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Dunne: A tough tax balancing act ahead

The Government faces both logistical and political challenges on the road to a capital gains tax, and has already tripped up by being too defensive, writes former Minister Peter Dunne.

Since the release of the Tax Working Group’s report there has been a constant stream of issues raised about the complications associated with the proposed capital gains tax in whatever form the Government may decide to advance.

The latest, but by no means the last, is the prospect of mass valuations of the nearly 2 million residential properties in New Zealand to establish their base value as at April 2021 (the assumed implementation date) for any future capital gains tax calculation they may become subject to during their life span.

I was Minister of Revenue for just under nine years under successive Labour and National-led governments. In that time I oversaw the implementation of a number of major tax changes from personal and corporate tax cuts, changes to student loan repayments, the introduction of Kiwisaver, and Working for Families tax credits, and major changes to the Child Support Scheme.

Each of these required significant changes to the administration and structure of the way the tax system operated, which had to be in place before the policy itself could be implemented.

Moreover, in each case, Inland Revenue had to have systems developed to cope with not only the new policies, but also the range of unexpected issues that would arise with them, and the circumstances of each individual taxpayer.

Now, for many people, including politicians, the operation and administration of the tax system causes their eyes to quickly glaze over, but the reality is that tax policy can only achieve its objectives if it has been properly implemented and administered. And it is inherently complicated, with a great risk of unintended loopholes being created or exploited which can quickly detract from the original policy intent.

But as well as getting the detail right, a government making big tax changes also has to sell them to an often sceptical public. Tax issues of themselves seldom win votes at election time, but they can frequently lose governments votes if they are not promoted in a wider context than just being a tax reform.

The current Government will have to be cognisant of both these factors, whatever it decides to do on the capital gains issue. Managing both the politics and the process of any change will be extremely challenging.

A hard sell

Take the politics first. It is one thing to make the case for change as the Tax Working Group arguably has, but it something else altogether to sell that change to the electorate.

When GST was introduced in 1986, its selling point was not that there was going to be a (then) 10 percent tax on all goods and services, but that personal taxes were to be slashed (with the top rate being brought down in two stages from 66 cents in the dollar to 33 cents with consequential reductions in other rates) and most other sales taxes abolished. People could see the cost of household appliances falling sharply as a consequence, making them more affordable for the average person.

Similarly, when the Key Government increased GST to 15 percent it marketed the change as a tax switch because of the accompanying more than compensatory cuts to the lowest tax rates.

Both moves were accompanied by the obligatory but vague references to simplifying the tax system and making it fairer, but they were really secondary considerations to the bolder emphasis on personal tax cuts.

In the case of the proposed capital gains tax, the selling point is a little more difficult. The Government will certainly run the fairness argument which will resonate with many of its core voters, but its compensatory offering of modest tax reductions of up to $15 a week pales into almost insignificance alongside the Key and earlier Labour Government tax switch propositions. Indeed, it is not much different from the additional amount National’s plan to index tax rates could deliver, without all the noise and distraction associated with the introduction of a capital gains tax.  

Already, the Government’s narrative is too defensive, as the Prime Minister’s press conference remarks this week demonstrated.

To some extent, they were, of course, a holding operation because she does not yet know what scale of reform New Zealand First will permit her to progress, and that is understandable. But focusing, as an opening gambit, her argument on trying to play down fears of a capital gains tax, even at this early stage, does not give much confidence the argument can be sustained successfully over the next two years between now and April 2021.  

Given the scale of change any move to a capital gains tax will impose the Government will need to develop a more far compelling case than it has so far to win over its doubters.

A challenging process

And that is where the process of implementation becomes critically important. Generally speaking, Inland Revenue requires a minimum of six months to gear up its systems for a major tax change of this type. That means the legislation establishing the capital gains tax regime will need to have been passed through Parliament by September/October next year at the latest. As the House will have almost certainly been dissolved for the 2020 General Election by then, that will not be a difficulty.

What will be more relevant is the process from here. Assuming the Government meets its current deadline of announcing its plans by April 21 – a date primarily contingent on the time it takes to negotiate an agreement with New Zealand First – the process of drafting the required legislation and getting it through Parliament can begin.

It is possible, with the Budget this year not due until the slightly later time of the end of May, that the relevant legislation could be introduced as part of the usual post-Budget package, although the Government may choose not to have the emphasis it will wish on its “wellbeing” Budget overshadowed by the capital gains tax legislation. In which case, the legislation may be held over until the House meets in June.  (It is also possible but probably highly unlikely that the Government will decide to rush the legislation through all its stages under Urgency after the Budget, but that would certainly obliterate any positive emphasis on the “wellbeing” Budget, as well as being a most retrograde step from a legislative point of view.)

Once the legislation has been introduced it will most likely be referred to a select committee for the hearing of public submissions. This could take up to six months, with an almost weekly opportunity for the opponents of the capital gains tax to rail against the government, submission after submission.

Whatever the submissions, the select committee will certainly make many, mostly technical, amendments, meaning that the legislation would not come back to Parliament for its remaining stages until the end of the year, or, at a worst case, early next year.

From the Government’s perspective, the aim will be to pass the legislation before Parliament rises for this year’s Christmas break, but that could be thwarted by either the length of the select committee process or the intransigence in the House of the Opposition, or both.

So the Government will be treading a fine line – wanting to steadily progress its legislation, while at the same time not being seen as wanting to truncate the select committee process, or wider public debate. It will be a difficult balance to achieve, but the last thing the Government will be wanting is for the legislation to still be before the House and to be heading the Order Paper when it comes back next February for election year.       

At the 2020 election, the capital gains tax will be judged far less on what it theoretically might achieve over coming years. If the journey to that point has been seen as divisive and chaotic, with there still being many unanswered questions, or a lack of clear and precise information about its impact, the Government will pay the price. If, on the other hand, everything looks like smoothness and light, the Government will be able to breathe a large sigh of relief.

The next few months will indeed be fascinating.

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