Govt came close to changing capital gains tax rules on property

Toughening existing tax rules about when the capital gain on a property can be taxed were still under consideration by ministers until relatively late before this year’s Budget, papers released by the Treasury show.

Wednesday, July 14th 2010, 10:00AM

by Rob Hosking

The papers show ministers ruled out a capital gains tax, a land tax, and the risk free rate of return tax on rental housing relatively early in the piece - indeed, a Cabinet paper the day the working group released its report ruled out those three options.

But "bright lining" the existing provisions in the Income Tax Act underwent a considerable amount of work before being abandoned.

The papers show the Treasury was quite keen on the idea: the Inland Revenue Department opposed it.

The proposal was that any property sold within five years of purchase be taxed on its capital gain, thus sidestepping the current requirement in the law that the Inland Revenue Department prove the taxpayer intended to sell the property for a capital gain.

This would have raised around $75 million in revenue - not large in terms of the other options being looked at.

However the Treasury indicated a preference for extending it beyond property to shares and other investments, for the sake of consistency - a proposal which does not appear to have got very far.

The five year period was suggested as being long enough to be an incentive against people wanting to "flick" housing to hold on until the end of the taxable period - an earlier proposal suggested a two or three year period.

Treasury officials argued in favour of a broad capital gains tax instead but told ministers that in the absence of this a "bright line" of the existing rules was the next best bet.

Inland Revenue opposed the idea of "bright lining" the existing rules, on the grounds of the arbitrariness of the 5 year -or any other- time period and the distortionary impact this would have on taxpayer behaviour.

Ministers eventually ruled the change out in April.

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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