Interesting Times

This past week has seen the spectre of a capital gains tax re-enter the political ring. A Capital Gains Tax (CGT) may serve to broaden the taxation base; however it is likely to add a significant compliance cost. The prospects of this dramatic change to the tax base will be giving rise to smiles throughout all those businesses that advise on taxation and investments.

To all the hard working New Zealanders who pay tax on every dollar they earn it does not seem fair that a lot of people have traded property and shares and not paid tax on the profits.  We already have a taxation system that can tax capital gain income from share and property traders. It just needs to be stringently enforced by IRD. Interestingly under the proposed CGT the tax rate will be at 15% whereas currently tax is imposed at the trader’s tax rate which could be as high as 33%.

As they say about proposals such as introducing a CGT,”the devil will be in the detail”. Currently very little detail has been provided, as it will need to be worked out by a tax expert panel, and then no doubt politically massaged. If a CGT were to be implemented it will take a number of years before there is a significant tax take from it. In addition the tax take will tend to be lumpy because of the nature of investment cycles.

The next two weeks could see significant events occurring on the global financial stage. The United States could temporally default on its debt obligations in order to stay under their regulated debt level. This could throw debt and share markets into a spin, which should only last a few weeks provided USA politicians come to their senses.

Of a more serious concern than the USA, are the European economies and the fate of the Euro. The latest rumblings are about Italy, the seventh largest economy in the world. To bail out both Italy and Spain the cost is estimated at two trillion euros. This makes the bail outs of Ireland, Greece and Portugal seem minor. To solve Europe’s problems there needs to be both the will of the politically elected, and the will of the people. The parties seem to be polls apart.

If the international debt markets were to go into turmoil because of defaults, borrowing costs will rise, severely impacting what is already a fragile New Zealand economy.

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.