Government has numbers to pass capital gains tax bill

Jeanette Fitzsimons says the tax needs investigating. Picture / Gerard Johnson

In the final of our three-part series on the new investment tax, we look at the chances of the proposal being modified, and its effects on technology start-up companies.

Investors looking to derail plans for a capital gains tax on directly held foreign shares will have their work cut out.

While a tax bill now before the finance and expenditure select committee makes some taxpayer-friendly changes to the treatment of investment in New Zealand and Australia, it also introduces a capital gains tax on shares held directly or through passive funds in British, US, Japanese, German, Canadian, Norwegian and Spanish companies.

The Government appears to have the numbers to pass the bill.

The bill's sponsor is Revenue Minister Peter Dunne, leader of United Future, which has three MPs. And New Zealand First (seven MPs) says it will support the bill, despite a philosophical dislike of capital gains taxes.

"Basically we have said we will support the bill but we will be listening carefully to the arguments because we suspect there are a few questions the Labour Party and United Future would like resolved themselves," the NZ First representative on the select committee, Doug Woolerton, said.

It was not a die-in-the-ditch issue for the party, he said. "We are honouring our support agreement [with the Government] more than anything else."

With the Progressive Party (Jim Anderton) that gives a majority of MPs.

But that does not mean submissions on the bill were wasted.

"I can't predict what changes the select committee will recommend, but I served on that committee for 15 years and I don't know of any tax bill that emerged unamended," Dunne said.

The question is how substantive any changes might be.

The regime has been substantially watered down from that proposed in a discussion document last year. In particular, Australia has been carved out and widely held GPG is to be given a five-year holiday from its provisions.

But some members of the select committee believe such moves have only whetted the appetite for further amendments.

National's John Key said a lot of the fierce opposition to the bill would be defused by widening the exemption from the capital gains tax provisions to include Britain and the United States as well as Australia.

But there are practical limits to how much the committee can change the bill. What emerges still has to be sufficiently palatable to Dunne as the bill's sponsor. "As a minister I'm not going to be promoting a bill I don't support," he said.

And if recommended changes cost too much revenue Finance Minister Michael Cullen could veto them.

Parliament's rules allow the Government to block by a vote in the House amendments that would have "more than a minor impact on the Government's fiscal aggregates if it became law".

Greens co-leader Jeanette Fitzsimons said the veto was sometimes used on member's bills. "But it's unlikely to be used on a select committee unless a Government has totally lost control of the committee."

The finance committee is unusual in having all parties represented. Labour and National each have four members on the select committee and New Zealand First, United Future, the Greens, the Maori Party and Act each have one.

"It's a genuine MMP situation and they might have to accept some change to get it through," Fitzsimons said, "which is why I don't want to take a simple for-or-against position at this stage."

The Greens "tended towards feeling" there should be a capital gains tax, if it could relieve some of the taxation on earned income and so long as it exempted the family home, she said.

"It's not our position to have one but it is our position that it should be investigated properly."

The Maori Party representative on the select committee, Hone Harawira, has yet to come to grips with the intricacies of the legislation, but said he was "open-minded" about it.