Green Party policy does not address the issue of implementing a Capital Gains Tax.
Overview
The Green Party believes the Review needs to seriously examine a capital gains tax (CGT). Absence of a capital gains tax has been noted for some time as a gap in our tax system. There are both equity and efficiency arguments for taxing capital gains. The efficiency argument relates to neutrality between investments that generate annual financial flows and those that generate capital gains. The equity argument relates to higher taxes on income for a given level of revenue that result from the absence of taxation on capital gains.
CGT and superannuation
The treatment of capital gains is also relevant to the superannuation debate underway at present. We believe that, without a capital gains tax, the present taxed-taxed-exempt (TTE) regime disadvantages those who save through managed funds as opposed to those who save through direct asset accumulation.
The Government has suggested that the solution is to move to a taxed-partially taxed-exempt (TtE) or even a taxed-exempt-partially taxed (Tet) regime. There is evidence such a regime does not increase national saving and may even lead to a fall in savings, thereby increasing our reliance on offshore capital inflows. An across-the-board CGT could boost private super savings as the CGT would remove a disincentive to save through super schemes. The Greens suggestion is to carefully evaluate whether a capital gains tax is a preferable option to changing the TTE regime.
CGT implementation details
Design of a capital gains tax needs to ensure it does not to lead to financial hardship or unnecessarily distort investment decisions. As capital gains are not usually realised on an annual basis, a basic requirement is some form of accrual system for capital gains tax liability.
Ideally capital gains will only be taxed on realisation. To do otherwise risks gross inequity and hardship. However tax needs to be calculated annually. A possible system would involve calculating the nominal capital gain in any one year and applying the appropriate personal or corporate tax rate to that income. This then becomes a charge against the asset when it is realised 78 . The start of period value of the asset for tax purposes is defined to be the capital value from the last period, net of capital gains tax. Capital losses as well as capital gains need to be included in such a regime for both equity and efficiency reasons.
There is little information available on the effect of CGT in practice. In particular, the treatment of owner-occupied private homes is a vexed one. It would be helpful to consider the impact of a comprehensive CGT on house values over time. To the extent that aggregate capital gains on the housing stock fall, the impact on individual home owners may be positive.
A slower rate of appreciation of house prices makes housing more affordable as well as lowering the asset value of homes. The latter effect does mean that any comprehensive CGT would need to be introduced with a long transition to avoid seriously disadvantaging those who have used home ownership as their main retirement savings plan.
Capital Gains Taxation
The Green Party:
1. believes the Review needs to seriously and thoroughly examine a comprehensive
capital gains tax (CGT) for New Zealand
