Identifying the factors affecting tax experts’ perceptions of the desirability of adopting a
comprehensive capital gains tax in New Zealand
Alvin Cheng1, Howard Davey2 and Jim Ryan2
This study gathered tax experts’ perceptions of the desirability of adopting a comprehensive
capital gains tax (CGT) in New Zealand. It identifies the main reasons given by tax experts
for favouring or opposing a comprehensive CGT. The study revealed there were 23
factors/issues related to tax experts’ attitudes towards a CGT. These included taxation factors
(such as current tax rate structure, tax burden) and non taxation factors (such as social and
political factors).
1
Faculty of Creative Industries and Business, Unitec Institute of Technology
Email: acheng@unitec.ac.nz
2
Waikato Management School, University of Waikato
1
Introduction
An overwhelming majority of OECD countries have some form of comprehensive capital
gains tax (CGT) regime. Drawing from experiences in different countries, the OECD
concluded that the advantages of a CGT generally outweighed its disadvantages (OECD,
2006). The benefits of a CGT include: (i) securing tax revenues, (ii) improving efficiency, (iii)
strengthening horizontal and vertical equity, (iv) encouraging savings and investment, and (v)
simplifying the tax system.
Burman and White (2003) describe the New Zealand tax system as unsystematic and “ad hoc”.
It remains one of only three OECD countries that do not have a general CGT (Labour Party,
2011). New Zealand treats only some capital gains as taxable income. For example, taxable
income includes capital gains from financial arrangements and foreign investment funds, but
it excludes gains from the sale of land on capital account. This is generally not the case in
other OECD countries. As a result, New Zealand has a hybrid tax system (or “New Zealand
style CGT system”) which taxes not only ordinary income but also certain selected capital
gains.
This study seeks to provide an understanding of why there is no comprehensive CGT in New
Zealand. It gathers opinions from tax experts on why they favour (or oppose) a
comprehensive CGT. The opinions were gathered from 30 New Zealand tax experts who were
asked to explore the key issues, aspects, and attributes concerning CGT in New Zealand.
2
Development of Capital Gains Taxation in New Zealand
The discussion on whether or not New Zealand should have a CGT has continued for more
than 40 years. Income tax legislation in New Zealand has not generally included taxing profits
on gains of a capital nature. However, exceptions exist relating to land sales, financial
arrangements (from 1986), share sales in certain situations, and sale of site goodwill in lease
situations. The main arguments for a CGT relate to equity, efficiency and combating tax
avoidance. An equitable tax system should treat equally those who have equal capacity to pay
(Ross Committee, 1967). Proponents of a CGT argue that it is difficult to justify taxing people
differently who earn the same amount of money, e.g., one in the form of salary and another
from a capital gain on the sale of an asset. With no CGT only salary income is taxed in full
and capital gains are tax exempt. It is also economically inefficient to exempt capital gains as
it encourages resources to be diverted into activities which produce lower pre-tax returns (e.g.
dividends) in exchange for higher long term capital growth (e.g. shares) (McLeod, 2001). The
exemption of capital gains can also lead to tax avoidance schemes where taxpayers
(particularly farmers) take advantage of the tax system by converting taxable income to tax
free capital gains (Goldsmith, 2008, p. 249).
An important aspect for not imposing a CGT is the political aspect. The ambivalence of both
the major political parties in New Zealand is best illustrated in David Lange’s comment in
1985 during his time as Prime minister. He stated “It is the sort of thing that you put in place
if you are sure you are going to lose the election and be in opposition for the next 20 years”
(“Editorial: Capital gains”, 1989, p.7).
3
During the 1980’s there was high inflation and a renewed focus was placed on investigating
the imposition of a CGT. Moreover, in 1985 a CGT was introduced in Australia. A number of
government reports investigated the option of a CGT for New Zealand. The McCaw report
(1982) stated that there would be substantial complexity and little revenue generated by a
CGT. It recommended that a CGT should not be included in New Zealand’s tax base. On the
other hand, other committees such as the Brash Committee, the Royal Commission on Social
Policy, and the Valabh Committee released their reports which supported the introduction of a
CGT based mainly on tax equity, efficiency and combating tax avoidance (Brash Committee,
1987; Royal Commission on Social Policy, 1988; New Zealand Government 1988).
New Zealand experienced rapid growth in housing price during the period from 1990 to 2005
(OECD, 2007, p.63). This rapid growth put national home affordability in New Zealand in the
“severely unaffordable” category according to international standards (Cox & Pavletich, 2006,
p.8). One of the means suggested to deflate the overheated housing market and to make
housing more affordable was to implement a CGT on property transactions. Despite the
significance of the housing problems, there was little debate on taxing capital gains in the
1990s. But the first decade of the twenty first century saw more government policy
recommendations directed toward debating whether a CGT should be implemented. For
example, a government review was undertaken in 2001 by the Tax Review Committee
(McLeod Committee, 2001). They acknowledged the existence of problems due to the lack of
a comprehensive CGT but concluded that a general CGT was not worth pursuing because of
the complexity and compliance problems that would be involved. Instead, they suggested
incremental policy changes to eliminate the flaws in the system.
4
In 2010 the report by the Victoria University of Wellington Tax Working Group, titled “A
Tax System for New Zealand’s Future”, identified several options for broadening the tax base
and raising more tax revenue for the government. The Group noted that a comprehensive,
accrual-based CGT would generate $9 billion in terms of the 2009/2010 price level. The
amount of revenue would decrease to approximately $4.5 billion if capital gains were
excluded on the disposal of owner-occupied housing (Tax Working Group, 2010). Given
these figures, another strong argument for the introduction of a CGT in New Zealand would
be the potential revenue it can generate, depending on the design of the tax. However, the
group cautioned that the introduction of a CGT could pose “practical challenges and
efficiency implications” (Tax Working Group, 2010, p.66). In particular, it expressed
concerns about the complexity of a CGT, the CGT treatment of owner-occupied housing, and
the lock-in effects of a realisation-based CGT. As such, the group finally concluded that it
would not support the introduction of a CGT.
Research Method
This study seeks to determine what the important factors are that impact the decision as to
whether a CGT should be implemented in New Zealand. It represents the third phase of a
larger research project. This included interviews of tax experts to identify the major factors
influencing the perceived desirability of implementing a CGT. It utilised individual face-toface interviews using a standardised semi-structured approach. All questions in the interviews
were designed to be open-ended which allowed the participants to express their thoughts and
feelings in detail.
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A review panel was first convened to help determine the nature and form of the actual
interview questions. A semi-structured interview guide was built based on five open-ended
questions about the New Zealand tax system. The interviewees were asked to suggest
improvements in the tax system to mitigate any identified anomalies. They were also asked to
identify the central or primary considerations they factored into the policy decision on
whether (and how) to tax comprehensive capital gains in New Zealand. The interviews lasted
from one hour to an hour and half and most were tape recorded.In total, there were 33
interviewees (consisting of 20 tax practitioners and 13 tax teachers). The tax experts were
drawn from across the north and south islands of New Zealand. All interviews were
conducted between 7 December 2004 and 28 April 2006.
A coding method was used to analyse the interview data. Computer software – Nvivo was
used to develop categories of coding and analysis. Initially, there were 93 nodes (or codes) in
respect to the tax experts’ perceptions about the current tax environment and the design
features of a CGT model. At the end, these codes were merged into several themes.
Research Results
The result found that the majority of interviewees (n = 19) opposed the introduction of CGT,
13 supported the implementation of the tax and one was neutral. The analysis also found that
tax experts from small business tended to oppose the tax (mean score of -1.09), tax teachers
were mildly negative (mean score -0.23), and those practitioners from medium-sized firms
were in favour of the tax (mean 1.5). Tax experts from large corporations tended to have
neutral opinion (mean -0.2).
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A careful analysis of the 33 tax experts’ opinions revealed that there are 23 basic underlying
factors influencing the CGT adoption decision. These can further be grouped into five subcategories relating to (a) tax environment, (b) CGT structure, (c) tax evaluation, (d) social and
political factors, and (e) international taxation factors. The 23 factors are ranked according to
how many of the tax experts mentioned the item. The top three factors - (which mentioned by
all 33 participants) - are high tax burden, negative political implications, and importance of
private residence. These are followed by the factors of equity and the complexity of the CGT
computation. Details are shown in Table 1. The top five factors are highlighted in bold.
Table 1 Ranking of Factors Influencing CGT Adoption
Category
Factor
Frequency
(no. of tax
experts)
Ranking
High tax burden
33
1
Gap between theory and
practice
Mistrust of IRD
15
15
12
16
Black-hole expenditure- nondeductibility of capital
expenditure
Complexity of the CGT
computation
Inflation and indexation
10
19
30
5
29
6
CGT additional record
keeping
CGT errors and tax penalty
22
9
16
14
Issues for preferential CGT
tax rate
Issues for accrual based CGT
8
20
5
22
Equity
31
4
Simplicity
27
7
Revenue consideration
22
9
Efficiency and neutrality
21
11
Taxation variables
Tax
Environment
CGT
Structure
Evaluation
7
Category
Factor
Frequency
(no. of tax
experts)
Ranking
Negative political
implications
Importance of private
residence
Stopping property speculation
33
1
33
1
26
8
Distortion in investment
behaviour
Increase compliance for small
businesses
Hindering savings for
retirements
Tax harmonization
19
12
19
12
12
16
11
18
Tax competition
8
21
OECD’s recommendations
4
23
External variables
Social
and political
International
taxation
The main theme of the clustering is clear: the decision for choosing the best way to tax capital
gains is significantly affected by non CGT structural factors i.e., the high tax burden in the
current tax environment, and social and political factors.
High Tax Burden
One major factor that hinders the introduction of a CGT in New Zealand is the high tax
burden in the current environment. The tax experts generally considered New Zealand’s tax
burden to be “high”. In fact, all of the tax experts perceived this as one of the major problems
in the current tax system. Some of them even suspected that “the government was profiting
from fiscal mismanagement by collecting excessive revenue” since the income thresholds for
higher marginal tax rates had not been indexed for inflation and more people were pushed
into the higher tax brackets, than initially intended.
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About two thirds of the tax experts (six tax teachers and 18 tax practitioners) expressed the
opinion that the high tax burden was due to the structure of tax rates and the system of social
assistance and abatements. In their view the tax system together with the system of social
assistance and abatements creates a very high effective marginal tax rate which has, in New
Zealand, resulted in a high tax burden and a poverty trap. It is important to note that the
effective marginal tax rate is different from the three aforesaid marginal tax rates. It is a
marginal tax rate at which the individual taxpayer pays after considering the effect of having
his/her receipts of certain social assistance and rebates being phased out.
Social and Political Factors: importance of private residence and negative political
implications
The importance of private residence and the CGT’s negative political implications are two
critical influences weighing against the adoption of a CGT. Strong opposition is expressed by
the experts against a CGT if it is to be imposed on capital gains derived from a principal
residence. An exemption for the private home was the most cited subject in the interviews
related to social and political factors.
Moreover, at the time of research, all tax experts acknowledged that adopting a CGT had
negative political implications and that the topic was therefore avoided by most politicians in
New Zealand. They often referred to former Finance Minister Michael Cullen’s description of
a CGT as “political suicide” (New Zealand Press Association, 2000, p. 1). The general view
was that any political party introducing a CGT would lose the subsequent election. Most of
the tax experts considered that imposing a CGT would be “a vote killer” for any political
party. Due to its damaging political effect, the tax experts simply gave up on its
implementation and did not invest any effort into, or did not even begin, considering the
design features of a CGT.
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Other Major Factors
Equity
Equity evaluation is another critical factor. The tax experts often cited “equity” as the most
important tax principle from amongst the three fundamental tax concepts, i.e., equity,
efficiency and simplicity. However, their interpretation of “equity” sometimes differed from
the one adopted in tax research. The experts provided many versions of “equity” in the
interviews. For example, from the practitioners’ perspective, “fairness” often means “reward
for risk-taking”. They considered a “fair” tax system as one that did not penalise those who
earned more. This interpretation runs contrary to the traditional tax principle of horizontal
equity and vertical equity.
In the study, it was found that the concept of “equity” was very subjective. Some tax experts
considered that justice and equity were the reasons for introducing a comprehensive CGT,
while others opposed the tax because they considered it to be inequitable. These varying
views had explained why the use of the same factor might often lead to a different decision.
Complex CGT Computation
Another major factor considered by the tax experts is the complexity of the computation of
CGT. The experts opposed CGT because of its complexity and thought the tax would
generate more problems than it would solve.
A tax export gave a fair comment about the complexity problem of a CGT. He stated: “CGT
would provide an opportunity to totally revamp tax and GST systems . . . political reality is
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that it would be a hybrid system with exemptions, making it complex and creating compliance
issues”.
Other factors
In addition to the top five factors, there were other important factors that were provided by the
tax experts in the interviews. Other than equity, evaluation factors such as revenue
consideration, simplicity, efficiency, and neutrality also played a significant role in the tax
experts’ CGT adoption decision. The majority of the tax experts often supported a simple and
neutral tax system which provided a “level playing field”. In most cases, the tax experts were
unsure of the effects of a CGT in practice.
Conclusion
The result of the study revealed that there are factors other than those cited in the New
Zealand Government committee reports that impact the decision as to whether a CGT
should be implemented in New Zealand. These factors included taxation factors (such
as current tax rate structure, tax burden) and non taxation factors (such as social and
political factors). Striking an appropriate balance from amongst all these CGT adoption
factors is important when considering the policy formulation of a CGT.
11
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