Tax will be a big topic of conversation in New Zealand in the next few months.
Not grumbling about tax, everyone likes to do that from time to time, but big conversations about how our tax system should be structured, and the best way to design particular taxes.
As a tax expert, I am excited that we are getting ready for this very serious conversation. It will be prompted by the release of the Tax Working Group’s final report, due to be released to the public on February 21, 2019.
One likely topic that will be covered in the report is tax on capital income.
There’s likely to be several aspects to the discussion: whether or not our current tax system is fair, whether or not capital income ought to be included in income tax, and exactly how the tax, if any, ought to be designed.
I think that the fairness issue is very important.
Right now, if you earn money quickly through wages or rents or business profits, you pay tax on every single penny of it.
But if you earn money slowly by holding onto an investment property in order to get capital gains, you don’t pay any tax at all. At first glance, that seems unfair.
We already include big chunks of capital income in our income tax system.
Anyone who buys an asset with the intention of resale ought to be declaring any gains on sale as income, and paying tax accordingly.
We see this happen most often with people who buy and sell shares, and people who buy and sell, or develop and sell, real estate.
For example, under our current law, if you subdivide your residential property and sell off the new section, you are required to pay income tax on any profit you make.
If you are a property developer, then that is a business, and profits made by the business are liable for income tax. If you have a pattern of buying and selling houses, then any profits made are also subject to income tax.
Details before Capital Income Tax
There’s a lot of detail to be worked through for any Capital Income Tax.
For example, one issue is whether or not the sale of a business should be subject to the tax.
And if it is, should there be a discount, or a one-off tax free transaction, given that many people build up their small business intending to sell it when they retire.
The business is in effect their retirement savings.
So, should we be allowing at least some of those ‘Savings’ to be tax free, given that we have big tax discounts on KiwiSaver savings? What should we do if someone inherits property?
Should we allow them a grace period to sell the property tax free, given that they didn’t intend to acquire it, and other inheritances are not taxed? And if we do allow a grace period, how long should it be?
This is only a tiny hint of the details that we will need to work through in our big nationwide conversation about tax.
My hope is that we can have a good discussion about it, based on fairness, and based on the idea of getting it right.
I am looking forward to it.
Dr Deborah Russell is elected Member of Parliament on behalf of Labour Party from New Lynn, Auckland. She is the Chairperson of the Parliamentary Select Committee on Environment and Member of the Finance & Expenditure Committee.