A Game of Tax

April is an exciting month. Not just because it marks the end of “tax season” in New Zealand, but because we have three momentous events taking place in the latter half of the month. Let me ask you, what excites you more:

(a)   The Government’s response to the Tax Working Group’s (“TWG”) final report, due to be announced on some date in late April.

(b)   The release of Avengers: Endgame on 24 April.

(c)   The start of Season 8 of Game of Thrones on 15 April.

Sorry, I know that is a trick question. The answer is obviously (c). The final season of this epic series will comprise six action-packed movie-length episodes and we will finally know once and for all who will sit upon the Iron Throne of Westeros.

However I suspect that you may reading this post not because you want to know my guess on who will take the Iron Throne (wouldn’t it be a great twist if Cersei Lannister gets to stay where she is?) but rather because you are, like me, a tax or finance professional. So instead here’s my prediction on topic (a) and the next stage in New Zealand’s “Game of Tax”.

In my view there are persuasive arguments in favour the Government adopting the minority view of the TWG – i.e. only introducing a capital gains tax (“CGT”) made from the sale of residential investment property. These include:

• It would be relatively simple to introduce (after all we already have the five year brightline test);
• It would raise the largest amount of revenue of any class of asset which a CGT could be applied to; and
• It is probably the easiest to sell politically, as it will keep productive businesses, the family bach and farmland out of the CGT net.

It is difficult to imagine New Zealand First, currently consistently polling below the 5% electoral threshold, supporting a tax that will hit family baches and farmers, particularly given their on-going push to win over voters in rural New Zealand.

Whether this is the eventual outcome remains to be seen, but what is certain (in my view at least) is that we will not have the comprehensive capital gains tax regime recommended by the majority of the TWG in force as law on 1 April 2021. There is simply not enough time. While Daenerys Targaryen could move swiftly enough to send her three dragons to rescue Jon Snow and his band of misfits from a circle of Whitewalkers north of the wall, the New Zealand legislative process moves at a more measured pace.

All five tax experts on the TWG have been clear that there is not enough time to draft the legislation necessary for a full CGT, have it open for public submissions, have it pass through three readings in Parliament and get enacted before the 2020 election. To attempt to do so would be to risk introducing legislation full of errors, inconsistencies and uncertainties. Jacinda Ardern will no doubt remember how inept David Cunliffe looked in the 2014 election when he was not able to explain the details of the Labour Party’s proposed CGT. She would risk a significant amount of brand damage defending legislation during an election that is not thoroughly thought out and that has not been through a watertight drafting process.

So my pick is that we will only get a proposed CGT on residential investment property and that the extension to include all other asset classes will be deferred until 2022. This would also allow a CGT to be properly debated during the 2020 election prior to enactment (and allow New Zealand First to distance itself from a full CGT during the election campaign).

In my view any extension of a CGT beyond residential investment property is not warranted. We would be taking leave of our senses as a country in introducing a very complex tax on productive sectors on our economy, for a relatively minor increase in Government revenues.

We would be far better off taking a harder look at what could be done within our existing tax framework if the Government really is hell bent on raising more tax revenue, such as a 1% rise in GST or adjustments to income tax thresholds. Either of these options could easily raise more revenue than a full CGT, with a far far smaller degree of complexity.

Having said that politics is a strange business. It is not inconceivable that the Prime Minister could ride on the back of her sky high popularity ratings to push through a full CGT. Like Daenerys riding on her dragons, she would difficult to stop. And is it just me or do the phrases “Dracarys” and “Let’s tax this” have an eerie similarity…..?

Bruce Bernacchi

11 April 2019