right has gone from saying CGT is a terrible idea to saying it’s a good idea but Labour is being too timid about it. If they really believe that – and I think that people like Don Brash, Bill English, and John Shewan do think that because they have been saying a full CGT would be good for over a decade – then why isn’t the Right going to this election campaigning for a more comprehensive CGT?

I think the reason that National’s lines are so screwed up is that they were planning to do just that. A CGT on everything including the family home to fund big income tax cuts was their second term plan.

National couldn’t really go into the election with no more of a plan than asset sales and, as we know, the Nats are a one-trick pony when it comes to populist policies: tax cuts. How could they afford more income tax cuts? Only by enormous social wage cuts , which wouldn’t be politically viable, or by raising that revenue somewhere else and the biggest hole in the tax system is the billions of capital gains income that is currently untaxed.

It can’t be a coincidence that the Productivity Commission that National established has just launched an inquiry into housing affordability, which is due to report a couple of months out from the election. That report, like every other one on housing for the past 45 years, will conclude a comprehensive capital gains tax would be best for the economy.

If National’s plan was to introduce a full CGT including the family home, they would have eventually raised the $4.5 billion figure that the Tax Working Group was talking about, and that would have allowed them to slash about 20% of the income tax take, including moving the top income tax rate into the low 20% range.

But, led by Captain Panic Pants and aided by the fact that John Key, exceptionally among righties, has never really liked CGT in any form (currency trading is captured by CGT), National decided that Labour’s CGT plan was a threat and they had to attack it from every angle they could make up. This led to the confused, contradictory lines from the Prime Minister, which are at odds with the lines from English, Brash, and the tax accountants.

Now, National’s back to square one: their only policy is asset sales, they can’t touch CGT themselves, and they’re facing an uphill battle to convince people that asset sales make sense and CGT isn’t fair.

Of course, now,

113 comments on “Were NACTs planning CGT themselves?”

  1. I’ve just got back from an afternoon doorknocking in Dunedin North. People I spoke with have an instinct for the fairness thing with the CGT, but the minute you mention that the alternative is asset sales, they’re 100% convinced. They realise that we need to pay down debt. They also realise that National doesn’t have a credible plan. I’m enjoying being on the right side of this argument!

    • Eddie 1.1

      good on ya David. CGT is a wedge issue for the Right between those who can admit its a good policy, most of the commentariat, and those who, like Farrar, who are stuck in vague default opposition because it’s been put up by Labour, not National.

      And when you make it CGT vs asset sales, that’s one hell of a strong position to take to middle New Zealand.

      Hope your bro’s getting such a good reception on the North Shore.

    • chris73 1.2

      So you tell them its partial sales and NZ will still own the controlling stake?
      Of course you mention how many (full) asset sales there were under previous Labour govts
      No doubt you mention Feel Goofeys own role in (full) asset sales
      You also mention that mining could alleviate the need for asset sales?

      Course you do because you wouldn’t want to mislead the voters (that wouldn’t be fair)

      • Eddie 1.2.1

        I would expect candidates of all partiesto honestly represent their party’s current policies. You wouldn’t expect National candidates to talk about how Key voted against WFF and called it communism by stealth, or promised no GST increases and then put it up anyway, etc etc

      • Jum 1.2.2

        chris73 aka turkey waiting for Christmas.

        ‘chris73 1.2
        16 July 2011 at 4:54 pm
        said, So you tell them its partial sales and NZ will still own the controlling stake?
        said, Of course you mention how many (full) asset sales there were under previous Labour govts
        said, No doubt you mention Feel Goofeys own role in (full) asset sales
        said, You also mention that mining could alleviate the need for asset sales?

        – PPP privatising, privatising, privatised.
        – Labour has admitted its error and does not intend to make it again.
        – Goff has admitted his party’s error and does not intend to make it again.
        – Mining has nothing to do with Key and Co’s intention to betray New Zealanders.

        Fly away turkey, quickly, Christmas is coming…

      • Georgy 1.2.3

        Mislead the voters????
        What about key claiming that the budget would lead to 170000 jobs?????????

        • Colonial Viper 1.2.3.1

          National is very clear that the Budget predicted 170,000 new jobs, not the Government. Clear as mud eh.

          • Georgy 1.2.3.1.1

            Well I guess it is part of the master plan. Be good when we all know what that is. Be even better when they know…….! ! ! ! !

          • freedom 1.2.3.1.2

            and then there is the admission from Economic Development they were not asked to do any work on job creation for the Budget. The Budget that is purported to create 170,000 jobs

      • Deadly_NZ 1.2.4

        “Course you do because you wouldn’t want to mislead the voters (that wouldn’t be fair)” But Blinglish lying to the house is fair??? And what about the Asset buy backs??? Air NZ sold by the NATS, asset stripped. Bailed out by Labour
        Kiwirail Sold by the NATS, asset stripped. Bought back by Labour.
        And now they are in power getting ready to asset strip New Zealand!!! So maybe we had better SCARE the voters and enlighten them to the fact that this is the biggest group of incompetents to have ever conned their way into power!

  2. MikeG 2

    I’m not sure why the Nats don’t announce that CGT is their policy as well – it would remove the biggest differentiator between the two main parties tax policies.

    • Eddie 2.1

      too late now.

    • Lanthanide 2.2

      The fact that they told the tax working group specifically not to consider a CGT also indicates that they weren’t keen on the idea (of course the TWG did consider CGT anyway).

      While it would conveniently neuter the Labour policy platform, it would really highlight them has having no plan and it being a knee-jerk reaction, because they could and should have started talking about it earlier, at least testing the waters with the idea.

  3. SpiderPig 3

    A fundamental design of any tax system should include broad base, low rate, simple to implement and hard to avoid. Labour’s tax policy fails on every measure.

    If the policy involved a comprehensive CGT (i.e. no exemptions including personal homes) coupled with a reduction in income tax rates then that would be welcomed.

    Quite clearly the policy is another egregious assault to soak the wealthy for even more tax, not a long term policy to rebalance the economy towards productive asset classes.

    • Eddie 3.1

      everyone gets an income tax cut from Labour’s policy except the very wealthiest 2%, who are still paying a hell of a lot less tax then they were a year or two ago.

      If you think ‘soaking the rich’ is a tax rate that existed during our longest period of economic growth since World War 2, when the incomes of the wealthiest 2% grew 153%, and coming in at over double the income it used to, you need to grow up.

      • everyone gets an income tax cut from Labour’s policy except the very wealthiest 2%, who are still paying a hell of a lot less tax then they were a year or two ago.

        That doesn’t add up. Your don’t sound like you’re trying to sell “fair”, you sound like your priority is to buy “votes”.

        If nearly everyone gets a further tax cut, and the rest are paying “a hell of a lot less tax then they were a year or two ago”, and Labour have complained about National borrowing to fund tax cuts, what are Labour going to have to borrow to fund even more tax cuts?

        • Eddie 3.1.1.1

          Labour’s running the same deficit track as National. CGT means they can give the income tax cuts without more debt.

          • Secret Squirrel 3.1.1.1.1

            Something doesn’t add up on that claim.

            Labour are cutting GST and spending more on R&D approximately offset by increasing >150k to 39%.

            They are also cutting tax on the first 5k, this won’t be offset by CGT for a number of years at least.

            Labour also claim they will cut tax avoidance by 300k per year, but National also claim to be addressing tax avoidance. How are Labour going to cut more via reducing avoidance and at the same time introduce a CGT full of loopholes and increase the top tax rate?

            What am I missing?

            • Lanthanide 3.1.1.1.1.1

              “How are Labour going to cut more via reducing avoidance and at the same time introduce a CGT full of loopholes and increase the top tax rate?”

              Lets see. National made WFF take into account any trusts that you’re a beneficiary of. They didn’t apply the same rules to income tax or student allowance. Labour can do that. They can also get IRD to enforce the existing law for catching capital gain under income tax.

            • Deadly_NZ 3.1.1.1.1.2

              what apart from having a sense of reason and fairplay??

              A tax system that will be fair to all. NO more hiding wealth in ‘family’ trusts. NO more offsetting the cost/loss of your Investment properties. IN basic English, and using small words so as not to confuse you. It means That NO matter how you get your money through either work. Or investments in property or shares, and using these to limit the amount you pay in tax. You will be NOW be taxed on ALL of it. Now that’s fair!

    • thoughts 3.2

      seriously, a buck earned is a buck earned. make the first $5000 tax free, tax EVERYTHING up to $50,000 at 15%, EVERYTHING up to $100,000 at 20% and EVERYTHING over that at 25%. that includes company tax. align those rates to income tax rates so there is no opportunity to dodge anything. raise the minimum wage to $18 an hour watch the economy sort its stuff right out. then nothing would have to change with GST either, because while i appreciate the reasons for taking it off fruit and vegetables, a massive rise in the minimum wage will counter the need to make things more confusing. the whole idea is to make it as simple as possible so there is no way around it.

      the only thing that should be kept from tax is the family home, as putting a CGT on that is basically taxing social mobility, ie you get older, your career progresses, you earn more, and in this time you have a family and need a bigger home, so you sell up hoping to use the money you make to buy a bigger place and find that you cant afford to as that was taxed. thats a bit silly really.

      • Eddie 3.2.1

        in aussie, CGT is 50% of your marginal income tax rate. It’s half to allow for the fact that some of your capital gain is inflation, not real (too complicated to actually take inflation into account). Other countries go for the single flat rate of CGT instead, there’s not a hell of a lot of difference.

        The US has progressive corporate tax rates, but its pretty obvious to see the problems with progressive taxation of corporate persons when you can just create a new one so easily and split profit between corporates to take advantage of lower progressive rates.

        • thoughts 3.2.1.1

          i do understand what youre saying about split corporate taxes, but in the case of the small business person, why should they pay more on what are effectively their earnings than someone being paid a salary? it would take a lot of effort to split a large business/corporation up to save stuff all, especially as the top corporate tax rate would still be reasonably low to begin with.

          im curious about this whole beat-up about farmers and death duties though. surely if the farm is passed from generation to generation and not sold, no capital gain is ever realised, therefore there will be no CGT? and if a farm is inherited and sold off 10-15 years later, any capital gain realised at that point can hardly be called death duties can it? surely a very simple work-around for that would be to have the farm valued as part of the probate process and, if it is sold on down the track, just put the CGT on the difference between the inherited valuation and the sale price. i guess that would be too sensible though.

          • Colonial Viper 3.2.1.1.1

            if the farm is passed from generation to generation and not sold, no capital gain is ever realised, therefore there will be no CGT?

            Correct, no CGT applies here.

            but in the case of the small business person, why should they pay more on what are effectively their earnings than someone being paid a salary?

            Exactly which part of a small business person’s earnings do you believe they are paying more tax on, compared to a salary earner?

            • thoughts 3.2.1.1.1.1

              not now theyre not, but if the rates were as per my suggestion above and company tax was progressive at the same rate as income tax they would be. businesses are creaming it now tax-wise, gear your business negatively, make a “loss” by paying out trust distributions and you effectively pay no tax. especially if those trusts that are being distributed to have rental properties and borrowing attached to them. and yet they keep a pretty penny sitting on term deposit to make it all look a bit more legit. nice for them. not so nice for others.

              and that folks is why a broad flat tax rate is better, if everything progresses at the same rate, what reason would you find to do all this “avoidance”?

              • rosy

                if everything progresses at the same rate, what reason would you find to do all this “avoidance”?

                The reason many of these people avoid tax is because it’s part of the ‘minimise tax game’. Sit around at the dinner table and talk about the bludgers and then carry on to talk about how they have set up your affairs so you don’t have to spend any of your money on them. This also gives them the right to call wage and salary earners stupid peasants for playing by the rules.

                As long as the accountant is cheaper than tax they will continue to play the ‘minimise tax game’ (and that’s hard to beat because the accountant is a tax write-off too). They justify it by saying their staff, at the company they run at a loss to set the share dividends against, pay tax and that’s the same thing as if they themselves paid tax. And because of this it’s ok that while they are sitting around in their mansions, while the truck with money rolls on in, little Johnny is at uni on a student allowance because they have no income.

                italics=their phrasing

  4. JaJ 4

    I would personally prefer a stamp duty on housing/land sales over a CGT since it would be simple and easy to administer, whilst still serving to dampen the property bubble. I don’t see taxing the capital gains from selling shares or a private company as neccessarily desirable, since growth of these firms are a positive for the NZ economy.

    • Colonial Viper 4.1

      IMO income from whatever source needs to be taxed. Taxing capital gains redresses imbalances we have today where labour and wages are taxed the most and capital gains not taxed at all.

      A CGT has little effect on the growth of a firm as no taxes are paid if ownership is not changed; if at some stage the firm is sold for a profit then that income should be taxable, just like income from labour and wages.

      Stamp duty you raise is a good idea, esp one limiting large mortgages.

    • Eddie 4.2

      the problem with land tax, as we find with rates which are land taxes, is you have people with large assets and small incomes, especially elderly people.

      Gareth Morgan’s ‘bug kahuna’ is a capital tax (not capital gains tax, capital tax) where every capital asset, not just land, is taxed as 1.5% of value per year. He’s got a book coming out about it, should be interesting.

      As for CGT on assets other than investment properties, the same logic still applies: if your business model means your revenues don’t exceed your expenses and you’re basically relying on someone to come along later and buy the capital you bought off you at a higher price than you paid, that’s not much of a model and not a productive allocation of capital.

      • Colonial Viper 4.2.1

        all you do is boost the GST on rates up over a period of 10 years, let people restructure their affairs to suit, and voila, you have your de facto land tax.

        • That’s a good approach, gradually bringing in an alternate tax, no sudden impact – as long as other tax such as income tax is reduced by at least an equivalent amount at the same time.

      • mikesh 4.2.2

        [the problem with land tax, as we find with rates which are land taxes, is you have people with large assets and small incomes, especially elderly people.]

        The numbers of persons in this category are probably small, and I doubt whether we should avoid an arrangement which is otherwise desirable on that account. And in any case over time societies would adapt to such a tax, though initially it might have to be introduced gradually.

    • Georgy 4.3

      My job is positive for the economy, like thousands of other workers….and WE PAY TAX ON EVERY DOLLAR WE EARN. So why shouldn’t someone who earns their income buying and selling houses pay tax on their income ????????

      • Chris 4.3.1

        They already should be, if they’re not then it’s tax evasion. Not even avoidance, but flat out evasion. Capital gains wouldn’t change anything for them.

  5. mikesh 5

    [IMO income from whatever source needs to be taxed.]

    Agreed. But CGT taxes capital not income. This is obvious from the fact that if I want to sell my investment property and and reinvest the proceeds in something else of equal value – shares, say, or a business of my own – I lose 15% of my capital. Oops, what a bugger.

    • Carol 5.1

      And how is that different from the money I have in term deposits? The interest gets taxed, and then I re-invest what’s left.

      • burt 5.1.1

        Exactly, wonder why people currently prefer property over other forms of investment.

      • mikesh 5.1.2

        Interest is not an increase in the value of the original investment, it is something you have received for providing the service of lending someone your purchasing power (ie it is income). The income associated with an investment property is the rent that I receive. The point is that it is inappropriate to tax capital, even if it increases in value, when we should rather be taxing the income which it provides us with. If we sell a capital asset we are passing that income to someone else who will then pay the tax on it. Taxing capital is taxing the goose that lays the golden eggs.

        • Eddie 5.1.2.1

          both the capital income and the revenue income are income. It’s easy to structure a business so it never pays out a dividend for you but retains the profits, which you later get as a capital gain when you sell – that’s income just like the dividend, and should be taxed too.

          This isn’t a capital tax (like a land tax), it’s a capital gains tax, in other words the income you make from selling capital at a higher price than you bought it is taxed, nothing more.

          The OECD says capital gains taxes are far less negative for growth than other taxes.

          • mikesh 5.1.2.1.1

            [both the capital income and the revenue income are income. It’s easy to structure a business so it never pays out a dividend for you but retains the profits, which you later get as a capital gain when you sell – that’s income just like the dividend, and should be taxed too.]

            A business pays tax on all profits whether they are retained or paid out as dividends. I don’t think a business owner should pay another lot of tax on retained profits when he sells the business. Retained earnings are revenue reserves not capital gains.

            “Capital income” sounds like an oxymoron, but I guess where matters of nomenclature are concerned we could argue all night without ever reaching a conclusion. However I think we have to distinguish between the income that comes from employing an asset, eg rents, profits, dividends, interest, etc, and a simple increase in the value of an asset. These are two different things, even if we call the latter “income”.

            If I hold an asset without selling I pay no tax on the increase in value but I do pay tax on the income (in the first sense of the word). But from the government’s point of view, how does having two consecutive owners, each paying tax on the asset’s income differ from having one owner only.

            It could well be different if a wealth tax, eg a land tax, was being paid on the whole value of the asset; on a regular basis and not just at the point of sale.

            • Colonial Viper 5.1.2.1.1.1

              But from the government’s point of view, how does having two consecutive owners, each paying tax on the asset’s income differ from having one owner only.

              Because the seller (first owner) makes income via a capital gain on the sale to the buyer (second owner).

              I don’t think a business owner should pay another lot of tax on retained profits when he sells the business. Retained earnings are revenue reserves not capital gains.

              It seems extremely doubtful to me that tax paid cash held in a company would be considered as a capital gain. So this scenario should never arise.

              • mikesh

                [Because the seller (first owner) makes income via a capital gain on the sale to the buyer (second owner).]

                Not really. The “gain” is counterbalanced by the fact that I have forgone the future income that provides the asset with its value; and that would include the increase in income that gave rise to the increase in value.

                • Colonial Viper

                  Not really. The “gain” is counterbalanced by the fact that I have forgone the future income that provides the asset with its value

                  You have forgone the future income, which is taxable income, in order to realise the present value of that income by selling today for a capital gain.

                  And in doing that why should realising the value today as a capital gain be untaxed, compared to receiving the future income stream which is taxed?

                  • mikesh

                    [And in doing that why should realising the value today as a capital gain be untaxed, compared to receiving the future income stream which is taxed?]

                    I receive a cash payment which, in the buyer’s hands, would have been non taxable, so why should I pay tax on it. The buyer receives (future) taxable income from me on which he will pay the tax.

                    • Colonial Viper

                      You’re taking into account the benefit the buyer (that he gets a future income stream) but ignoring the benefit to yourself (that you get a capital gain in hand, today).

                      Both parties obtain financial benefits from the deal, hence both should be taxed.

                    • mikesh

                      [Both parties obtain financial benefits from the deal, hence both should be taxed.]

                      There is no actual gain by me. I’m simply exchanging one asset, property, for another of equal value, cash.

                    • Colonial Viper

                      There is no actual gain by me. I’m simply exchanging one asset, property, for another of equal value, cash.

                      If you make no actual gain on the sale of a property, CGT does not apply.

                    • McFlock

                      “There is no actual gain by me. I’m simply exchanging one asset, property, for another of equal value, cash”
                      But in the case of a capital gain, the current value of the property is more than the value when you exchanged cash for the title deed. The CGT is a tax on that increase in income.

                    • mikesh

                      [But in the case of a capital gain, the current value of the property is more than the value when you exchanged cash for the title deed. The CGT is a tax on that increase in income.]

                      If were paying a tax on an asset, eg a land tax, then presumably the tax would be based on the value of the asset, and of course an increase in the the value of the asset would necessitate a corresponding increase in the amount of tax that we would have to pay. But we don’t have an asset tax so the amount we pay is zero. And even if the asset doubles in value, 2 x zero = zero.

                    • McFlock

                      A land tax (beyond basic rates)  is based on theoretical value that has not been converted into cash. CGT is based on actual profit that is in the hand.
                      So we have a tax (based on a value estimate) that discriminates against asset-rich cash-poor people vs a CGT that you only pay if you receive an actual profit.
                      And shonkey hasn’t said anything about wanting CGT or asset tax. So if you want a fairer version of a capital tax than we have now, vote labour.

                    • Colonial Viper

                      So we have a tax (based on a value estimate) that discriminates against asset-rich cash-poor people

                      You would exempt the family home and the first $500,000 of investment assets, say, in order to manage this.

                      discriminates against asset-rich cash-poor people

                      Yes I suppose a few people might own a Porsche 911 Turbo and not be able to afford to put petrol in it. But those cases could be managed as well. Not a show stopper.

                    • McFlock

                      Actually I was thinking about an ongoing asset tax marginal land proprties, farmers in lean years, or pensioners who own their own home. And hippies on lifestyle blocks. People for whom coming up with an extra 3 grand a year might be an issue, but when they sell up to go into a home or whatever then a lump sum payment would be affordable.

                    • mikesh

                      People who can’t afford to pay their land tax would be free to sell up and move. It ought to be the ideal tax for a free marketeer.

              • Alwyn

                You might think it is “extremely doubtful” CV , but that is exactly what they intend.
                Consider a business that I buy for, say, one million dollars.
                I run it for ten years and during that time I make an after-tax profit of another one million dollars
                I choose not to pay any dividends and leave all the money in the business.
                Someone else then buys the business of me. They are willing to pay me the original million, which is all it is worth, PLUS of course another million for the lovely stash of cash.
                I would have to pay 15% on the “capital gain” which is only the TAX-PAID money in the firms bank account.
                I repeat. You may think it “extremely unlikely” but that is exactly what is intended.

                • Colonial Viper

                  So you’re saying that the CGT will encourage businesses to build up massive cash reserves from their profits over time, and not distribute or invest those monies because it confers a tax advantage in the long term?

                  • Alwyn

                    No it is the other way around. It would be leaving the money in the business that would be silly.
                    If they were to leave the money in the business it will lead to incurring a CGT liability when they sell the business.
                    By the way I am not suggesting the scenario I proposed is a likely one. I was just trying to show how already taxed income for the business could be then retaxed as a supposed capital gain by the proprieter.

                    • Colonial Viper

                      Cash and cash equivalents will probably be exempt – but we do have to wait for the fine print to be released before we’ll know for sure.

                    • Alwyn

                      This is intended as a reply to CV’s comment at 2.15pm but there is no reply tag under it.
                      I would love to know why you think you can make that assumption. As for seeing the detail it would appear, if Whale’s leak from Trevor is right that we aren’t going to see any detail.
                      Phil Gs press release does say that it applies to foreign currency holdings so I don’t see how you can make any such assumption. Even if you do how do you calculate it? Imagine saying something like this. “When calculating the sale price of shares you should deduct from the amount received your pro-rata, based on the percentage of the total shares in the company that you are selling, share of cash assets held by the company which will include current and term investments ……… etc etc etc”.
                      Oh boy the accountants will have a field day.
                      Incidentally try and work out the capital gains on the following scenario of foreign exchange.
                      Suppose I have an AUD account with $A10,000 in it.
                      This returns me $A50 per month in interest.
                      After a year I go to Oz for a holiday and withdraw $A2,000 to spend over there which I do over a 10 day period.
                      There is a different exchange rate on every single day involved.
                      I would assume, and my assumption is as good as anyone else’s, since Labour don’t seem to know what the details are, that the CGT would have to be incurred each time I spent money. It can’t be when I withdraw it from the bank as at that time I still have the money as Australian dollars.
                      Even if you can tell me when the liability is incurred please tell me which money is it? Interest? Original Capital? What purchase exchange do I use?
                      In New Zealand I can do my own tax returns. When I lived in Australia I had to do what most other people did and have an accountant do them. I think that if this ever comes in I will have to do that here.

                    • Colonial Viper

                      Yeah look I don’t know the detailed clauses of the CGT package, Labour said in their presentation of the policy that experts would have to knock heads together to formulate the fine print.

                      By the way the foreign investments regime currently in place has a whole lot of rules around calculating exchage rates/timings to be used.

                      These things do not have to be produced from scratch.

                • mikesh

                  This is the problem with imposing a CGT on increases in share prices. In most cases it will be very difficult, if not impossible, to work out how much of the increase is revenue gain and much capital gain.

        • Georgy 5.1.2.2

          The tax is to be on the capital GAIN

        • bbfloyd 5.1.2.3

          mikeyy… silly word games achieve precisely nothing, unless you are attempting to expose yourself as a tory apologist, or a serial nitpicker.. both are symptoms of emotional imbalance..

          are you wishing that in exposing yourself in this way, that you will get the help you need? the onnly help i can offer is to point you towards your nearest mental health facility.. or i would if the last national govt hadn’t sold all of them off to developers.

  6. Ben 6

    “Agreed. But CGT taxes capital not income. This is obvious from the fact that if I want to sell my investment property and and reinvest the proceeds in something else of equal value – shares, say, or a business of my own – I lose 15% of my capital. Oops, what a bugger.”

    No. You get taxed 15% on the gain in the capital value from the date of the legislation coming into force.

    And the whole point of this is to encourage investment in productive assets, or rather remove the current incentive in (non-productive) property investment. So, really you’re complaining that it works as designed.

    • But CGT will also apply to productive assets as well won’t it? So there is no incentive to change. So if it’s designed to encourage that change it won’t work.

      It might encourage people to change their investment to those things that are exempted from CGT.

      • Reality Bytes 6.1.1

        Although I am supportive of the CGT as proposed by Labour, I do agree with this flaw, if anything it should have been something like 15% tax for property and say a 7.5% tax on the sale of businesses (or kiwi company shares etc), in order to provide a bit more of a carrot towards productive areas. That’s my only issue with it.

        If Anyone from Labour is reading this blog, please have a think about that 🙂

        But having said that, I think 15% is a smart figure, it’s not too punitive, and yet reasnoble enough to earn some good revenue. To argue that people will leave to OZ because of it is logically flawed.

        I’m a self employed business owner myself, and I’m ok with a 15% CGT if I ever decide to sell my business, I don’t think it’s that bad really.

        But I do wonder, is the retrospective exemption applicable to companies (as it is properties) also?

        • Everything has to be valued as at a a valuation day, or v-day.

        • Carol 6.1.1.2

          I think I saw Goff say on TV last week that NO tax is ever retrospective. But anyway, Labour’s CGT won’t be retrospective for anyone, and there are some extra exemptions for some small businesses.

          http://www.stuff.co.nz/national/politics/5284832/Labour-confirms-capital-gains-tax-new-rate

          The CGT would apply to capital gains from the date of implementation, and would not take into account past capital gains.

          […]

          * Small businesses held by over 55s and held for more than 15 years will be Tax free for the first $250,000 of capital gains

        • mikesh 6.1.1.3

          [But having said that, I think 15% is a smart figure, it’s not too punitive, and yet reasnoble enough to earn some good revenue. To argue that people will leave to OZ because of it is logically flawed.]

          In other words it will achieve sweet fanny adam. On another thread I suggested a rate of 90% reducing, in steps of 5 percentage points for each year the asset is held, over a 15 year period, to 15%. This at least might discourage investment by would-be landlords unable to make a profit at it.

          • Reality Bytes 6.1.1.3.1

            A billion a year, and retaining 300mil or whatever income is not something to be sneezed at, I thought Cunliffe did a good job explaining it in his video, what part do you disagree with?

            Although I support this tax approach over National’s policy approach, I still see things in this that I disagree with, but I accept at the end of the day we can’t have something that suits everyone, and this is one of the best proposals I’ve seen. I have a hell of a lot more disagreements with the one-off sale of infrastructural assets approach. Um BNZ, Telecom etc… Billions in revenue going offshore, great.

        • Colonial Viper 6.1.1.4

          15% CGT on properties is effective because you can purchase the vast proportion of a property with debt, and then make capital gains on the entire total value of the property: even if you only own say 10% equity.

          A CGT makes leverage far less attractive in these instances.

          With capital gains on properties looking less attractive, steady income from a sound business is becomes far higher than that from a rental. This leads to a reweighting away from property investment for capital gains.

          • mikesh 6.1.1.4.1

            Yes. You’re right. I hadn’t thought of that. It doesn’t really need a high rate for it to be a deterrent. And a low geared landlord will probably be making good profits and paying lots of income tax.

          • mikesh 6.1.1.4.2

            No. On second thoughts I was right originally. If I put up $10,000, borrow $90,000 from the bank and purchase a property for $100,000, and then sell it subsequently or $150,000, I’m left, after paying back the bank and paying the IRD $7,500 (15% of $50,000), with $52,500, more than 5 times my original investment. Hardly a deterrent to investing.
            With a 90% rate however I would be left with $15,000 – $5,000 more than I started with. This would still represent a healthy return, though it would not be enough to get excited about.

            • Colonial Viper 6.1.1.4.2.1

              Please factor in mortagage interest rates of 6.5% p.a. on the principal of $90K over the 4 year property boom period you need for that house to go from $100K to $150K market price.

              Now also imagine that we are not in a period of a property price bubble and it takes 10 years for the price of the house to go from $100K to $150K. What do the mortgage interest costs over that time do to your return of $52,500?

              • mikesh

                I’m not factoring in the interest, but nor am I factoring in the rent that I would expect to receive during that period. I’m just looking at it from the point of view of the arithmetic pertaining to capital gearing.

                Of course if the value of the property drops by 10% the landlord borrowing 90K loses his entire equity, but that’s true whether or not we have a capital gains tax in place.

                • Colonial Viper

                  Understood. There are benefits to a simpler analysis. And I don’t disagree with you that in a market where property prices are still appreciating significantly year on year, people can still make pretty decent capital gains over time, despite a 15% CGT.

      • Eddie 6.1.2

        any enterprise that relies on capital gain to be viable is unproductive. A viable business should, on average, have revenue exceeding costs.

        If a business screwed if the owner has to reduce their paper increase in the value of their capital by 15%, that’s not much of a business model.

        • any enterprise that relies on capital gain to be viable is unproductive.

          All that means is they don’t make a profit. But the owner will usually be taking out some drawings to live on which will be taxed, unless the business isn’t their primary source of income.

          • Colonial Viper 6.1.2.1.1

            One owner might take drawings but what about the other shareholders?

            And taking out drawings is shadow accounting anyway; if the owner had not taken out drawings throughout the year there would be money at the end of the year to pay the shareholders dividends.

            Bottom line: such a business is marginal, waiting for the next market squeeze to fold.

          • mikesh 6.1.2.1.2

            Drawings wouldn’t normally be taxed, only business profits. No profits, no tax, though drawings may still covered by the depreciation allowance.

            • Colonial Viper 6.1.2.1.2.1

              drawings are taxed as ordinary personal income.

              • mikesh

                Not unless they are taken in the form of a dividend from a company, and even in that case there would usually be an imputation credit attached to the dividend.

    • mikesh 6.2

      [And the whole point of this is to encourage investment in productive assets, or rather remove the current incentive in (non-productive) property investment. So, really you’re complaining that it works as designed.]

      Although I specifically mentioned property investment my contention would apply to any investment, productive, non productive, whatever.

      • mikesh 6.2.1

        I think property values are more likely to fall in years to come (though of course I could be wrong), but in that case a CGT won’t do much harm revenue wise even if it doesn’t do any good. However a much higher rate might achieve some sort of restructuring in the property market, in which case it could perform a useful function.

        • Assets sold quickly are often now classed as taxable gains at 30%.

          National have already tightened up on property investment, eg they stopped being able to claim depreciation on property that normally appreciates. They claim this is sufficient restructuring at this stage.

          • Colonial Viper 6.2.1.1.1

            Assets sold quickly are often now classed as taxable gains at 30%.

            Not if you hadn;t intended to sell the asset quickly.

            Whatever “intended” means. Notice you are still attacking the CGT.

          • Reality Bytes 6.2.1.1.2

            So why is Key bitching that we are all going to die?

  7. Were NACTs planning CGT themselves?

    Interesting question, we may never know the answer. My guess is they weren’t judging by their reaction to Labour’s proposal, if they were they would have been far better off trying to propose CGT done better.

    • Ironically, Key started the ball rolling by removing tax depreciation on rental properties/investments. This was probably the biggest rort of them all: claiming for property depreciation even while property values rose.

      Had they gone for a Capital Gains tax themselves, they might’ve lost a few percentage points in the polls (referred to as “spending some political capital”) – but they would’ve won the coming election without a doubt.

    • Ari 7.2

      Well, I know that the answer is no, but I can’t discuss why I know just yet. 😉

  8. bbfloyd 8

    on a lighter side…. bill english agrees “in theory” with a cgt… or should i say that the “theoretical” policy makers have communicated (possibly through the same type of container that held shrodinger’s cat) to bill these “theoretical” positives..

    maybe we owe a vote of thanks to phil goff for heading them off at the pass?

    • Sookie 8.1

      According to 3 News tonight, Blingish also thinks there’s nothing wrong with the super rich not paying any tax, because we need entrepreneurs, the usual ‘Bow Down, You Peasants’ morally bankrupt bullshit. Despite real entrepreneurs being quoted saying they should be paying tax. Good ole Bill, sticking up for slumlords and rapacious, polluting dairy farmers. They’re the real Kiwi battlers eh?

      • Colonial Viper 8.1.1

        He’s standing up for the investment banking class whom he’s desperate to get a job with after he gets kicked out of office.

      • According to 3 News tonight, Blingish also thinks there’s nothing wrong with the super rich not paying any tax,

        That was blatantly misleading from TV3.

        If you look at the interview you’ll see that the discussion was about a single sale of share transaction, English said if no tax was paid within the law he saw nothing wrong with that.

        • MrSmith 8.1.2.1

          Pete I just looked up the definition of “Blatantly misleading” in my Secret Squirrel dictionary and it came up with (Bill English) 

  9. Afewknowthetruth 9

    How will a capital gains tax work when assets values fall continuously? I see that house values in the US continue to fall as the global economy implodes and US society collapses. NZ may be a year or two behind the global trends, but house values in NZ have already fallen in most regions and are likely to fall further. The high NZ dollar is creating an illusion that all is well, but it isn’t. The volcano we’re sitting on will explod soon.

    Peak Oil portends a continuously contracting economy and no amount of jigging of government statistics will conceal the truth for long.

  10. mikesh 10

    A land tax would be fairer because everyone would have to pay it annually, even those who hold for a long period. Also, it would in effect be a charge on land, in much the same way that insurance (say) is a charge on buildings, and not just a tax on capital like a CGT is. And, in addition, the amount paid would be proportional to the value of the land and would therefore provide the government with increasing income streams as land values increased.

    And, who knows, it might help to bring property values down, and discourage unsuitable persons from entering the landlord business.

    • millsy 10.1

      Too bad the farmers would throw their toys out of the cot and throw a bigger tantrum than a spoiled ADHD 4 year old at a supermarket who had his request for a lollipop from his mother turned down.

  11. mikesh 11

    [Too bad the farmers would throw their toys out of the cot and throw a bigger tantrum than a spoiled ADHD 4 year old at a supermarket who had his request for a lollipop from his mother turned down.]

    They’ll probably do that anyway if this CG tax goes through. I’d give them a smack on the bottom and send them to bed without their chardonnay.

  12. MarkM 12

    Bill English sees nothing wrong with Labour apologist Selwyn Pellet paying no tax on his share transaction as that complies with the law.
    The same law that was in place and presumably acceptable ,when Labour were in power for 9 years Sookie

    • Colonial Viper 12.1

      Of course English is good with it, National loves low taxes and socialist hand outs for the wealthiest in society.

    • mikesh 12.2

      I see nothing wrong with it either. Pellet probably paid oodles of tax on the dividends he received when he had them, and the the new owner will probably just step into his shoes and continue paying tax on the dividends to come. A government would be a bit greedy if it wanted to grab a chunk of the capital as well.

  13. Jenny 13

    A very timely poll has come out showing that Labour at 27% voter support, some of the lowest levels of voter support it has ever polled at.

    Why do I say this is timely?

    Well, the poll was done just before Labour announced their intention to impose a Capital Gains Tax. This makes this poll a perfect test for the premise, that if Labour moved more to the left they would pick up more voter support.

    I can’t wait for the next poll to come out to either prove or disprove this hypothesis.

    I wonder what the result will be?

    Will there be a recovery in voter support for Labour?

    Or will Labour continue their record low level poll support?

    Latest poll shows Labour struggling

    • Jum 13.1

      Jenny,

      This year will show only what New Zealanders are – people worth their countryhood or not. If they vote in NActMU obviously not.

      What side are you on Jenny?

      Greed and selfishness with Key and Joyce and Brash and the business rotundtable?

      Control over New Zealanders with Turia and Harawira?

      The rights of all workers, which I will keep Labour/Progressive/Greens’ feet to the fire to achieve?

  14. davidc 14

    The polling period was the week leading up to the tax policy anouncement when the “leaked” policy dominated the news media. I am picking the poll shows NZers hate the “go way into debt” tax policy.

    • Colonial Viper 14.1

      Of course, because the “sell our children’s future off” policy from National is better 🙂

      • davidc 14.1.1

        I dunno about you or yours but my kid isnt reliant on any Govt for a leg up in life.

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