Tax Working Group recommends capital gains tax

It's confirmed - the Tax Working Group (TWG) thinks the Government should introduce a capital gains tax (CGT).

The TWG has also recommended reducing KiwiSaver and personal income taxes, and increasing taxes around protecting the environment.

The CGT would apply to all gains and losses on land and improvements (except the family home), including shares and business assets. It would not apply to personal items, like bikes, boats and art.

The group was split on a broad-based capital gains tax. Not all members agree on the approach to include all land and buildings, business assets, intangible property and shares.

However, group chair Sir Michael Cullen said all members of the TWG agree a CGT should be taxed from the sale of residential rental properties.

Capital gains would be taxed when an asset is sold, the TWG report said. Those gains would be calculated from the date the new law was implemented.

"We have judged that the increase in compliance and efficiency costs is worth it if we can reduce the biases towards certain types of investments and improve fairness, integrity and fiscal sustainability of the tax system," Sir Michael said.

The TWG's own workings estimate a CGT will result in small rent increases initially, which would eventually be offset by more people exiting the rental market as home ownership becomes more accessible.

New Zealand already has a variation on a CGT. The Taxation (Bright-line Test for Residential Land) Bill was passed in 2015, and required income tax to be paid on any gains from residential property that was sold within two years of purchase. That two-year limit was increased by the current Government last year to five years.

However, the bright-line test does not currently apply a person's main home, nor does it apply to property acquired through inheritance.

Sir Michael admits introducing a CGT could discourage people from selling their assets, which could stagnate the economy. Investors may also take fewer risks and invest less if there's more tax to pay.

Nevertheless, the TWG estimates that if the Government implements its CGT recommendations, it could generate $8 billion over the first five years.

The TWG believes tax-free capital gains are "mostly enjoyed by our wealthiest households", and therefore "taxing them would help reduce the gap between rich and poor".

With a broad CGT, it said the Government won't need to be so reliant on revenue from wages and salaries since taxing capital gains will "broaden the tax base".

Hence, the TWG recommends reducing personal income tax by increasing the bottom tax bracket from $14k to $20-$22.5k and reducing taxes for KiwiSaver to "reduce inequality"- but it also recommended increasing the rate for the second tax bracket.

The Government's full response to the recommendations will come on April 21. No policy measure would come into effect until April 1, 2021, giving New Zealanders the chance to vote on any decisions made by the current Government.

Finance Minister Grant Robertson said the findings of the TWG report confirms there is "some unfairness that we need to address".