Tax Working Group dissenters less opposed to 'CGT light' but National unmoved

Wednesday, 13 March 2019

National Party finance spokeswoman Amy Adams says it would remain opposed to a capital gains tax even if the Government watered down its impact while still delivering the bulk of its proposed offsets.

However, two members of the Tax Working Group who issued an opinion opposing a comprehensive capital gains (CGT) – BusinessNZ chief executive Kirk Hope and former Inland Revenue deputy commissioner Robin Oliver – acknowledged a 'CGT light' could go some way to addressing their concerns.

A well-connected source forecast the Government was likely to propose slashing the maximum 33 per cent rate at which a CGT could apply and introducing several concessions, while still offering income tax cuts worth at least $420 a year to almost taxpayers as well as improved incentives for KiwiSavers.

National's finance spokeswoman Amy Adams said she had no doubts the Government was preparing to soften the Tax Working Group's proposals, but questioned whether lengthening the time over which they would be tax neutral would be responsible.

Central to that idea would be deciding that the overall tax changes could be allowed to be 'tax neutral' over a longer period of perhaps 10 years, rather than the five years proposed by the working group.

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Officials and some members of the Tax Working Group were struggling on Wednesday to explain exactly how it was decided that tax changes should be 'neutral' over five years, leaving room for the Government to play what could politically be a trump card.

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Adams said she had 'no doubts' that the Government was intending to soften what she said had been a 'pretty unpalatable' set of proposals from the Tax Working Group.

'They will hope everyone will be so relieved it is not as bad as it might have been, that they forget how bad it still is,' she said.

'I don't think that is going to pull the wool over New Zealanders' eyes into thinking it is still anything other than a capital gains tax with the costs, complexities and disincentives that come with that.'

Former PWC global tax leader Chris Wales forecast National could struggle to challenge a CGT that applied at the rate of 15 or 20 per cent and that came with more concessions for KiwiSaver funds, small business owners and owners of lifestyle blocks.

BusinessNZ boss Kirk Hope is 'partially' mollified by the concept of a water-down capital gains tax.

But Adams said more exemptions to one already proposed for the 'family home' would create more distortions.

'Every time you create a new exemption you create more complexity and you increase those distortions.'

The 'fiscal risks' involved in allowing a CGT to be tax neutral over 10 years rather than five were also significant, given revenue from a CGT would be hard to predict from year-to-year, while the tax breaks proposed in the TWG's final report would be 'largely automatic', she said.

'You run the risk you could 'hardwire-in' up to $6 billion a year of 'savings' and find yourself raising nothing like that.

'I am pretty sure Treasury would be saying the fiscal risk in providing for it to be revenue neutral over 10 years would be significant.'

Finance Minister Grant Robertson and Revenue Minister Stuart Nash last year floated the idea of a threshold under which small business owners might not pay tax on profits they made when they sold their businesses.

An alternative might be to only apply a 'CGT light' to small businesses set up after the tax came in, an approach known as 'grandparenting'.

That would avoid small business owners having to deal with a complicated 'valuation day' over which NZ First leader Winston Peters has hinted concerns.

Oliver – who was one of three members of the TWG who wrote a minority opinion disagreeing with a full-blown CGT – said his main concern had been whether the benefits were worth the costs.

A 'grandparenting approach' for small businesses could start to address one of his main concerns but it might be hard to determine where such a concession should end, he said.

Neither Oliver nor Hope could immediately recall exactly how the TWG had decided the tax changes should be tax neutral over five years, rather than a different period.

Robertson said the time period was determined by the TWG with 'no ministerial direction', and did not rule out changing it.

Oliver said it was the period over which economic forecasts were normally based.

The timeframe was a question of 'fiscal management' and prudence, he said.

Hope said the CGT-light concept would 'partially' address his concerns.

With the mooted concessions, it could raise roughly $12b over 10 years, rather than the originally proposed $32b, he believed.

But 'while good', it would still result in a complex tax change, he warned.

'A response has to be very well-thought through in terms of what the implications of any exemptions might be.'

Hope said changing the period over which it was decided any tax change should be tax-neutral was 'completely up to the Government'.

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