Issues around capital gains tax
A tax conference entitled “Key issues in the design of capital gains regimes” was held on 18 July 2014 at the University of Auckland Business School. This conference was jointly organised by the University of Auckland’s Business School (represented by Professor Craig Elliffe) and the Law School (represented by Professor Michael Littlewood).
The conference was designed to focus on the issue of how a 21st century capital gains tax (CGT) would look – rather than on the question of whether we should have one or not. This feature of the conference was designed to reduce some of the politics in this debate and instead to learn from overseas jurisdictions.
Given that the idea was not to promote the introduction of CGT but merely to help inform the debate, there was great interest in the problem areas that overseas jurisdictions had grappled with, as well as areas that worked well. After all, those opposed to the introduction of CGT perhaps have an even greater interest in the detail than those in favour.
But whatever else might be said either for or against it, the introduction of CGT would entail significant change for lawyers, accountants, valuers, businesspeople and investors generally; and the transition period – from the government’s announcement of the tax until several years after its introduction – would be likely to be particularly challenging. The conference therefore also attempted to give some indication as to the practical implications of CGT.
It is, of course, impossible to summarise the conclusions reached by the various speakers, but readers may be interested in some of the more significant lines of thinking. For example, some key issues involved:
- Whether the CGT should be integrated as part of the income tax provisions or a separate stand-alone tax. Most of the jurisdictions concerned integrated CGT as part of their income tax. A notable exception was the United Kingdom which had a separate assessment Act, leading to unnecessary (and inconsistent) repetition in respect of some statutory provisions.
- How to introduce such a tax (in respect of all assets acquired after the implementation date or in respect of gains occurring after implementation on any asset held at the implementation date). There are obvious advantages and disadvantages to this. One can argue that only an asset acquired after the introduction of the regime should be caught by it but there seemed to be, based on Australian experience, quite significant problems associated with this, including a pronounced “lock-in effect” and the need for complex legislation to deem some sort of acquisition event in respect of assets held in companies or trusts (the sale of the company could otherwise preserve the exempt from CGT status of an asset for an extremely long period of time).
- Whether the rate of tax on capital gains should be similar to the rate of tax on income or lower. In the history of both the United States and the United Kingdom, the rates for income tax and CGT have aligned for periods of time. Views expressed by experts in these jurisdictions suggested that this was an ideal situation (in the case of the US it was possible to reduce the highest marginal income tax as an outcome). The advantage of this is a reduction in all the common problem areas in CGT, particularly those associated with capital/income boundary issues.
- Whether capital losses should be available to offset against ordinary income or only capital income. Almost universally, CGT regimes do not allow the offset of capital losses against ordinary income because of the ability to “cherry-pick” these losses by voluntarily crystallising them whilst deferring the realisation of gains.
- Whether we should tax non-residents on a less comprehensive basis than residents. Many jurisdictions around the world do not impose CGT on the gains associated through the sale of personal property. The most important category of such personal property is shares in companies. This exclusion normally does not apply to companies that derive their value substantially from real property, preventing the strategy of using a company to own real property and selling the shares rather than the real property itself. One of the important reasons for this is the outcome predicated in many double taxation agreements. Some jurisdictions do not impose CGT on non-residents at all (like the UK, where this is largely for historical reasons). This has led to quite a major problem in foreign investment in housing (there are proposals currently being considered by the UK government to reform this) and the problem of residents becoming non-resident prior to crystallising their capital gains.
- What exemptions should be available (personal residence and rollover relief for businesses/farms), how should they be structured (should they be unlimited or capped at a dollar value) and when should they be available (in respect of each transaction or upon death)? Once again, different countries have approached this in hugely different ways. One interesting solution on private housing in the US and South Africa is to offer a threshold limit on the gain on personal property (meaning that a personal home is subject to CGT, but only to the extent it exceeds this threshold). Presumably, apart from generating revenue, the intention is to reduce the so-called “mansion effect”, which has led to people in countries like Australia putting all of their resources into a single family home and consequential dramatic property price increases.
To shed light on these questions, the conference was lucky to attract to Auckland distinguished visitors from countries whose CGT approaches might be viewed as helpful models, including Professor Reuven Avi-Yonah (Irwin I Cohn Professor of Law at the University of Michigan, brought to Auckland as a Hood Fellow), Philip Baker QC (one of the UK’s most eminent tax scholars, brought to Auckland under the University’s Distinguished Visitor Programme), Professor David Duff (of the University of British Columbia, brought to Auckland as a New Zealand Law Foundation Visitor), Professor Ann O’Connell (of Melbourne University) and Professor Jennifer Roeleveld (of the University of Cape Town).
The speakers also included a number of New Zealanders, namely Dr David White (of Victoria University), Shelley Griffith (Otago), Professor Craig Elliffe (University of Auckland), Peter Vial (Chartered Accountants Australia and New Zealand), Shaun Connolly (Russell McVeagh) and Aaron Quintal (Ernst & Young).
The conference was very well attended with 130 people present, representing all the major legal and accounting firms as well as other business people and advisors. Academics from around the country also attended. The papers will be available soon in a book to be published by Edward Elgar in the United Kingdom – this will be a helpful reference tool in New Zealand and more widely in other jurisdictions. In addition, a special edition of the New Zealand Journal of Taxation Law and Policy which will focus on particular New Zealand issues will be issued in March 2015.
New Zealand is a small and open economy. The experience of overseas jurisdictions in dealing with difficult and significant tax and economic matters can be extremely helpful to New Zealand policymakers in their attempt to create the best settings for a vibrant and successful New Zealand society.
The organisers were grateful to their own institution (the University of Auckland), the Lion Foundation, the New Zealand Institute of Chartered Accountants Australia and New Zealand, Russell McVeagh and Ernst & Young for helping raise the level of debate on an issue of national importance.