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Capital gains tax may be in doubt

By the time you read this article, the Tax Working Group should have released its interim report, with a Capital Gains Tax (CGT) expected to be the centre piece.

I was hoping this was going to happen before I had to write the article, as it appeared that the Group was moving away from a CGT.

Media reported the CEO of accounting body CPA Australia saying "a close reading of the tea leaves" suggested that the "highly important and politicised" issue of a CGT "is probably to be parked for further consultation and input".

When presented with this comment, Sir Michael Cullen didn’t deny that the issue was to be parked, interestingly saying he had "not reacted strongly to that comment".

This was followed up by an enlightening article on Sir Michael Cullen in the Sunday Star Times on 16 September. Cullen confirmed that Treasury and the Reserve Bank were supportive of a CGT to reduce inequality.

(As an aside, it was a Treasury and Reserve Bank report to the TWG that suggested rental property was undertaxed compared to other assets. The NZPIF produced a report that dismissed this, which was thankfully accepted by the TWG.)

While Cullen believes that National underplay inequality he also said “I think some people overplay it a bit, as though there has been a very large change”.

While economic modelling suggests a CGT would result in reduced house prices and increasing rents, Cullen says “we have come out with a more general conclusion that taxation has only a limited effect on the housing market and the housing problem remains one of supply”.

There was another interesting article by Fund Manager Mark Lister, under the heading “Will a CGT backfire?”. He says he is worried politicians will get it wrong, with assets like shares and businesses getting hit. Unbelievable that this is just dawning on the finance industry that has advocated for a CGT as long as it just applied to rental property.

Despite the slow uptake, it is good that the Finance Industry is finally awaking to the downside of a CGT and appears to be moving away from being a prime cheerleader.

There is a distinct concern I have with the TWG moving away from a CGT and that is that they will suggest a land tax instead, excluding the family home.

However, Cullen appears to be against a land tax as a CGT alternative, saying that incomes can change year to year, making a land tax hard to budget for. “We have got so much of our economy tied up in land-based systems, all of them characterised by high volatility of income, that it is a very hard tax to apply”.

Hopefully the end consensus will be that our tax system isn’t really broken and there is nothing needing to be fixed.

While it will be very interesting to read the TWG’s interim report, it is the final report in February that will really matter. Despite a lot of good rhetoric going around, when looking at different options Cullen has said “you come back to the CGT-type model as being probably the most efficient and effective”.

Tags: federation reports

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