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5872 posts

Uber Geek

#2184594 21-Feb-2019 08:12

Bluntj:

GV27:

Tax Working Group Report due Today.

Unsure what to expect but as has been point out on Twitter; this will not affect the baby boomers in the slightest, however it will likely give them lower personal tax rates on their retirement incomes.

Coalition will probably treat it with kid gloves as I am sure Winston wont like it at all. In an MMP environment I find it difficult to see a CGT becoming a reality.

I hope pragmatism wins out and we get something a bit more surgical like a Stamp Duty. Still allows for targeting property, doesn't catch out Kiwisaver and business disposals and doesn't require assets to keep rising in prices to bring in cash. Plus you can variable-rate it depending on who is buying e.g. 0% or -% for FHBS in lieu of a subsidy, etc.

https://www.iselect.com.au/home-loans/stamp-duty/nsw/

I really think this is a far better solution than a CGT - if it's about addressing housing investment, and not about punishing people for having stuff. This is Sir Michael Cullen's baby, after all.

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Aredwood

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Uber Geek

#2184706 21-Feb-2019 10:27

GV27:
Tax Working Group Report due Today.

Unsure what to expect but as has been point out on Twitter; this will not affect the baby boomers in the slightest, however it will likely give them lower personal tax rates on their retirement incomes.

Interesting part, will be if the report tries to analyze how they think people will change their behavior in response to the tax.

Since the CGT is a tax on selling things. The easiest way to avoid paying it, is to simply not sell anything. Property prices might actually increase. As less houses available for sale, will mean that the owners of those houses will demand higher prices.

Supposedly the tax will also be charged at normal income tax rates. Which will give lots of scope for creative means to reduce the amount of tax that you would need to pay.

And how will they treat related party sales? EG, someone wants to sell a house. Instead of initially selling it on the open market. They instead sell it to their wife/ kid /grandmother etc. For a cheap price. Someone who is not working for whatever reason. That person then sells the house for full price. Because the second person is not receiving any other income, less tax is paid due to the progressive nature of the income tax rates.

And hidden side deals combined with related party sales. EG someone sells their house for cheap. And the buyer, in exchange for getting a cheap price. Buys the seller a brand new car.

Rich people will go a step further, and do things like buy the houses in their kids names. And avoid the related party sales completely. Just wait for an article on Stuff, from a tenant complaining that their landlord is a newborn baby.

And what about mortgages? EG a million dollar house has a 500K mortgage on it. Instead of selling the house for a million, then repaying the mortgage. Sell the house for 500K, and the buyer takes over liability for repaying the mortgage.

networkn

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#2184708 21-Feb-2019 10:33

I am not super unhappy with a CGT, however, how it's implemented will mean a lot about how I support it.

If my primary home is excluded, and my other primary assets are as well, then I guess I don't really mind.

Will a CGT mean that if I take a loss on an asset, I can claim BACK tax? What about how it's valued? Will I need to pay and get an valuation at the time of the tax being implemented? Will I be able to claim tax on improvements I make to improve the value of my home etc?

Aredwood

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Uber Geek

#2184710 21-Feb-2019 10:39

And that predicted wave of baby boomers and retirees selling their homes will get delayed. As they will pay less tax, if they only sell when they are too old to continue working. Going to be lots more people living by themselves in large homes. Because if they sell and then buy a smaller home, they would have to pay the CGT.

And even subdivisions would become a means of reducing tax. Own a large property? Subdivide it or split it into unit titles. Sell 1 of them per year. Less tax paid. Government would also like that method. As the number of new houses would increase (only on paper, but that is good enough for claiming that they are providing more new homes).

networkn

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#2184714 21-Feb-2019 10:45

Aredwood: And that predicted wave of baby boomers and retirees selling their homes will get delayed. As they will pay less tax, if they only sell when they are too old to continue working. Going to be lots more people living by themselves in large homes. Because if they sell and then buy a smaller home, they would have to pay the CGT.

And even subdivisions would become a means of reducing tax. Own a large property? Subdivide it or split it into unit titles. Sell 1 of them per year. Less tax paid. Government would also like that method. As the number of new houses would increase (only on paper, but that is good enough for claiming that they are providing more new homes).

This assumes the primary home is not exempt. All indications that I have seen seem to indicate it will be exempt, so potentially not an issue.

GV27

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Uber Geek

#2184717 21-Feb-2019 10:49

Reminder: Prices have to keep rising forever for a capital gains tax to result in a steady stream of income for the Government.

GV27

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#2184718 21-Feb-2019 10:53

Aredwood:

And how will they treat related party sales? EG, someone wants to sell a house. Instead of initially selling it on the open market. They instead sell it to their wife/ kid /grandmother etc. For a cheap price. Someone who is not working for whatever reason. That person then sells the house for full price. Because the second person is not receiving any other income, less tax is paid due to the progressive nature of the income tax rates.

And hidden side deals combined with related party sales. EG someone sells their house for cheap. And the buyer, in exchange for getting a cheap price. Buys the seller a brand new car.

The first example is already covered by associated persons rules.

The second example would be an enterprise specifically to defeat taxation, i.e. tax evasion.

This is already pretty well covered by existing tax practice and there's not a lot of new stuff in there.

Where it will get awkward will be business disposals, Kiwisaver and any potential exemptions; such as the 'fine art and collectables' clause which I've never understood the justification for.

Bluntj

550 posts

Ultimate Geek

#2184724 21-Feb-2019 11:00

From the assumptions I have read already the introduction of a CGT is not about a fairer distribution of the tax take, but rather a huge increase in taxation over time.

GV27

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#2184738 21-Feb-2019 11:13

The only suggested reforms are to the lowest bracket (one even increases the 17.5% rate to 21%!); no additional higher rates or staggering of the rates throughout the middle income levels.

This is exceedingly poor and disappointing to see. What a waste of an opportunity. As expected, this is a tax for having stuff, not meaningful tax reform.

Aredwood

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Uber Geek

#2184830 21-Feb-2019 13:57

GV27:
Aredwood:

And how will they treat related party sales? EG, someone wants to sell a house. Instead of initially selling it on the open market. They instead sell it to their wife/ kid /grandmother etc. For a cheap price. Someone who is not working for whatever reason. That person then sells the house for full price. Because the second person is not receiving any other income, less tax is paid due to the progressive nature of the income tax rates.

And hidden side deals combined with related party sales. EG someone sells their house for cheap. And the buyer, in exchange for getting a cheap price. Buys the seller a brand new car.

The first example is already covered by associated persons rules.

The second example would be an enterprise specifically to defeat taxation, i.e. tax evasion.

This is already pretty well covered by existing tax practice and there's not a lot of new stuff in there.

Where it will get awkward will be business disposals, Kiwisaver and any potential exemptions; such as the 'fine art and collectables' clause which I've never understood the justification for.

Not disagreeing with the points that you made. But actually enforcing them is another matter.

What if the house was renovated between the two sales, there was a long time between the first and second sale etc? Or in the side deal example, say the house sale is in NZ, the seller moves overseas, and the buyer purchases the car overseas? As there wont be any record of the side deal in NZ.

The IRD will both fail to catch lots of examples of tax avoidance. And some people will end up with large tax bills. When they did something that had the effect of avoiding tax. Or the IRD challenges an assumed low price for a related party sale. When that price was actually a fair price at the time. Either way, lots of compliance costs.

And what about forced sales? Land acquired by the council or government for public works, Marriage breakups, mortgagee sales (especially if the mortgagee is also a related party) And sales due to the owner needing the money for cancer treatment, or to pay for rest home care. There will be some negative headlines on Stuff. And the lawyers will make lots of money, As big parts of divorce case law will get litigated again.

The very rich, would have already done their related party sales. And other measures to reduce their future liability to pay the CGT. There is also the problem, in that the decision of whether someone has avoided the CGT, via related parties or other methods. Will often come down to the opinion of IRD enforcement officials. Or the courts. Which means the risk that low and middle income earners will be unfairly targeted. As they would be less likely to challenge the IRD.

And since the family home is exempt. There will be alot more uneconomic spending on people's own homes. And even more trouble with poor quality rentals. As landlords now have a big disincentive to improve their rentals. As improving them would mean having to pay more tax.

GV27

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Uber Geek

#2184870 21-Feb-2019 14:42

Aredwood:

And what about forced sales? Land acquired by the council or government for public works, Marriage breakups, mortgagee sales (especially if the mortgagee is also a related party) And sales due to the owner needing the money for cancer treatment, or to pay for rest home care. There will be some negative headlines on Stuff. And the lawyers will make lots of money, As big parts of divorce case law will get litigated again.

The very rich, would have already done their related party sales. And other measures to reduce their future liability to pay the CGT. There is also the problem, in that the decision of whether someone has avoided the CGT, via related parties or other methods. Will often come down to the opinion of IRD enforcement officials. Or the courts. Which means the risk that low and middle income earners will be unfairly targeted. As they would be less likely to challenge the IRD.

And since the family home is exempt. There will be alot more uneconomic spending on people's own homes. And even more trouble with poor quality rentals. As landlords now have a big disincentive to improve their rentals. As improving them would mean having to pay more tax.

The McMansion effect is real, and already a problem in NZ.

But as far as someone actually evading tax goes; there's sort of no way to to get around that. If someone wants to file a fraudulent return, they will. Short of having a tax department that kicks down doors like the Gestapo, you can't actually design a tax system that makes evasion impossible.

I need some time to go through the report in full once I get home.

Aredwood

3885 posts

Uber Geek

#2184954 21-Feb-2019 17:12

There would still be major issues around timing. As since not having a job, will mean paying less CGT if you sell a house while unemployed.

There will be an incentive to quit your job for a year, take a long holiday, and then use the tax savings to pay for some of the costs of that holiday.

Even more fun when the employee and employer are themselves related parties. Situation- Husband owns a company, his Wife owns the properties. So that if the Husband gets sued, the properties can't be touched. Often the wife would also be an employee of the Husbands company, which is itself often tax avoidance if she is getting paid in excess of the value she is providing to the company. A house needs to be sold, the wife just so happens to not be employed in the tax year that the house sale occurs in. And if they are smart, they will time it so the wife is on maternity leave, looking after a family member etc.

What about houses, where the owner is running a home office, Airbnb, has flatmates /boarders / home stay students. Needs to work overseas for a year or two, and rents the house out while overseas. If a repeat of the accidental landlords situation caused by the Christchurch earthquakes happens again. What point does the family home become liable for CGT?

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#2184972 21-Feb-2019 17:53

Aredwood: There would still be major issues around timing. As since not having a job, will mean paying less CGT if you sell a house while unemployed.

There will be an incentive to quit your job for a year, take a long holiday, and then use the tax savings to pay for some of the costs of that holiday.

Even more fun when the employee and employer are themselves related parties. Situation- Husband owns a company, his Wife owns the properties. So that if the Husband gets sued, the properties can't be touched. Often the wife would also be an employee of the Husbands company, which is itself often tax avoidance if she is getting paid in excess of the value she is providing to the company. A house needs to be sold, the wife just so happens to not be employed in the tax year that the house sale occurs in. And if they are smart, they will time it so the wife is on maternity leave, looking after a family member etc.

What about houses, where the owner is running a home office, Airbnb, has flatmates /boarders / home stay students. Needs to work overseas for a year or two, and rents the house out while overseas. If a repeat of the accidental landlords situation caused by the Christchurch earthquakes happens again. What point does the family home become liable for CGT?

You are very good at finding reasons why things don't work. How about coming up with some solutions so they would?

Plesse igmore amd axxept applogies in adbance fir anu typos

GV27

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Uber Geek

#2184991 21-Feb-2019 18:59

A few thoughts so far:

- Why are cars, fine art and other such trappings of a wealthy class exempt? Isn't this exactly the sort of stuff they should be capturing? How is that 'fair'?

- If you've ever had a flatmate or claimed a home office expense, you're on the hook. Double-whammy for business owners who now face a tax on the disposal of a business AND their family home.

- Collecting at the top marginal rate is further than any previous CGT proposal has gone (pre-election CGT were usually 15%). This is incredibly high.

- The report assumes constant growth in house prices at a rate of 3% a year, forever.

- The dissenting opinion in the 8 - 3 report was from a former Bell Gully partner, the BusinessNZ representative and a former commissioner of the IRD. I broadly agree with their comments and have to suggest their experience and authority to make such a report is perhaps a bit more comprehensive than other members of the group.

networkn

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#2185050 21-Feb-2019 20:54

Rikkitic:

You are very good at finding reasons why things don't work. How about coming up with some solutions so they would?

Heh, I find it curious you would suggest a thing. I can't recall you having ever doing the same?

At least some of us are thinking critically about the issue, good or bad side.

I'll be most interested to know why you think it's a good idea, or not?

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