Drew Herriot: Capital gains tax by stealth is an option

John Key did rule out a comprehensive capital gains tax when Parliament opened this year. Photo / Mark Mitchell

Are New Zealand investors really out of the woods regarding a capital gains tax in this year's Budget?

Yes, Prime Minister John Key did rule out a comprehensive capital gains tax when Parliament opened this year, and the message has since been reiterated by Government ministers.

However, does this leave the door open for a targeted capital gains tax? Precedent suggests that targeted measures would not be seen as a "comprehensive" capital gains tax. Targeted measures have always been in the Income Tax Act or have been introduced to tax certain transactions.

A prime example, and one which may be particularly pertinent, is the land rules. New Zealanders have generally thought of gains in the value of property as being tax free.

That is correct for most people (including most investors). However, there are provisions, which were strengthened in 2009, that actually tax those gains. They are currently targeted at various taxpayers (and their associates) in some way involved in the business of land - for example, builders.

At the time there was a degree of consternation over the "tripartite" test because it stretched the boundaries of who would be taxable. From a practitioner's perspective, a taxpayer would not necessarily know that they were associated, and so the risks in this area are high.

I certainly don't think the Government will bring all land gains into the tax net. But given the precedent that has been set and the Government's stated frustration at the fiscal cost associated with residential rental properties and the loss offsets against personal income, some form of across-the-board capital gains tax on any non-owner occupied land may be on their agenda.

While pure supposition, this could include:

* A straight tax on gains where the owner is not the occupier of the property.

* The taxability of gains where the property is sold within, say, 5-10 years.

* Inventive solutions, such as taxing gains where losses have been claimed during the holding period of the rental property.

Other targeted areas might include gains on New Zealand and Australian shares. Generally thought to be non-taxable - unless certain conditions were present (not unlike land) - this would take much consideration as changes were made to the investment rules not that long ago.

The introduction of the controversial FDR/PIE rules would mean adjustments to other regimes.

NZX chief executive Mark Weldon has long promoted investing in New Zealand shares as investing in productive sectors in New Zealand.

I do have several issues with this position. Unless an initial public offering (IPO) occurs, the sharemarket is a passive investment for the investor. It does not raise capital for the company and is reliant on dividend flows or gains.

Having said that, the Government has been very specific about what it has ruled out, given the potential other matters that would need to be altered and aligned. The big picture suggests that their precise wording was to ensure options still remain open to them.

Overall, there are much simpler ways of achieving a similar result without going anywhere near the words "capital gains".

However, the Budget may yet produce some surprises.

Drew Herriot is an associate at Grant Thornton.