Capital Gains Tax: potential merit, but we need details

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It appears the odds are slightly in favour of a Labour-led government within a few short weeks. On the tax front, this means uncertainty in the short-term and some potentially major changes further out.

The lack of detail is somewhat concerning, given Labour have told us very little about how they plan to implement the “vision” they insist they’ve been so clear about.

Businesses despise uncertainty, and the way they respond to it is simple. Some investment, hiring and spending decisions are put on ice until they know what they’re dealing with.

In the case of the Labour tax plan, this could be some time away. I doubt the working group will convene over summer, so presumably this mysterious committee is a 2018 story.

After that they’ll report back to the government, who will take time deciding which recommendations to adopt, ignore and fine-tune. That’s a great recipe for slowing the economy in the interim, which will make life harder for employees as well as bosses.

At the crux of it all is the much discussed capital gains tax (CGT). Actually it’s more speculation, as you can’t really discuss something when you don’t know exactly what’s being proposed.

For first-home buyers, I doubt it’ll be a game changer. Other countries with a CGT still have unaffordability problems, so a CGT alone certainly won’t solve ours.

That’s no surprise, as neither Labour or National genuinely wants house prices to fall. They champion affordability, yet when asked directly if they want to see lower house prices, they squirm and deflect.

Still, I see what Labour are trying to achieve and I’m on board, in principle at least. They want to make investing in housing much less of a sure thing, in the hope price rises from here are much more modest.

What worries me are the unintended consequences of a broad-based CGT that applies to everything other than the family home. Investors in productive assets like businesses and shares could end up similarly punished, and that makes no sense.

We want those investments to be more attractive and tax efficient than property. That way, money that would’ve simply gone into more houses might find its way into investments that create wealth and boost productivity.

The one-eyed property investment brigade will disagree, but the difference is shares and businesses encourage innovation and create jobs. Houses don’t. Overvalued shares don’t do people out of a place to live either.

Labour could be on the right track, but they’re executing badly if they want to get the business community over the line with this one.

Changes that curtail the vast amount of money that goes into unproductive housing investment are commendable, but not if they come at the expense of businesses and those who provide the capital these firms require to succeed.

A poorly thought out CGT, designed by committee, where voters don’t get to see the fine print until it’s too late, will benefit nobody. Such significant tax reform is too important for “just trust us” to be good enough.

This article was published in The New Zealand Herald on Tuesday 12 September 2017 under the headline: ‘Mark Lister: Why a capital gains tax won’t be a game changer for first home buyers’.


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Mark Lister is Head of Private Wealth Research at Craigs Investment Partners, his Adviser Disclosure Statement is available on request and free of charge under his profile on craigsip.com. For personalised investment advice please contact a Craigs Investment Partners Investment Adviser or phone 0800 272 442. This column is general in nature and should not be regarded as specific investment advice.

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