Should New Zealand have a capital gains tax? State your position and provide the reasons for your decision.
Capital gain can be explained as an increase in the value of the capital asset that provides a higher price than the purchase price. The exceeding difference between the selling price of an asset and its original purchase price is capital gain. Capital gains can be classified into two categories. Firstly, a capital gain is realized when the asset is sold. Secondly, an unrealized capital gain is an asset which has increased in its value, but it’s still not sold yet. Currently, New Zealand is the only OECD (Organizations for economics co-operations and development) country without a capital gain tax in place. There are good and bad effect on introduction of capital gain in New Zealand. This essay will explain both point of views of capital gain (Oliver, 2000).
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Firstly, many scholars and politicians have decided to go with capital gain tax in past and recently, Labour political parties agenda for this upcoming election is to introduce capital gain tax in New Zealand. Introduction of the capital gain tax will generally provide the support and reliability in the tax system by reducing opportunities for tax planning and tax avoidance (Oliver, 2000). This is a very important aspect. For example, a New Zealand based company has recently developed an intellectual property and then decided to sell the property to another offshore company to enjoy the benefit of untaxed capital gain, and then licensed the property back to themselves and pay a tax deductible royalty (Burman & White, n.d). If there were enough provision in place for capital gain than there would be no tax advantage to this transaction. There are many facts and evidences involved to support that the value of capital gain tax is a backstop against the tax avoidance. It is largely unrealistic but we have to think that it will have a positive effect on the system.
Secondly, the current approach of New Zealand in taxing income from capital is in inconsistent, and a lot of the income generated from capital gains are taxed under changed rules (Burman & White, n.d). For instance, certain land transactions, financial instruments, and intellectual property are all taxed to an extent (Oliver, 2000). Whereas, shares and intellectual property transaction fall outside the taxed part. Mainly the part between taxable and not taxable income is always unclear.
Lastly, Capital gain are often used to deliver tax revenues. Less obviously, it increases revenues from the ordinary income tax. This is a one reason many taxpayer now days do not convert their taxable income as not-taxable capital gains (Burman & White, n.d).
The main argument for not introducing capital gain in New Zealand are described below:
Firstly, capital gains are quite different from all other types of income. As indicated, capital gains generally increase on risky asset, putting a tax burden on them will discourages risk-taking. This will further give the disadvantage to the economy. Secondly, there are argument in favour of lower tax is that capital gains are eroded by inflation. Profits generated from corporate shares and holding unit trusts also represent income which is subject to be taxed at company’s tax rate, making individual level taxation an inefficient double tax. Capital gains also discourages saving in an economy’s (Burman & White, n.d).
Thirdly, capital gains creates “Lock-in effect’’. Lock-in effect can be explained by a circumstance where an individual is not able to exit a situation because of the rules and regulation. When we tax gains generated from realization it creates lock-in effect. Because of the rules an investor had to hold his asset to avoid the tax relation. Even in the situation where capital losses are generated, they can only be deductible against capital gains (Burman & White, n.d). Allowing deduction for full low would create virtually limitless power to shelter other income from taxation, since an investor could purchase offsetting short and long position in assets and then take in the spot with the loss to shelter other income while studying on no risk. Even when such schemes are placed under the law, an investor would still achieve similar result by selecting realizing assets with losses and supporting those with addition. However, with loss limits, full taxation of gains may penalize capital gains compared with other less risky investments (Oliver, 2000).
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Fourthly, many scholars have been saying that providing concessional taxation on gains encourage tax avoidance. This tax avoidance is unfair because high earners pay less tax than other taxpayer. Furthermore, the Mcleod committee was appointed to undergo a research in the current New Zealand tax system (Burman & White, n.d). The committee found that New Zealand should not go for capital gain tax because these type of tax would not make our tax system fairer and more efficient, would not lower tax avoidance and would not raise substantial revenue that could be used to lower rates. The committee also recommended to continue with the current New Zealand taxation system for dealing with capital gains as they arose. They also proposed a risk-free return method for taxation, to address the problem which could be caused by the dissimilar taxation method (The taxation of capital gains, 2009). In 2007, the government of New Zealand decided to align the rules for taxing gains of certain collective investment entities that arising due to the sale of shares in New Zealand companies and Australian listed companies with the non-taxation of capital gains often arising from the sale of shares by individuals.
In the course of our research above, we discussed some good and bad points about introduction of capital gain taxation in New Zealand. As, it seems like New Zealand should not have capital gain at the current moment. Because introduction of capital gain will shrink the saving, increased the tax burden on individuals and encourage taxpayer to use tax avoidance. Practical, there is no country in the globe with a general capital gains tax on acquiring gains (Oliver, 2000). So, if we go with the international norms, the real question we need to answer is whether or not there would be efficiency benefits from bringing in the capital gains tax which is likely to involve taxing realized capital gains (The taxation of capital gains, 2009).
Burman, E. L., & White, I. D. (n.d) Taxing Capital Gains in New Zealand: Assessment and Recommendations. Retrieved from
CCH New Zealand Ltd. (2014). New Zealand Master Tax Guide for Students, Auckland, NZ.
CCH New Zealand Ltd. (2014). Tax Legislation for Students, Auckland, NZ.
Inland revenue Department. IRD Tax Information Bulletin: Volume Seven, No.2 (August 1995). Retrieved from https://www.ird.govt.nz/resources/5/9/590fc8804ba388048a31bf9ef8e4b077/tib7-02.pdf
Oliver, R. (2000). Capital Gains Tax - The New Zealand case. Retrieved from http://www.goodreturns.co.nz/article/976485506/capital-gains-tax-the-new-zealand-case.html
The taxation of capital gains. (2009, September). Retrieved from http://www.victoria.ac.nz/sacl/centres-and-institutes/cagtr/twg/publications/3-taxation-of-capital-gains-ird_treasury.pdf