‘Surprise card’ (really?) could help sell CGT

An obvious possible aim with Michael Cullen’s Capital Gains Tax proposals, especially the very high tax rate, was that the Government could adopt a watered down version and sell that as a good thing – this is an old political trick, lead with something terrible and then claim that a half as terrible policy was somehow great.

There are hints that this is indeed a deliberate approach taken, with a more moderate CGT being quietly circulated.

Tom Pullar-Strecker (Stuff): Surprise card could help Labour sell a capital gains tax ‘light’

The Government has a trump card that could make a capital gains tax less unpopular and far harder for any future National government to reverse.

Tax Working Group chairman Sir Michael Cullen has proposed making a tax on capital gains “tax neutral” by handing back the $8.3 billion in revenue it is expected to generate over five years, mostly through income tax cuts and improved KiwiSaver incentives.

But a well-placed source believes the Government is likely to propose slashing the rate of a capital gains tax (CGT) and introducing significant exemptions to get the tax in place, while still offering all the major “carrots” and keeping the change tax-neutral.

That could be achieved simply by declaring that the CGT should be “tax neutral” over a longer period than five years, say 10 years.

A ‘well-placed source’ sounds suspiciously lie a leak strategy is being used.

The Government asked the Tax Working Group (TWG) to come up with tax packages that were tax neutral.

But Finance Minister Grant Robertson confirmed it was the working group that determined that should be over five years, with “no ministerial direction” on the timeframe.

Robertson would not rule out changing the time period, saying only that the Government was “carefully considering the report and all of its recommendations”.

The source suggested that if the Government did shift the goal posts set by the working group it could halve the maximum tax on capital gains from the currently proposed top income tax rate of 33 per cent, to 16 or 17 per cent.

It could also decide “not to touch KiwiSaver” by exempting KiwiSaver funds from paying tax on Australian and New Zealand shares, exclude more “lifestyle blocks” from a CGT, and introduce a threshold under which small business owners would not pay tax on their capital gains.

Together that would address the “four main concerns” with a CGT, including one “which is gaining traction” that it would be unfair to tax capital gains at 33 per cent while not adjusting them for inflation, the source said.

This makes it sound like Robertson may be the ‘well-placed source’. Which wouldn’t be surprising.

It also wouldn’t be surprising if Cullen and Robertson had either planned a strategy of proposing a heavy handed CGT and then switching to a CGT-lite from the start, or have sugested the lite version in response to the widespread negative reaction to the version proposed by the Tax Working Group.

Lengthening the period over which a CGT would be tax neutral could also make it less appealing for any future National government to quickly reverse the tax changes, since many of the benefits from the overall changes would then be more heavily “front loaded”, the source observed.

Chris Wales, a former leader of PwC’s global tax team who has advised prime ministers and finance ministers in several countries, including Britain’s Tony Blair, said the approach could be “wise, sensible and democratic”.

“At a simplistic level, people will, of course, be relieved that the potential breadth of a CGT has been reduced and that the rate is nowhere near the 33 per cent that the TWG has put forward,” Wales said, speaking from Kiev.

The Government could argue it had respected the outcome of the group’s deliberations but listened to the people as well, he said.

It sounds like ‘the people’ are being played here.

There’s not much of a surprise in that.