Capital Gains Tax
Government rules out introducing Capital Gainst Tax

There were good reasons for ruling out Capital Gains Tax. Let’s have a look at some arguments for and against.
Whenever we look at improving our tax system it is predictable that capital gains tax will be raised as an option. It has been examined in 1967, 1978, 1982, 1987, 1988, 1989, 2001, and 2009, 2014 and by the recent Tax Working Group.
One reason we keep returning to capital gains tax is that the exemption for capital gains is the one, large, glaring exception to New Zealand’s “broad base” approach to taxation and, of course, expanding the tax base is necessary unless we are happy with increased indebtedness to foreign nations.
A big portion of the Tax Working Group’s final report is focused on the question of whether New Zealand should adopt a capital gains tax.
Some argue a capital gains tax on investment properties would be fairer and ease inter-generational tensions. A question often raised is whether it is fair to tax money earned from a bank deposit, but not from capital gains on an investment property.
At present, interest from term deposits is taxed, but the capital gain on the sale of an investment property is not. But should this differing treatment exist? In a policy report, ‘Benefits and Drawbacks of a Capital Gains Tax’ prepared in February 2014 for the then Minister of Revenue Todd McClay, Inland Revenue noted:
“There is no obvious reason why a person who derives $100,000 in interest income should be taxed differently to a person who derives $100,000 in capital gains.”
The argument that a “buck is a buck” and everyone should therefore bear the same tax burden on every dollar earned is attractive.
So, why are we reluctant to tax capital gains from investment property? I do not think it is about fairness.
Many commentators have come out against recommendations to impose a capital gains tax because they are all concerned it will have a crippling effect on businesses and farmers.
While capital gains taxes raise revenues for government they do so with considerable economic harm.
Capital gains taxes reduce the return that entrepreneurs and investors receive from the sale of their investments. This diminishes the reward for entrepreneurial risk-taking and reduces the number of entrepreneurs and the investors that support them. The result is lower levels of economic growth and job creation.
One of the most significant economic effects is the incentive it creates for owners of capital to retain their current investments even if more profitable and productive opportunities are available.
Economists refer to this result as the “lock-in” effect. Capital that is locked into sub-optimal investments and not reallocated to more profitable opportunities hinders economic output.
Also, we should not ignore the fact that one of the principles of good tax policy is that there should be no double taxation of income that is saved and invested. Such a policy promotes current consumption at the expense of future consumption, which is simply an econo-geek way of saying that it penalises capital formation.
Every economic theory agrees that capital formation is key to long-run growth and higher living standards. Even Marxist and socialist theories are based on this notion (they want government to be in charge of investing, so they want to do the right thing but in a very wrong way). Many economists believe that the economically optimal tax on capital gains is zero.
President Obama’s first chief economic adviser, Larry Summers, wrote in the American Economic Review in 1981 that the elimination of capital income taxation “would have very substantial economic effects” and “might raise steady-state output by as much as 18 percent, and consumption by 16 percent.”
Whatever else might be said either for or against it, the introduction of capital gains tax would entail significant change for lawyers, accountants, valuers, businesspeople and investors generally; and the transition period – from the government’s announcement of the tax until several years after its introduction – would be likely to be particularly challenging.
Introduction of capital gains tax in New Zealand would add huge complexity to what is currently one of the world’s simplest tax systems and would result in a massive industry – as happens elsewhere in the world.
#IRLegal #LegalExperts #ImmigrationLaw #CommercialLaw #TaxLaw #EmploymentLaw #Australia #NewZealand #501deportation #LegalAdvice #NewRealities #NewStrategies #Lawyers #PartnerVisa #BusinesssVisa #StudentVisa #BridgingVisa #LegalTips #ContractLaw #LegalAdvice #CommercialContracts #LegalServices #ContractDrafting