- Changing demographics will place increasing pressure on New Zealand’s current tax structure
- A capital gains tax could be critical to ensuring sufficient revenue streams for New Zealand in 20 years time
- There is business community concern surrounding the complexity of capital gains tax and its potential negative impact on foreign investment
In December 2017, the Labour Coalition Government established the Tax Working Group to review the country's tax system and evaluate the need to widen its base. As one of only a few OECD countries without a capital gains tax (CGT), debate has waged as to whether New Zealand should rethink its tax system.
Geof Nightingale FCA, Partner and former Head of Tax at PwC, served as a panel member on the Tax Working Group that recommended a CGT.
Why have a CGT?
Nightingale argues a CGT could have multiple benefits for the tax system, but principally it diversifies the current revenue structure that is reliant on personal and corporate income taxes, and a goods and services tax (GST). While he doesn't see the current tax structure as a problem for New Zealand, he warns changing demographics could mean it will struggle to perform in the future.
"Our current system is broadly sustainable, but coming under increasing pressure. As our population ages, our workforce will need to support increasing healthcare demands and other associated costs. This could mean more fiscal pressure to tax personal incomes, so that naturally raises the question of how a CGT could potentially add value in this scenario," Nightingale says.
"You look to other OECD countries and most of them have some sort of CGT. Take Australia for example, it's estimated that it's CGT accounts for up to 5% of total tax revenue. I think that's a valuable contribution."
Common CGT concerns
While Nightingale is in favour of a CGT, he recognises it doesn't come without potential disadvantages. One of the principal concerns centred on the complex structure of a CGT, which can make it difficult to implement, administer and maintain. As a result, the potential for efficiency issues in the New Zealand tax system could increase.
"One of the main concerns the Tax Working Group considered was the complexity of a CGT, and how it could be effectively adopted and operated," Nightingale explains.
The working group heard submissions from the business community and they revealed a common perspective was that a CGT could negatively impact foreign investment, and reduce the incentive for entrepreneurs to establish and grow businesses. Nightingale acknowledges these concerns but recognises there are also potential benefits for businesses.
"We received multiple submissions that raised concerns around how a CGT could deter investment and entrepreneurship, but on the other hand, a CGT could potentially reduce the tax burden on businesses by offsetting losses," Nightingale says.
Nightingale says the general perception that a CGT represented greater government intrusion on personal earnings was another significant concern the working group had to grapple with.
"We are used to the government taxing our salary, but if our income from investments in shares or property is also taxed, we feel like it's a very different level of government intrusion," he says.
"You look to other OECD countries and most of them have some sort of CGT. Take Australia for example, it’s estimated that it’s CGT accounts for up to 5% of total tax revenue. I think that’s a valuable contribution."
What a CGT free future means for New Zealand
According to Nightingale, the current tax system is operating well. It collects sufficient revenue, enjoys widespread voluntary compliance, and does so with minimal administrative costs. However, he warns reform is needed to ensure the tax system's continual effectiveness.
"The Tax Working Group found that the current system operates really well. The one glaring hole, compared to other advanced economies, is the lack of a CGT but for now it isn't an urgent concern. The future challenge will be undertaking the necessary structural reforms to ensure that in 20 years time, our revenue streams are sufficient in a society with a significantly different demographic," he says.
Will a CGT be proposed again? Nightingale believes so, but not for a while.
Both the current government and opposition leadership have committed to not introducing a CGT, so it may take 12-15 years before it comes back on the agenda," he says.