Price Waterhouse Coopers oppose measures aimed to cut tax avoidance

I came across an opinion piece from the Dominion Post on Friday where multinational tax advisors Price Waterhouse Coopers (PWC) attempt to start a scare campaign about the Government introducing a capital gains tax.

The article is headed 'Capital gains tax lifts its ugly head'. All that is lifting its ugly head here is the spectre of tax advisors complaining they will be less able to help their wealthy clients avoid paying their fair share of tax.

Is the government proposing to introduce a comprehensive capital gains tax? Sadly no. Ugly? Well assuming such a tax included an exemption for the family home, it is only ugly for the well off who have taken advantage of the lighter taxation on property investments, and have driven first home buyers out of the market as a result. It is a shame Labour didn't close this complete rort when it raised the top tax rate to 39c in the dollar in 1999.

Between 1989 and 2005 the residential property market provided investors and owners with a tax free gain of 319%*.

Despite PWC attempts to scaremonger, all that is happening is that the Government is tightening the rules around existing tax law that makes investments in housing for the purpose of making a capital gain taxable. So the Government is seeking to remove the loopholes that PWC and its clients love so much. It is not a new tax. As Michael Cullen explains:
"Associated persons: ... The definitions are used extensively in the Income Tax Act, primarily in an anti-avoidance capacity to counter transactions that are not conducted at arm’s length and therefore have the potential to undermine the intent of the law. ....There are a number of major weaknesses in the current definitions, particularly in the definition relating to land sales. That definition contains some major gaps which allow land dealers, developers and builders to circumvent the land sale tax rules by operating through closely connected entities. Parliament’s clear intent in 1973, when it enacted the current land sale tax rules, was that land dealers, developers and builders would be generally taxed on all gains on property sold within ten years of acquisition, and they could not claim to hold non-taxable investment portfolios."

PWC's Chris Leatham says
"In our view, the changes will not be well received. Land dealers, developers and builders have previously been allowed to structure their affairs to avoid tainting of rental properties so that they are not placed at a disadvantage to other taxpayers."

The New Zealand tax system generally taxes property investments with a lighter touch than other forms of investment. The whole point of removing such obvious loopholes in tax law is to ensure particular taxpayers are not disadvantaged over others. Why are PWR defending such loopholes I wonder?

Opponents of capital gains taxes often make unsubstantiated claims about how unpopular a capital gains tax could be - just because they don't like it. I think views are changing. Many economic commentators, including many on the right, now support capital gains taxes because they can see New Zealand would benefit from more money being invested in companies rather than sitting in bricks and mortar. A capital gains tax introduced in a declining or flat housing market would have limited immediate impact, but it would help to slow the next housing boom that will eventually happen. Then there are the growing numbers of twentysomethings and thirtysomethings, now on good incomes, who are becoming more and more aware of how the baby boom generation have shut them out of the housing market by speculating for tax free gains on the housing market. Bernard Hickey is really onto something when he identified "The generation that New Zealand Inc failed"

If it was up to me I would introduce a comprehensive capital gains tax (with an exemption for the family home) and direct the proceeds towards affordable housing initiatives. Ironically, a declining or flat housing market can make the structural issues easier to address.

Returning to Leatham's little opinion piece, one could be mistaken for thinking that the Dominion Post are now running free advertising features for Price Waterhouse Coopers.
"The new rules will apply only to property purchases from April 1, 2009 onward (or, in the case of builders, to property improvements made after that date). This gives you the opportunity to talk to your accountant to understand the impact of the changes."

As for their views on the taxation of housing investments - their vested interests are plain to see.

* Source: Sunday Star Times (17/6/07), "The Rent Trap"