What’s this capital gains tax and don’t we already tax gains on sale of property already?

Sir Michael Cullen says the potential tax reform he’s suggesting isn’t quite Robin Hood taking from the rich to give to the poor, but it isn’t far off

It’s not news that Labour is considering a capital gains tax. Originally cited as a way to dampen the rapid growth in house prices, a closer read of the Tax Working Group’s (chaired by Michael Cullen) recommendations indicate that the capital gains tax will likely be applied to every asset class (property, shares, businesses, farms, restaurants, intellectual property, artwork, etc).

And the tax rate currently recommended is 33%. So that’s 33c for every dollar you made. It’s not surprising that after the news came out, the findings of the Tax Working Group has been widely criticised.

To be honest, we already have a weathered down version of a capital gains tax: the bright line test captures gains made from selling a residential real estate within five years of acquisition if purchased on or after 29 March 2018 (subject to some exemptions such as owner occupied houses), section CB6 of the Income Tax Act also captures gains made from selling real estate if the purchaser intended to sell it at the time of purchase, section CB4 taxes gains made from selling personal property (cars, stocks, boats) if they were acquired for the purpose of resale. And the tax rate will depend on the person’s marginal tax rate.

So it’s not as if NZ doesn’t tax “capital gains”. It already does but only in the situations covered by the Income Tax Act. But it also recognises that it’s important for New Zealanders to save and invest in businesses to grow the economy so doesn’t tax capital gains where the investment purpose is to receive dividends or rents. The dividends and rents themselves are taxed as income.

But if Labour were to implement a widespread capital gains tax on everything, it would have a substantial impact on your retirement savings. Just think about it … any gains on investments you have will likely be eroded from inflation and on top of that you have to pay a tax on it. No wonder many political commentators have denounced the Tax Working Group’s capital gains tax recommendations. Back to the topic on housing, such a tax will likely turn away amateur speculators but professional speculators who renovate do-ups will still be in business. Rents are likely to increase because investors know that capital gains tax will reduce their return so they will have to increase rents to compensate for this. Already rental losses are being ring-fenced so investors have started implementing rent increases to ensure their rental income covers their expenses. In the end who suffers? the ordinary working people who want to save up for their retirement.

Rich listers don’t suffer much because of the way they have structured their tax affairs. Just look at Eric Watson and his businesses. And anyway wealthy rich listers have businesses domiciled in other countries (Graeme Hart businesses are based offshore) and generally the NZ govt can’t touch those businesses if they have been structured correctly.

But it comes down to the question … What is the point of this capital gains tax? If it is to raise more money, the govt should learn how to budget and control their spending. They should set an example for New Zealanders and balance the budget and control their spending. That’s sound financial advice they should take.

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