Practical Example of How Unfair Labour’s CGT Will Be – Houses Brought Pre-CGT. You Need to Read This.

Labour candidate hopeful, and Massey University tax lecturer Deborah Russell – and I like Deborah so in the age of dreadful, dirty politics, I am at pains to point out this is about policy only - has blogged a piece to allay our fears over Labour’s proposed capital gains tax (CGT), which she says is a fair tax. Only, as you will see from our correspondence below on that thread, my fears are only heightened - sorry for lousy formatting, I've not time to fix it.

My first query under comments:

A spillover from Twitter, I understand you don’t want to debate there, but there is one question I have which is a serious concern, given how Labour’s CGT tax was being mooted by end of the last Labour government.

Namely, in calculating the profit on instigation of CGT the deduction (for houses bought pre-CGT) was going to be a valuation date (I think that would’ve been date CGT came into effect). If so I would face the following unenviable position: I purchased a holiday house (for my sanity) at the peak of a market. In the area concerned that house would now have a market value $250,000 to $300,000 lower than I paid (which I’m fine with because the house is about lifestyle and my sanity from stressful job, it was not bought as an investment). However, under current CGT, would my deduction on a future sale be original cost to me in 2007 (from memory), or a recent valuation point deemed in the legislation.

That is, say if a year after your CGT comes in I sell my house for exactly what I paid in 2007, thus no profit (and a loss in inflationary terms), is there correctly no capital profit under your proposed CGT, or is my deduction the valuation on day CGT starts (being $300,000 less than cost, which it now is), thus I will be stung with tax on a $300,000 fictitious profit?

Deborah’s Reply:

The CGT will apply to gains from the date of implementation. So the critical date for existing assets is the date from which the CGT law comes in. It’s right there in the policy: Labour’s Capital Gains Tax Policy.

But it’s an interesting problem, and one on which I presume you would put in a submission when the fine detail of the law is being hammered out. I can think of a solution right away, but I’m a little reluctant to leap into print on it without talking it through with people in my party.

And My Signoff Comment:

See, I'm stunned. You can see how unfair this is .... getting back to your notion of fairness.

Trouble is first time around - end of last Labour government - I was corresponding over this matter with the then minister (can't remember who, Dunne?) on simply changing the wording to 'deduction the higher of valuation on implementation date or original cost', and I was getting no traction at all. And how hard can it be to achieve the fairness in that simple clause? Problem is the Left don't worry about fairness to those of us paying the taxes, and I can't think of anything unfairer than that.

I believe Australia's CGT takes something up to one third of their taxing acts: it's a complex, unfair behemoth. So I hope to Rand we don't end up with a Labour/Green government, but all the best with your own campaigning.

(And if you want a 'laugh' I'm still trying to do the numbers on Maryan Street getting in on current polling at number 15. I see the only piece of worthwhile legislation that is likely over next three years - given National are socialists also - being the basic individual/family right back of dying with dignity, and despite possibility of being ostracised by fellow Libertarians, I will party vote Labour this once to make sure Maryan gets across the mark - do you know if she is in with Labour polling about 24%?)

All the best.

In summary, in case you missed it, and it’s a real world problem for me, the value of my holiday house on the date of implementation of Labour’s CGT is likely to be up to $300,000 lower than I paid for it, so if I sell it for exactly what I paid, no profit, I will be taxed on $300,000.

You decide how fair that is.

With that, I’ll give the final word to Deborah, as her closing comment:

Well, I think you and I both have the same solution in mind, Mark, and should we get a high enough party vote, I will be right there to argue for it. :-) So Party Vote Labour!

I am not consoled.


Footnote:

A partial resolution: hat-tip Geoff Nightingale, tax accountant - @Geoftax - not anyone from Labour who seems to know their own policy here, this issue will be going in front of the (increasingly important) expert panel, per page 10 of this link on Labour's site. Given CGT cases would be filling the tax courts on definitions alone, that panel would need to be Herculean to get this tax in place by 2015, which is what Labour plan.