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The Compliance Costs of Taxing Capital Gains: Implications for New Zealand

This article explores the tax compliance costs — those costs incurred by taxpayers or third parties, such as businesses, in meeting the requirements laid upon them in complying with a given structure and level of tax — that New Zealand could expect to encounter if a capital gains tax (CGT) were to be introduced. It recognises that a decision was made by the New Zealand Government in April 2019 not to proceed with a CGT, but also suggests that it is possible that a CGT may be back on the agenda at a future date, at which point the compliance cost implications will again be relevant. The compliance costs of CGT regimes are typically and anecdotally thought to be relatively high in comparison to the compliance costs imposed by other taxes, a view that clearly dominated much of the debate about the possible introduction of a CGT in the period to April 2019. However, the empirical evidence qualifies this conclusion in two important ways. Firstly, it notes that the CGT regime applies to a relatively small number of taxpayers compared to, say, the goods and services tax (GST) or personal or corporate income taxes (PIT or CIT). As a result, overall CGT compliance costs are not high relative to the compliance costs of other taxes. The second qualification is that the Australian CGT regime is often the source of concerns about high CGT compliance costs. However, a number of relatively unique Australian structural features have caused Australian CGT compliance costs to be higher than would normally be expected of a CGT regime. These high-cost structural features have been compounded by excessive and frequent changes to the legislative provisions in the 33 years since the regime was introduced, with resulting uncertainty and unpredictability in their operation. The article examines the CGT design features proposed in the Future of Tax: Final Report prepared by the Tax Working Group and published in February 2019 (the TWG Final Report). It concludes that overall the proposed design features suggest that the CGT compliance costs would not be unduly onerous. Most of the design features reflect international best practice and take the compliance burden into account wherever possible. A few will lead to higher compliance costs than might otherwise be the case. And for some it is impossible to evaluate the likely compliance cost impact.