The Tax Working Group has confirmed its support for a broad-based tax on capital gains, suggesting handing back much of the $8.3 billion it might raise over five years through income tax cuts for almost all workers.
Some have criticised the proposed tax as "envy tax", but working group chairman Sir Michael Cullen said it was wrong that wage-earners were taxed on their full income while "you can earn income from gains on assets and not be taxed at all".
"We are proposing a fairly comprehensive approach," Cullen said, releasing the report. "There are undoubtedly compliance costs," he admitted.
The proposals, if adopted by the Government, would take billions from the wealthy and give most of that money back quite evenly to millions of taxpayers.
The capital gains tax proposed by the working group would apply to profits on investment property, land, shares, business assets and intellectual property, but not the family home and personal possessions.
The extra taxes would kick in from 2021 at the earliest and would initially only raise a few hundred million dollars a year, but the working group forecast it would raise almost $6 billion annually within 10 years.
"Untaxed capital gains mostly benefit wealthy households," Cullen said.
The vast majority of the extra tax would come from the wealthiest 20 per cent of Kiwis, who own more than 80 per cent of the assets that would be newly taxed.
"The ordinary middle-income, middle-class 'average hard-working Kiwi' does not have an expansive bach at Omaha Beach," he said.
The working group's favoured option is to hand back much of the proceeds by increasing the amount of money people could earn at the lowest 10.5 per cent tax rate, which is currently capped at $14,000.
Options include raising the threshold to $20,000 or $22,500 from 2022 or 2023, at a total cost of between $3.8b and $6.8b over the first five years of the capital income tax regime.
That would deliver an income tax cut worth between $420 and $595 a year to the majority of taxpayers.
An alternative slightly more generous option that was set out in its interim report to remove tax altogether on income under $7000 a year was dropped in the final report.
"Many people who have very low income are not part of low-income households," Cullen explained.
The increase in average take-home pay from the proposed income tax changes would have the knock-on effect of bumping up NZ Superannuation payments by a few hundred dollars a year.
The working group has also proposed as an option axing Employer Superannuation Contribution Tax for KiwiSavers earning less than $48,000 a year, phased reductions for people earning between $48,000 to $70,000, and reducing the lowest rates of tax on KiwiSaver and other PIE (prescribed investor rate) funds.
That would deliver another benefit to low and middle income earners worth just over $2.3b over five years.
Raising the lowest tax threshold to $20,000 and implementing the KiwiSaver benefits in full could still leave room for some business and housing-friendly measures worth $2b two years, such as reintroducing depreciation deductions for owners of commercial and industrial buildings, the working group believed.
Cullen said that could encourage faster progress with seismic strengthening.
The Tax Working Group has recommend taxing gains on assets that people already own from the date the tax changes came into effect, requiring a "valuation day approach".
It also confirmed people would pay tax on capital gains at their marginal income-tax rate and capital gains would not be adjusted for inflation.
In general, investors should be able to offset capital losses – for example if they sold shares or property for less than they paid for them – against their other taxable income, the working group's final report said.
But it warned letting investors deduct capital losses from "ordinary income" would "come with some risks and would require careful monitoring by the Government."
Finance Minister Grant Robertson and Revenue Minister Stuart Nash wrote to the working group in September asking it to consider a tax-free threshold for small business owners under which gains from the sale of their businesses would not be taxed.
But Cullen said such a "graduated" tax would create distortions, suggesting business owners might respond by splitting their businesses to keep them under any threshold.
"There would be an awful lot of small subsidiaries for a start," he said.
Robertson would not confirm whether that was the end of that idea.
"Like all of the recommendations both positive and negative, we will take a look at it and see where that sits for us but we haven't made any decisions on that," he said.
Cullen argued in November that it might be "last chance saloon" for a capital gains tax and that it was not just about bringing about greater equality.
The Productivity Commission estimated last year that the proportion of Kiwis' income that came from wages, as opposed to returns on capital, fell by more than 8 percentage points to 56 per cent between 1978 and 2016.
- Capital gains to be taxed through income tax.
- Family home (one per person) to be excluded from tax, within some limits
- Gains to be taxed from date tax comes into effect on assets people already own
- Tax generally to apply when people sell assets, with limited "rollover" relief if proceeds are reinvested
- Rollover relief to apply on death/inheritance
- Capital gains won't be adjusted for inflation
- Investors to have up to 5 years to have some assets valued.
- Personal possessions, including artworks that may be held as investments, to escape net
- Capital losses could "generally" be offset against other taxable income.
- Income tax breaks worth between $420 and $595 a year to almost all taxpayers
- Low and middle-income KiwiSavers to benefit from reduction in tax on employer contributions
- Wealthier KiwiSavers to lose out from taxation of funds' Australian and New Zealand shares
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