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Paul Glass: Taxing our Future

25 March 2019

Written by:

Paul Glass of Devon Funds Management , republished with permission by , Richard Maloy - Authorised Financial Adviser - Wealth Generation


Capital Gains Tax Investment Advice Hawkes Bay Napier Hastings

Devon Funds recently put out a thought-provoking article on the recent discussion around Capital Gains Tax.

It's food for thought so we thought it worth sharing here.

 Many thanks to Paul Glass and Devon Funds Management for the interesting viewpoint.


 5 March 2019

The recently released Tax Working Group (TWG) report “Future of Tax” should more correctly have been labelled “Taxing our Future”. Tax is an incredibly important component of a well-functioning economy and it is good to review our tax structures periodically. Unfortunately, rather than being a visionary document as we might have hoped, the TWG have produced a report that is economically naïve and would, in our view, shift more of the tax burden onto aspirational younger people.

Before looking at some of the problems with the report’s recommendations it might be useful to shed some light on NZ’s current tax framework. Let’s start by looking at the amount of tax that New Zealanders pay. The best measure of this is the tax to GDP ratio which in NZ sits at 32.0% or just below the OECD average of 34.2% and above countries like Australia and the USA at 27.8% and 27.1% respectively. Relative to OECD averages the NZ structure is characterised by higher taxes on personal and company income, rates about average on property taxes and contains no separate taxes relating to payroll or social security contributions. So, all in all, our overall tax burden looks about right.

Where it gets very interesting in NZ is when we look at who pays the tax. One measure is the amount of net tax paid, which is the amount of tax paid less transfer payments (like benefits, Working for Families etc). There are many different ways to slice this but according to Treasury figures the bottom 50% of households, as measured by income, pay no net taxes (that is after transfers and benefits), the top 3% pay about 24% of all net tax paid, and the top 10% pay over 70% of net income taxes. On top of this, wealthier households often pay twice for the provision of services (for example private healthcare and education), which is not picked up in the tax numbers. The question of whether or not the wealthy should pay more tax than this is largely a political one. The best way of levying these taxes was the focus of the TWG and the majority (3 members dissented) recommended the introduction of a broad approach to the taxation of capital gains.

NZ is unusual in not having a Capital Gains Tax (CGT). Superficially a broad CGT has great appeal in that it sounds fairer and would help capture “windfall” profits which have occurred largely in the property sector.

The devil is of course in the detail and we can simply look overseas at other jurisdictions to see the problems with a CGT:

The theme of “fairness” comes up very frequently (54 times!) in the TWG report but this is a very hard concept to put into place with a complicated tax system. In particular what we are likely to see occur will be a tax on future generations to fund the retirement of baby-boomers, which is probably exactly the opposite of what the government would like to achieve.

Let’s look at a few practical examples to demonstrate some issues:

The family home is to be exempt from a CGT so we are likely to see the “mansion” effect occur. This is where instead of investing in additional properties or a business, an investor will put all their investable funds into buying or upgrading the family home to avoid paying CGT.

There are numerous other problems in the proposals including the treatment of lifestyle blocks, farms, NZ shares (very unfavourable and which will drive money out of NZ and into international shares) and Kiwisaver, but it is probably not worth focusing on these issues until we know what the Government position is- this will be disclosed in April. Politically the issue of a CGT appears to have arisen due largely to the untaxed gains which have occurred in the housing market and related to land. There are much simpler mechanisms to achieve “fairness” in this area than a broadly based Capital Gains Tax, the burden of which which will largely fall in the years ahead on aspirational young people.

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This article was written by Paul Glass of Devon Funds Management, and originally published viewed here at devonfunds.co.nz. It has been shared with permission.
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