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Analysis: Government turns its back on Capital Gains Tax

After months of speculation and uncertainty, the proposed Capital Gains Tax (CGT) has been axed. Many New Zealanders breathed a sigh of relief but for others, they were disappointed. In this month’s blog, we look at both sides of the equation to see how different Kiwis fare from this decision.

What were the proposed changes?

  • The Labour government had proposed introducing a CGT. On the table were the following proposals:
  • Taxing any profit made on the sale of assets. The rate would be set at the same as the income-earner's top tax rate, 33 percent for most people.
  • The CGT would have applied to interest dividends, rental income gains made after selling an asset (such as a rental property) or the return on capital invested in a business.
  • The CGT would not have applied to the family home or land under it.

What were the arguments in support of the CGT?

Finance Minister Grant Robertson said that the CGT was about fairness and balance to ensure that all New Zealanders were paying their fair share of tax. He argued that people paying tax on income from wages and salaries were at a disadvantage as people with other income sources weren’t being taxed.

The Tax Working Group also argued that a CGT would push down house prices and therefore improve rental yield. The group stated that the introduction of CGT overseas has shown no clear correlation to increase in rents.

Proponents also believed that the tax would improve the integrity of the tax system as a whole.

What were the arguments against the CGT?

The National party argued that the CGT proposals were among the world’s highest and most severe.

Many opponents also felt that it was unfair to base the tax rate on the income-earner’s tax rate rather than base it on the asset itself and that this would be especially tough on middle income earners.

Opponents also argued that the tax would only raise GDP by 1% after 10 years and bring very little into the Government coffers. So why bother with it?

Sir Michael Cullen who chaired the 11-member Tax Working group himself admitted that investors may take fewer risks and invest less if there's more tax to pay. This was an outcome that could be detrimental to the economy as a whole.

One of the biggest arguments against the CGT was that the housing market would be adversely affected, rents would increase so landlords could cover their losses and as a result, lower income earners would be hit in the pocket.

Finally, there were major concerns about how the Capital Gains tax would hit small business. Many Kiwis in business see their business as their retirement savings and opponents argued that a CGT would have seriously impacted the savings plans of thousands of Kiwi property owners

What does the announcement mean and what changes are going to be made?

Based on the official announcement from Prime Minister Jacinda Ardern, the plans for a CGT have been scrapped completely.

The Labour-led government were unable to reach an agreement on the scope and extent of any CGT and so the decision was made that no form of the tax would be introduced.

But now, we await the day when this topic will yet again raise its head. After so much research and discussion, the introduction of some form of CGT in the future is still a very real possibility.