Capital gains tax on the cards

Investors’ concerns that a capital gains tax is likely to be introduced have been confirmed today with the release of the TWG’s final report on the reform of the tax system.

It comes as no surprise that Sir Michael Cullen’s 11 member group has recommended a capital gains tax should be applied to the sale of rental properties.

According to the TWG, this sector is undertaxed when only rental income is in the tax base.

Cullen says that all members of the TWG agreed on this, but a majority of the group also support broadening the tax to include all land and buildings, business assets, intangible property and shares.

The TWG recommends that a realisation based tax on capital gains would kick in when an asset, such as a rental property, is sold or changes hands.

It would be applied with no discounted tax rate and no allowance for inflation, and gains would only be calculated from when any new law comes into force (after “Valuation Day”).

The gains would be taxed at full rates, with no discount and no allowance for inflation.

The “family home” and personal use assets like cars, boats and other household durables would be excluded from the tax.

But Cullen says the TWG has presented the Government with choices and options on how the taxation of capital gains could be extended rather than a rigid blueprint.

“The Government doesn’t necessarily need to make a straight call over whether or not to adopt the Group’s preferred model for taxing more capital gains.

“It could choose to apply it to only some types of assets or stagger the inclusion of different assets over time. It may decide to apply the deemed return method to property. All these options are open to the Government.”

The TWG estimates that broadly taxing more income from capital gains will raise roughly $8 billion over the first five years, Cullen says.

“If the Government chooses to proceed down this path, it then unlocks opportunities to reduce taxes in other areas so we have given them some options to consider.”

In an initial response from the Government, Finance Minister Grant Robertson and Revenue Minister Stuart Nash say the TWG report’s overall findings confirm that there is no need for a major overhaul of the system.

The Government’s response will preserve the key principles of our existing broad-based low-rate tax system, the ministers say.

“The Government is not bound to accept all the recommendations the TWG has put forward and it is highly unlikely all recommendations will need to be implemented.”

The ministers say they are looking forward to discussing the recommendations with their Coalition partners to find a consensus on the best overall package and to get the balance right.

The Government’s full response to the TWG report will be released in April 2019.