Coalition Government capitulates on CGT

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On 17 April, many kiwis breathed a collective sigh of relief when the Prime Minister announced that the Coalition Government would not proceed with the Tax Working Group’s (TWG’s) recommendation for a capital gains tax (CGT). 

The announcement ended months of rhetoric and speculation. It came as a surprise to most. My bet was that the government wouldn’t proceed with a comprehensive CGT, but that it would look for a fall guy to tax instead, namely residential property investors.  

After all, the TWG had offered up residential property investors as the sacrificial lamb to the government. The minority view of the TWG was that TCG should only apply to residential property investors, rather than everyone else. The government could have run with this and in doing so saved face and salvaged some credibility as it beat its hasty retreat.  

At the end of the day the government’s capitulation was not due to lack of conviction by the Prime Minister. After all, Labour had campaigned for almost a decade on it and Jacinda Arden genuinely believed there were inequalities in the tax system that a CGT could have helped to solve. 

NZ First clearly held sway and the political key to the eventual decision. If the government was to proceed with the CGT, it would have needed NZ First’s support every step of the way. From deciding what TWG recommendations it would run with, and those it wouldn’t, right through the eventual legislative process. And sure enough, the Prime Minister’s announcement confirmed that it was indeed the inability to find consensus with its coalition partners that ended its CGT journey. 

While it took Ardern a while to get there, she came to the realisation – late in the piece – that all preceding governments have come to: the introduction of a CGT would be political suicide. 

Not only did the Prime Minister take a CGT off the table, this time round she went one step further and ruled out a CGT in future under her leadership. 

A full retreat was an astute political move that showed Labour is more concerned with getting elected next year than following its own convictions and the principled recommendation from the TWG. Better to retreat and live to fight another day, than to alienate your key coalition partner and endanger chances of re-election. 

It has taken the wind out of the National Party’s sails and removed a key re-election issue from which it could have made up political ground.

Political reasons aside, the time period the government had given itself to design and legislate a CGT seemed woefully short. No doubt policy officials would have been drumming this home to the government during the deliberation process.

Australia took five years to introduce its CGT system,  two to three years to legislate it, and close to 10 years in fixing it up. The government would have had 15 months if it was to pass the legislation into law by July 2020. 

If the government had proceeded there was a high chance that it would have gone down in New Zealand’s political history as the government that presided over a rushed and fractured CGT system.

The TWG process was far from a waste of time or an exercise in futility. The TWG conducted a thorough review of New Zealand’s tax system, identifying areas that needed work and in doing so making business and taxpayer-friendly recommendations that could encourage savings and investment and support business. 

The report card came back looking good. For the most part the TWG gave our tax system a clean bill of health. It works well, delivers adequate revenue for the government and has relatively low compliance and collection costs. 

Of the 99 TWG recommendations, only two related to GCT. The Prime Minister has confirmed that the majority of the non-CGT recommendations will be investigated further and form part of the government’s work programme. Many of these are taxpayer friendly.

While there is to be no comprehensive CGT introduced, the Prime Minister has confirmed there are things that can be done to improve the fairness of the tax system and that the government will tighten the rules around land speculation and work on ways to counter land banking.

So, a new capital gains tax for land speculators may not be off the table. Nor do I believe that the government won’t look to introduce a comprehensive CGT for rental property investors. After all the current tax rules tax capital gains in certain instances for land speculators and developers and it wouldn’t take much to extend these rules.  

The comments in this article are of a general nature and should not be relied on for specific cases, where readers should seek professional advice. 

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Grant Neagle

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