Unrealised gains tax looks unlikely

Press, 7 September 1989, Page 22

Unrealised gains tax looks unlikely

By

PATTRICK SMELLIE

in Wellington

Signs are emerging that the Government is unlikely to implement a tax on unrealised capital gains, although it may attempt to catch some realised gains in the tax net.

Comments by Treasury officials in answer to Opposition questions for the finance and expenditure select committee rehearsed arguments for and against different kinds of capital tax. “Taxing unrealised capital gains annually as they accrue would improve the neutrality of an income tax,” the Treasury said. “In practice, however, a full accrualbased capital gains tax is difficult to achieve.

“Principally, this is because the success of an accrual capital gains tax is based on accurate annual asset valuation.

“This would be very difficult for assets which have no ready market value, e.g., shares in a private company. “Such a regime would, therefore, be especially prone to undervaluations,” the Treasury said. “The relative weights that should be accorded these various considerations represent a policy issue on which the Government has yet to announce a decision.”

Commenting on possible compliance costs, the Treasury said it was difficult to make precise judgments about the value of a tax against its costs of

administration. This was because a new tax reform might increase the efficiency of the tax system as a whole. However, compliance costs would be a critical consideration in developing any tax.

The Treasury gave no progress report on the discussion paper which is scheduled for release later this year. It is understood work is well under way for a document to be ready for release by then. Treasury branch manager, Mr Tom Berthold, told the committee that three people were working on the capital gains tax project, with one full-time and one part-time.

On the question of tax compliance costs in general, the Treasury said the desire for simplicity in the tax system had to be weighed against the need to make the system efficient and effective. “Many of the reforms to the tax system in recent years have been aimed at preventing the widespread deferral and evasion of tax that was previously prevalent, particularly among businesses and the higher paid.” The Treasury said there could be scope for reducing compliance costs by moves such as integrating dates for payment, filing of returns, and new rules governing who should be required to file returns.

There was a case to be made for different compliance regimes for small taxpayers against large taxpayers.