Capital gains tax in doubt, decision seen too political for tax working group

The Tax Working Group is understood to have stopped short of recommending a broad-based capital gains tax, in an interim report due out within days.

The working group chaired by Sir Michael Cullen was tasked with designing a capital gains tax for consideration by the Government, but is expected to push back any firm recommendation to its final report which is due to be published in February.

It had been widely expected that the Tax Working Group (TWG) would recommend a broad-based capital gains tax on the likes of sharemarket and property investments as the centrepiece of tax reforms on which Labour would fight the next election.

However, doubts began to creep in earlier this year that the Government would ultimately back the plan, amid concerns the new tax would be unpopular and would cause rents to rise without delivering much in the way of extra revenue for at least a decade.

Deferring the matter back to ministers would appear to amount to a recognition that changes to the tax system are too "political" to be outsourced to an expert group.

Paul Drum, chief executive of accounting body CPA Australia, said in a newspaper column that "a close reading of the tea leaves" suggested the "highly important and politicised" issue of the capital gains tax "is probably to be parked for further consultation and input".

Sir Michael Cullen hinted that was on the money, saying he had "not reacted strongly to that comment".

British tax expert Chris Wales, a former adviser to former British prime minister Tony Blair, forecast the TWG could continue to face difficulties making a final recommendation.

There were two fundamental problems, he said.

One was that there was "no money" in the medium term for any government from introducing a conventional capital gains tax (CGT) – if it was assumed that house prices and stock markets were close to reaching a plateau.

"The only way to raise any revenues from it would be to tax unrealised gains that have accrued to date. That would be bad policy and suicidal politics."

It is expected that the model for a CGT floated for consideration by the working group would only tax assets that were bought after the new tax came in.

That would mean it would exclude gains on assets such as investment properties that people already owned and which might already have risen in value.

The second snag was that New Zealand's tax system had evolved in its current form at least partly to take account of the absence of a CGT, Wales said.

"Putting one in place would lead to a large number of consequential changes. This might be particularly difficult in relation to financial instruments and investments but would also affect many other areas," he said.

"Without a clear political steer, it will be difficult for the group to make a recommendation even in its final report," Wales forecast.

"It will be a political decision."

New Zealand is rare in not having a broad-based tax on capital gains or an inheritance tax, and instead relying largely on income tax, GST and company tax to fill the Government's coffers.

But Wales said that did not make its tax system worse, only less conventional.

"The way out for the TWG is, frankly, to be honest and open about the revenue issue and to propose a 'least worst' approach for modernising the system.

"It should give the Government the choice between complex major reform, more limited extensions of the taxation of what would normally be treated as gains elsewhere, and doing nothing."

The TWG has also looked at new environmental taxes, possible changes to GST, and matters such as the index-linking of tax on the likes of bank interest payments.

However, it was warned off looking at specific new "green" taxes in April by officials who cautioned that could cause an overlap with other policy work, and to instead concentrate on principles or a "framework" that could apply.

The TWG is expected to have rejected the idea of adjusting taxation for inflation because of the complexities involved in applying that across the tax system, and shown no appetite for revising GST.

"Given the constraints around their remit and the Government's expectations, the TWG has, I believe, found itself very much focused on CGT," Wales said.