Avoiding capital gains tax

Bill English has pointed out that we already have taxes on various capital gains in New Zealand. If you’re in the business of buying and selling houses, or farms, or any other large items that are usually regarded as “capital”, then you’re up for tax on the profits. If you buy something with the intention of resale, then you’re up for tax on the profits too. Gains on some financial arrangements get caught up in the tax nets, and so do gains on buying and selling shares, if you do it often enough.

But buy shares and hold onto them in a static portfolio, and you won’t get taxed on any capital gains. Buy a house, live in it while you do it up over two or three years, and then flick it on, and you won’t get caught either. Of course, IRD might try to argue that you bought the house with the intention of resale, but it would be a hard case to prove. Own some land or a beach house or a rental property, and while you might pay some tax on current year income earned from that land, you won’t pay any taxes if the property increases in value.

English goes on to argue that to be effective, any capital gains tax needs to be comprehensive, and that means that it should include the family home. The implication is that he won’t support any CGT that doesn’t include the family home. And from there, the conclusion is that therefore he and the National party are not interested in extending our capital gains taxes.

Well, thank you for playing, Mr English.

It’s not at all difficult to implement a comprehensive capital gains tax that exempts family homes. Developed nations all over the world do it. Our nearest neighbours do it, reasonably successfully. Yes, capital gains taxes can be rorted, just like any tax can be rorted if you have sufficiently clever tax advisors. But equally, sufficiently clever policy wonks and legisation drafters can write rules that circumvent most of these tricks. I’ve only seen one suggestion for exploiting the family home exemption – just give each family member a home.

There’s a simple solution to that dodge: ensure that the exemption applies only to owner occupied homes, so that title in the house would actually have to pass to whichever family members are claiming the exemption. And they would have to actually live in the house. So giving a house to your three year old child won’t be a viable option for circumventing the CGT rules.

I don’t think Mr English is all that concerned by the need for an exemption for family homes. The problems with exemptions for family homes are well known, and we can learn how to deal with them from other tax jurisdictions. It’s a non-problem.

I think that the group of people Mr English is really looking to protect is farmers.

There have been massive increases in the value of farmland in recent years, out of all proportion to the income that can be earned from farming. Talk to any primary sector accountant for long enough, and she or he will admit that their clients are farming for capital gains, not current year taxable income. At present, those capital gains are entirely tax free.

When Mr English says that there won’t be a capital gains tax because we have a problem with family homes, I think he is being disingenuous. The problem is not exemptions for family homes. The real problem is the National party’s rural support base, and the massive untaxed capital gains earned by those supporters. That’s why we won’t have a comprehensive capital gains tax while the National party is in power.

This entry was posted in Economics, NZ Politics, Taxation and tagged , , . Bookmark the permalink.

3 Responses to Avoiding capital gains tax

  1. Mindy says:

    As someone from a farming background I always thought that the capital gain from when you sold the farm was pretty much the only reason to hang on so long. It is basically your superannuation and thanks for all backbreaking labour all those years. I know some people do very nicely out of farming but I can’t say that my family was one of those. But the sale of the farm did give my Grandparents enough money to build a house and have a vegie patch so that they could grow some of their own food. The real money came from my Grandfather holding onto his header and doing contract grain stripping for other people until he became too ill to keep going. But at the end my grandparents were still on the old age pension and eking out an existence. There was not a huge payoff from years of farming.

  2. Pingback: Random recommended reading | Ideologically Impure

  3. Rosco says:

    I do not like paying a lot of tax, will you be advocating any spending cuts?

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