Date posted: 26/03/2019 4 min read

Too little time for NZ Gov't to go whole hog on CGT

Tax experts say expect the Government to reveal a diluted Capital Gains Tax thanks to “almost impossible” timeframe.

In Brief

  • There’s simply not enough time for full implementation of the Tax Working Group’s Capital Gains Tax recommendations
  • Instead expect the Government to take a diluted tax to the electorate in the 2020 election campaign
  • Retirement savings described as “without a doubt one of the toughest areas” for the Tax Working Group

Don't expect the New Zealand Coalition Government in April to announce, and prepare the way for, a comprehensive Capital Gains Tax (CGT).

Tax experts say the country should instead expect the unveiling of a diluted tax which the Government will take to the electorate in the 2020 election campaign.

There's simply not enough time for full implementation of the Tax Working Group's CGT recommendations, according to some of the country's leading tax experts speaking in a panel debate at a Chartered Accountants Australia and New Zealand tax event in Auckland in March.

The panel took part in a wide-ranging discussion on a number of key areas before the working group, including the tax burden of small businesses, how to extend a CGT regime to retirement savings and the benefits and limitations of environmental taxes.

The panel (left to right): Aaron Quintal, John Cuthbertson panel MC, Craig Elliffe and Greg Haddon.

The panel (left to right): Aaron Quintal, John Cuthbertson panel MC, Craig Elliffe and Greg Haddon.

There was agreement across the table that the timetable for introducing a comprehensive CGT was "too tight".

"It's almost impossible - there is so much work to be done," said Greg Haddon FCA, taxation specialist, Partner at Deloitte and Chair of the CA ANZ Tax Advisory Group.

Aaron Quintal, an EY tax Partner, described the question - "what the Government will do" - as the "million-dollar question".

CA ANZ has mapped a timeline for the introduction of a CGT starting with a Government decision in April on the working group's recommendations through to CGT legislation being enacted by the middle of next year.

Late last year CA ANZ warned the Government about its tight timeframe to get a broad capital gains tax ready - as promised - to take on the 2020 election campaign trail. It urged the Government to consider deferring the introduction date of the tax and to stage its application.

Quintal said, given the coalition partners have to agree on a CGT package, and the inevitable tight timeframe, what the Government unveils in April will have to be a lot narrower than the working group's full proposal.

Haddon said "If it is to be comprehensive, there is still so much work to be done. The rules will be just way too complex to get it to a place that I think will be workable."

He indicated further time constraints. "The working group left a lot of things dangling - more work has to be done on these areas and those areas are a lot."

"And there is quite a list of areas where the officials don't agree. Areas where I can see massive debate."

He pointed out Australia's White Paper consultation on that country's CGT took two years. And after 16 years, that country is still making changes to "get it right".

In comparison, Professor Craig Elliffe FCA, Professor of Taxation at Auckland University said the working group had its own time constraints. He was a member of the Tax Working Group which spent a year considering improvements to the structure, fairness and balance of the New Zealand tax system.

The CGT sub group, he said had "part time - one or two days a week - working on it for much less than six months".

There were many areas where "we had to take a view" that there would be a tax policy process to follow.

He spoke of "running out of time" to fully consider some issues.

"If [the CGT] is to be comprehensive, there is still so much work to be done."
Greg Haddon FCAChair of the CA ANZ Tax Advisory Group

Retirement area tough

Elliffe described retirement savings as "without a doubt one of the toughest areas" for the Tax Working Group.

He said Kiwis save for retirement in a range of ways and one of the challenges the group faced was the widely held belief that KiwiSaver funds are currently not taxed. "That is complete nonsense."

"Between only 8 to 18% of KiwiSaver portfolios are invested in Australasian shares. That is the only untaxed area."

The working group was trying to make its recommendations neutral for people belonging to KiwiSaver. He said that "Basically anyone earning up to $70,000 was going to be ahead in terms of KiwiSaver and those above $70,000 shouldn't be that far behind by the time all the compensating adjustments were made."

He said the working group was "looking at our tax system for the next 10 years. What's it going to be like in 10 years' time?" There was going to be fewer salary and wage earners, but also more pension and health costs to be paid.

Small business

Haddon welcomed the working group's Taxpayer Advocate Service proposals supported by CA ANZ observing that often engaging in either informal or formal disputes with Inland Revenue is too costly and complex for small business.

Quintal noted that while some tax regimes, such as the Fringe Benefit Tax, had an important fairness function, these regimes are overly complicated. "You can solve the big problems without chasing every cent."

He commended the group for taking steps to simplify regimes which had a disproportionate impact on small businesses.

Elliffe commended CA ANZ for being the "go to people" for consultation on small business and the Taxpayer Advocate Service.

Environmental taxes

The working group's framework for environmental taxation was described as a good one. "Tax has its place in that framework when the behaviour or issue Government is trying to resolve is widespread, measurable and responsive to price fluctuations," said Quintal.

"Whether that should be revenue raising or behaviour driven or both, I think the important point is it should never be both." For example, tobacco excise has become a billion dollars the Government is addicted to and we don't want environmental taxes to end up in the same situation.

Working groups final recommendations

The group’s final report marks the start of a challenging period of consultation.

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