Mood of the Boardroom: Capital gains tax by any other name

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Deloitte chief executive Thomas Pippos.
Deloitte chief executive Thomas Pippos.


New Zealand has an aversion to capital gains taxes. Or is it just the name?

Those who are offended can find any number of reasons, whether personal or principled, with the irony being that the badge seems more offensive than the concept.

Consistent with this, 72 per cent of respondents to the Mood of the Boardroom CEO survey believe that politicians have no appetite to engage on a capital gains tax and only 47 per cent believe not introducing one was a lost opportunity in terms of raising revenue and levelling the playing field.

By contrast however, the bright line rules are accepted by 71 per cent as a CGT under a different name and 88 per cent believe they should have been introduced earlier; 86 per cent also think extending the rule from two to five years would have a noticeable dampening effect on property.

What's in a name here isn't new. Officials, followed by all politicians, have continued to erode the capital boundary by taxing capital gains over time, but always by another name.

In addition to the bright line rules, we currently have proposals to tax capital gains in employee share arrangements. Other traditional capital gains made by employees are already taxed.

Capital gains on financial instruments, derivatives, bonds etc. are taxed, including on an unrealised basis. So are (in effect) capital gains on portfolio shareholdings in global companies (excluding Australian). We also have older rules that tax capital gains in certain property transactions. None are called a "CGT".

Does this mean that taxing property (even under a different name) will address Auckland's challenges?

No. It would raise revenue, reduce the net gains investors derive, possibly dampen some of the heat in the market and broaden the tax base. But only 53 per cent believe that it will reduce the attractiveness of property investment and 46 per cent believe it would negatively impact prices.

Somewhat interestingly, any such measures are likely to also increase the percentage of income tax paid by the highest earning 10 per cent from the currently reported 45 per cent; recognising that income and wealth disparity also play a part in these statistics.

Equalising the taxation treatment across asset classes is one thing, but taxes can also discourage forms of investment. Stamp duty is one example. Survey respondents generally exhibited tissue rejection to that with only 43 per cent thinking a stamp duty is a viable option and 29 per cent wishing it was introduced earlier. What did however find favour was banning foreign ownership (68 per cent and ring fencing losses (71 per cent).

Irrespective of the rules, Inland Revenue came in for a bit of a hammering as only 13 per cent felt that they are suitably policing the boundaries. Possibly related to this, of those that had a view, 93 per cent felt that people thought that their property gains were simply not taxable.

Overall therefore there is an overwhelming sentiment of unfinished business for property tax settings viewed through an Auckland lens.

Outside tax, reflecting the extent of concern exhibited by Auckland-based leaders, 85 per cent thought both Christchurch and Wellington should be encouraged to develop further and faster as global cities to be more attractive as destinations of capital and labour -- a sentiment that has not to date been articulated or pursued by politicians. The sense is the score would definitely be higher than if you went back five years.

Overall therefore, there is an overwhelming sentiment of unfinished business for property tax settings viewed through an Auckland lens.

This may be because Auckland is now already a global city, but more likely, the lack of regional parochialism is a function of the challenges growth has brought Auckland that no one senses will abate any time soon.

Back to Auckland and migration from Asia: 33 per cent didn't feel that expectations of tax and other compliance norms were being challenged, slightly less felt that they were, with the majority (39 per cent) feeling it was probably more perception than reality.

But perception becomes reality and this is certainly something Inland Revenue are looking to be more visible on. Possibly more alarming in terms of outcomes, the two overwhelming tax rate themes were around R&D and the taxation of multinationals. Of those who favoured change, over 90 per cent looked for greater assistance with R&D and more tax paid by multinationals. The R&D sentiment is not surprising, looking to encourage innovation in a digitally disrupted and connected world.

The multinational sentiment is considerably more concerning and surprising. Though there will always be cases of concern, the perception among respondents is that the issue is more widespread and impacts much further.

Food for thought, but there is certainly unrest around these issues that someone will capitalise on during the election year. Though there aren't any easy answers there are any number of largely ineffective but populous initiatives that will no doubt come to the fore.

Thomas Pippos is chief executive of Deloitte New Zealand.

- NZ Herald

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