Chapter 8 – Further Measures

8.1 Role of a Capital Gains Tax
8.2 Interjurisdictional Allocation Rules
8.3 Recommendation

8.1 Role of a Capital Gains Tax

8.1.1 We have commented already on the possible role of a capital gains tax in the context of the present reforms. In many cases, the income that residents derive through offshore investments (apart from distributions) is best characterised as capital gain and, short of violating accepted income tax principles, is most appropriately taxed under a capital gains tax.

8.1.2 The lack of the comprehensive taxation of capital gains in New Zealand is the last outstanding gap in our tax system. The reforms that the Government has implemented over the last few years have gone a long way to broadening the tax base and addressing sources of avoidance. The first major base broadening measure was the introduction of GST. Within the income tax system, the next step was the removal of explicit tax concessions such as export incentives and accelerated depreciation provisions. The removal of such incentives in return for a reduction in tax rates is very much the central theme of current tax reform programmes in OECD countries.

8.1.3 The third set of reforms was the adoption of comprehensive accrual rules. These were aimed at countering tax planning based on the deferral of financial arrangement income or the advancing of tax deductions. The fourth and present set of reforms address the avoidance and deferral opportunities which arise in the international context. The Government has also moved simultaneously to reduce the avoidance problems which arise with the exemption of the superannuation funds and other entities.

8.1.4 The last major tax base problem is the general exclusion of capital gains from the definition of assessable income. There is widespread support amongst tax practitioners for the taxation of capital gains. The Committee endorses this view. Many of the remaining deficiencies in the tax system have their origin in or are compounded by the lack of a capital gains tax. The next step in the Government's tax reform programme should be to extend the tax base to include capital gains as soon as it is feasible to do so with the objective of facilitating a further reduction in tax rates.

8.1.5 New Zealand is the only country in the OECD which still has no general capital gains tax. Countries such as the United States, the United Kingdom, West Germany, France and Japan have all taxed capital gains for some time, while Australia introduced a capital gains tax in 1985.

8.2 Interjurisdictional Allocation Rules

8.2.1 In addition, we reaffirm our view that priority should also be given to the introduction of interjurisdictional allocation rules to ensure that New Zealand collects its share of tax. Along with the taxation of capital gains, such rules form one of the basic building blocks of the tax systems of countries such as the United States and the United Kingdom.

8.3 Recommendation

8.3.1 The Committee therefore recommends that, in addition to giving priority to the extension of the income tax base to include capital gains, the Government give priority to the introduction of interjurisdictional allocation rules, such as expense allocation rules and more effective transfer pricing provisions.