Asset Tax Proposal

Asset Taxation (Substitute for a Capital Gains Tax?)


The Proposal A tax on assets that would apply to all assets over an individual lower limit A threshold that would eliminate most family homes.

Most importantly offset against tax already payable on income # see further explanation below

The means would be best shown by examples which would be based on:

a. Family main residence say $500,000 (50% above the NZ average house)

b. Main residence exemption not available unless owner occupies for minimum 90 days annually. Penalizes absentee owners.

c. Asset tax at 2% of gross asset value (equivalent to notional income of 6% on an asset).

d. Would incentivise making use of items like land banking

e. Would apply to individuals, trusts, and businesses.

f. Would apply to world assets of NZ resident entities.

g. Would avoid the need for a separate FIF regime.

Example 1 Family home $600000 with or without mortgage. Asset tax 2% of $100k =$2000 However income tax paid by owner(s) $20k NO more tax paid

Example 2 As above but absentee/overseas owner paying only $5000 NZ tax Asset tax $12,000

Example 3 Business owning property. Tax payable only if asset tax exceeds income earned. Loss making business may have to pay but recoverable from future profits.

Example 4 High net worth individual with assets of $50 million Asset tax $1 million. Would have to earn in excess of $1 million NZ paid tax but could also offset tax paid to an overseas country.

Example 5 Pensioner with $1,000,000 home. Asset tax could be $10,000 and tax on NZ super would not reach this level. Allowance for tax to be delayed until on sale or death.

Example 6 Taxpayer with overseas investments under FIF (complicated rules!) This would simplify the rules that would apply to all jurisdictions.

#Why offset against tax paid on income?

Examples shown include situations where the owner of an asset has no income associated or has deliberately avoided incurring/declaring tax with the expectation of obtaining non taxable gains or benefits such as Working for Families. Taxpayers who have earnings from outside NZ may not be including these in their position while occupying expensive properties in another example

Why gross asset value? Where income is earned there is already an offset because owner income tax paid is lowered by the interest deducted. Otherwise offsetting mortgage value would be a doubled benefit to the very highly geared.

SUMMARY

Who will pay a tax on assets?

1. Holders of assets that earn nil or low returns of income as returned as income tax.

2. Overseas residents will pay as above but also will pay on their property including a personal home if they are resident for less than 90 days each year.

3. All entities who use transfer pricing to hold their income below a minimum return for income tax purposes and who exercise control over NZ based assets.

Who will NOT pay tax on assets?

1. Those who generally earn 6% return gross and pay income tax accordingly.

2. Home owners on a personal residence of up to $500,000 or $800,000 jointly. Possibly a higher allowed value for those with no other assessible income - retired etc.

3. Superannuitants/ retired whose income is only from non business activities may pass accrued tax to their estate interest free.

SIMPLE IMPLEMENTATION LOGIC

Each asset is taxed based on its annual valuation based on say 5% at 30% = 1.50%

When the entity (owners of the asset) make its income tax return it can reduce its tax payable by the tax already paid on behalf by the asset proportion. Consequently if the asset has earned less than 5% on behalf of that entity's share the net benefit to the tax system is based on a 5% return on the asset.
Bare land for example which has no income will pay 1.50% of its capital value and there is no offset in the hands of the beneficial owner and so that owner will have to find cash to pay from other sources.
This incentivises owners of nil or low performing assets to get a return.
Overseas investors will have to make a 5% return on their gross asset value to avoid the tax and therefore there is less incentive to exercise transfer pricing which reduces NZ tax paid below a nominal 5% return. Double taxation agreements would not allow avoidance because the tax is initially not income related so has no equivalent in the other country.

Owner occupied homes could be excluded by annual adjustment allowance.
Government could introduce the tax gradually each Budget until it reaches a maximum level -possibly 5% or even 6%. Subsequent reductions could be dependent on performance of the overall economy

Thoughts have moved on and the comment below is the latest concept