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Wealth tax rears its head again

Wealth tax is a controversial subject, but it is not new, and it is election year after all, writes Stephen Tsang.

By: Stephen Tsang

1 April 2023

The notion of wealth tax has again come to the fore – results from a recent government- commissioned survey suggest respondents prefer wealth tax over fuel tax or road-user charges.

Maybe it is time to refresh our minds on this subject... it is election year after all.

First, we should understand the motivation behind it. There has been a push recently imploring governments to address social inequality. In fact, The Tax Working Group considered this possibility back in March 2018 when they released their discussion paper on how to tax wealth. Interestingly, China has the same idea, openly sharing the rhetoric of their “common prosperity strategy” in the midst of the pandemic.

MIXED MESSAGES

Wealth tax is usually a tax on an individual’s accumulated wealth, including assets such as property, investments, and maybe even savings. It aims to target the wealthy, though I guess it is all about perspective. Apparently, according to some financial news, you are considered wealthy if you earn $100,000 or more. Really?

So, are we getting mixed messages here? On one hand we were told to improve productivity; working smarter not harder and striving for higher pay and better living/working conditions. Yet in the same breath, fruits of our labour and ingenuity will be eroded by a wealth tax. Is this incentivising me to get ahead financially?

Wealth tax may be controversial, but it is not new.

As an aside, New Zealand used to have a wealth tax. Here is a quick snippet down memory lane of what we had previously:
Land Tax – you are taxed on your commercial land holdings value at the end of each financial year.
Stamp Duty – perhaps a reduced form of wealth tax, payable on all commercial property conveyance and leases.
Gift Duty – duty was payable on any gifts over $27,000.
Estate Duty – duty was payable on any estate value over $450,000.

ESTATE DUTY

Interestingly, all the above “wealth tax” provisions were repealed except Estate Duty. Despite successive government changes, none of them have expressed the desire to formally repeal Estate Duty apart from abolishing the rate. Is there a hidden message here?

So, what could Wealth Tax look like in the future?

Firstly, the most challenging part is determining the taxable base.

As we already tax residential property investors on gains made within the bright-line periods and those who invest in overseas shares are taxed on their comparative value gains, what else could be captured in this net?

Now that we have a new prime minister and Labour still holds the majority in the House, could we see a discussion on capital gains tax being put back on the drawing board?

Perhaps it would be more palatable and less aggrieving for property investors if there is a broad-based capital gains tax capturing everyone from business sale to sale of local shares rather than just targeting property owners.

DOUBLE JEOPARDY?

Although the counter argument here is fairness. “Boomers” never envisaged losing a big chunk of their capital on their retirement – just when they needed the money. And remember, retirees are constantly being reminded they should be paying for their own rest home rather than relying on government subsidies. A double jeopardy perhaps?

Secondly, there is the issue of setting a tax rate for this wealth tax. Should it be a flat rate or on a progressive rate pegged to your total taxable personal income.

The rumour wheel has started to turn, suggesting the government may surprise us with a new 45 per cent income tax rate in the upcoming Budget. Ironically, this rumoured new tax rate roughly resembles the 40 per cent Estate Duty rate that was abolished.

Finally, should there be any exemptions from this wealth tax – family home, family bach, where do we stop? Bear in mind, the more twists and turns we allow for possible exemptions the higher the compliance costs will be to collect it. I am sure we all have our tinted personal views regardless of political divide or social conscience. But are we not really debating whether financial success should be celebrated or despised.

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