CGT – General Recap

As I seem to have gotten myself into a bit of a barny on Kiwiblog, I thought I’d provide a general (none technical) recap of CGT and the points illustrated there (I am thinking of doing posts on Labour’s actual proposal(s) and possible alternatives, including a property tax and enforcing existing income tax provisions better). Anyway, the main points are:

1) I don’t agree the CGT is an effective inheritance tax and I think it’s being overdone that way. From what I remember of Labour’s proposal, the tax would be at disposal, and thus if you inherit property, you’ll end up only paying tax at disposal (they were reasonably explicit about the effect on inheriting the family bach, from memory). So while there is an element of potential taxation ‘down the line’, the reality is that it doesn’t appear death counts as a disposal for CGT purposes (but this would, obviously, need to be checked in any proposed legislation, regulations, and IRD determinations).

2) The complexity of such a tax is a real problem. People are already (before it’s even been discussed at a technical level) mixing up the concept of an individual and asset ‘gain’. Looking abroad, the general approach I am aware of is that you pay tax not on your personal gain, but on the asset’s gain between disposals. As such systems have an inheritance tax, it often appears a personal gain, but in reality a death is treated as a disposal followed by a new owner. This is not what Labour has proposed, which would allow inter-generational transfers without a disposal being declared. The point is that we haven’t even got any technical details yet and people already are confused as to whether they will be subject to tax on only their period of ownership or on the entire period of ownership between the previous purchase and their disposal (or some arbitrary valuation date in between).

3) I am very concerned about the lack of actual detail being applied in advance of such a major tax change. Saying that ‘we’ll sort out the details’ later is very silly and, really, just dangerous. If Labour thinks the idea is so great, why not form the committee now…or in the past 4 years, and actually work out what kind of a tax they are after. It makes a shambles of policy development that they haven’t figured out the real details yet, and worse, it gives their forecasts little / no credibility (‘We are going to raise $5bn from this, but we don’t actually know how the details will work yet’). I don’t think every policy needs to be fully fleshed out before it gets to Parliament, but such major changes in the tax system need to have a wee bit more rigour applied before seeing the light of day.

Anyway, the real impact of all of this is going to be that people decide to retain property (rather than disposing of it) upon the death of relatives. So a person who’s 45, who inherits a fully paid up house with another sibling, will be looking at the potential to purchase 4-5 houses (at 20% equity each), and increase the amount of future capital gain / rental income (once the mortgage is paid off). This will have two effects:

1) You’ll end up further removing supply from the housing market and increasing the supply in the rental market (doesn’t seem likely that will be good for the ‘first time buyers’ it’s supposed to be helping); and
2) You’ll end up with a gradual build up of larger family ‘estates’, as people will simply inherit property and hold it, rather than dispose of it. There will always be children who ‘want it now’, but if my sister and I inherit our mothers property, under this proposal, we could easily leverage it and end up with 2-3 properties each, and end up paying no tax (rather than disposing of it and doing whatever we wish with the subsequent cash).

I really am not sure this is what Labour intends (unless the end game is to say we need an inheritance tax to ‘rectify’ the ‘injustice’ of building up large housing estate families).

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