Capital gains tax could be set at earner's top tax rate

A capital gains tax on the sale of investment property, businesses, shares and farms is a step closer if the interim report of the Tax Working Group leads to firm recommendations next February.

The final recommendations of the independent group, led by a former deputy prime minister and minister of finance Sir Michael Cullen, will then require government decisions, but the interim report falls firmly in favour of broadening the existing narrow range of capital gains taxes to capture profits on the sale of a far wider range of assets than the current regime.

Crucially for public acceptance of such an outcome, Finance Minister Grant Robertson simultaneously released updated instructions that the group should produce a final package of recommendations that "could" raise no more revenue that the tax system does today.

Sir Michael Cullen's Tax Working Group has released an interim report. Photo / Doug Sherring

The family home is already excluded from any consideration of a capital gains tax.

However, an expanded CGT could include residential land other than under a family home, "commercial, agricultural, industrial and leasehold interests not currently taxed, intangible assets, including goodwill; all other assets held by a business [for example, depreciable assets]; and shares in companies".

Cars, boats, and other durable personal assets were not to be included, with most such assets falling in value anyway, the report says. Nor would jewellery, fine art and collectables for reasons of "simplicity and compliance costs", nor property sold in the course of a relationship settlement.

Cullen challenged whether New Zealand's long-standing "mantra" that the strength of its tax system's strength lies in charging tax at low rates and is broadly based.

That was "not true" in the case of capital taxation, especially when compared to other developed economies, said Cullen, raising the question of whether New Zealand was "so smart or too dumb" to tax capital gains in ways more similar to its international peers.

For its final report, the group will consider two types of capital gains tax:

An extension of the existing tax net to cover the sale of a wider range of assets; or
taxing "deemed returns from certain assets" or "risk-free rate of return" approach, although Cullen said "no one does that" because taxpayers could struggle to pay tax on unrealised increases in the value of assets covered by the regime.

Cullen said the TWG could theoretically recommend against both options in its final report, but it was unlikely to do so.