New Report: Five Rules for a Fair Capital Gains Tax

While taxpayers wait for the release of the Tax Working Group’s Final Report, the New Zealand Taxpayers’ Union has released a new report which provides a framework – Five Rules – for assessing a possible capital gains tax, expected to be proposed by Working Group.

The exact detail of the capital gains tax will be crucial for determining whether the tax is fair or not, and whether the Taxpayers’ Union will accept the reform – or fight it with everything we’ve got.

To be fair, a new capital gains tax must abide by the following:

1. No Valuation Day: Any capital gains tax regime should exclude a valuation day approach in favour of grandfathering assets into the system upon sale, as was the case in Australia when it introduced a capital gains tax.
2. Indexation for Inflation: Any capital gains tax regime must discount for inflation, so taxpayers are taxed only on their real capital gains, rather than nominal gains.
3. Revenue Neutrality: Given the Government's surpluses, any revenue from a capital gains tax must be used to fund tax cuts in other areas so that the total tax burden does not increase overall.
4. Roll-Over Relief: Tax should be paid only on sale – not death. Further, there should be roll-over relief when capital raised from a sale is then immediately invested in the same asset class.
5. Discounted Rate: Any capital gains tax should apply at a discounted rate, instead of at the full personal income tax rate, to avoid New Zealand having one of the highest capital gains tax rates in the world.

If the Government puts forward a reasonable proposal, focused on fairness and steady reform, the Taxpayers’ Union is ready accept a tax shift. In contrast, if the Working Group process was just an excuse for aggressive tax hikes, we’ll fight it to the end.

Even if the Working Group's proposals fail the five common sense tests, taxpayers will still have opportunities to make their voice heard, either to the Government now, or during Parliament's Select Committee process. We will be working to make sure the new tax legislation follows our Five Rules for a Fair Capital Gains Tax.