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Capital Gains Tax Unfairness

Capital Gains Tax Unfairness

There’s a double-standard when it comes to taxing property versus taxing shares and it needs to be addressed, writes Mark Withers.

By: Mark Withers

1 December 2018

It is galling to property investors to hear cries from the funds management industry for exemptions from the Government’s proposed capital gains tax (CGT). These cries say “the problem” lies with residential property, so why tax the stock market? But what is “the problem”? Is it rising values? What about the speculatively driven rises in stock market prices?

The fund managers should examine some awkward truths before they make these pleas. Speculation in residential property is already taxed and there is a CGT on any non-speculative gains made within five years of acquisition as a result of the bright-line rules. Not only that, the laws are strictly enforced. Every land transaction in New Zealand now has the IRD number of purchaser and vendor recorded and the IRD have a dedicated property compliance division ensuring that tax is paid.

When it comes to tax compliance the contrasts between the equity investment sector and the property investment sector couldn’t be more stark. Existing law in section CB 4 already says that if a person derives a gain from disposing of personal property, that gain is taxable if the property was acquired for disposal. Stocks and shares are personal property. This means that the gain on every share that is purchased with a view to selling it for a profit is already taxable under New Zealand law. But there is universal non-compliance with the law and seemingly no political will to enforce it. The equivalent legislation for property is section CB 6 which taxes speculative gains and has recently been strengthened with the five year bright-line test. When you consider that the entire funds management sector remunerates itself by charging a fee based on the value of funds under management rather than the dividend income the funds generate you start to realise that the focus of these managers is really about picking winners, getting in and out of stocks and shares where they believe profits can be made and speculating on where gains can be found.

But hang on a minute, where is the compliance with existing law that should already tax these gains? Where is the shares and equities bright-line test? Where is the shares and equities compliance division at IRD?

Not only is this sector universally non-compliant with existing laws, they are now calling for exemptions from any capital gains tax because “residential property” is the problem.

There is another angle on this that the equities sector should pause to consider. The Tax Working Group has said from the outset that they want the introduction of a CGT to be fiscally neutral (it would make the tax system fairer rather than increase overall Government revenue). It’s no secret that the current Government would dearly love to go to the next election promising middle New Zealand tax cuts by introducing a CGT to fund it. But to do this, the Government has to overcome one massive problem. That is that the loss of tax revenue from an income tax cut is easily predicted but the amount collected from a CGT is very hard to predict as it only taxes gains on assets from the point the tax is introduced. Especially hard when you have introduced laws like foreign buyer bans designed to artificially reduce the demand for residential property.

Another problem is that the tax from the property sector is already being paid. But the tax from speculation in the stock market is not being paid. If the Government is serious about fiscally neutral changes to the income tax system it must look to remove the unfairness that exists between the way the property sector is taxed and compliance managed and do something to rein in the rampant speculation in the share market where none of the gains are declared and taxed.

I believe the Tax Working Group is thinking deeply about the problem of how a government could predict the tax take from a CGT. This is why you have seen the suggestion of taxing capital assets on a deemed rate of return; setting a tax to be paid on a percentage of an asset’s value regardless of whether it is sold for a profit. This would offer the Government the massive advantage of a predictable revenue take. All they would have to do is enforce compliance. This is not really a CGT; it’s simply a wealth tax. Introduction of this type of tax would collect more from a heavily taxed property sector.

One can only hope that if it were introduced the funds management sector that trades stocks and shares without declaring its gains as income would finally contribute some tax in the same way the property sector does. Then perhaps the system would genuinely be fairer. The differences between the property sector and the equities sector are currently anything but fair.

Mark and his team specialise in advising on property-related transactions, valuation and restructure services, and tax planning. Withers Tsang & Co Phone 09 376 8860, www.wt.co.nz