LAWCOMM 403 long notes.docx-CONTENTS Tip...
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
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LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
LAWCOMM 403 long notes.docx-CONTENT...
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
Page 36
EXEMPTIONS
What exempons should there be from a CGT?
FAMILY HOME
Henry Simons does not provide any exempon for family homes – if you make a gain on your family home, you should
pay tax all the same
However, exisng CGTs generally provide for some form of preferenal treatment of owner-occupied residenal
property (mainly for polical reasons, as policians need to get themselves re-elected)
o
If so, then should we allow for complete exempon or paral exempon (e.g. exempt the first $500,000 of
gain, but if more gain is made, then you pay tax on that)?
o
Issues with exempon:
Mansion effect
If the capital gain from selling the family house is completely exempt, then there is obvious
incenve for taxpayers to arrange their affairs to make as large a capital gain on their house
as possible (so people will build very large houses)
Inequity between owners and renters
Owners are exempt for capital gains tax
People with enough money to buy a house but rents one instead and spends the rest into
seng up a business, if they sell the business, then they are liable to tax. Therefore, they are
encouraged to put more money into their house and less in their business. This is
economically inefficient because a house is unproducve whereas a business is producve –
so the exempon encourages people to put money into unproducve investments
Distoron of investment – example: inequity for people who own holiday homes
In most countries, you get an exempon or preferenal treatment for only one family home
– therefore, they have to pay tax on a second home
This incenvizes people to put all their money into a family home rather than a holiday home
– so it distorts investment
ROLL-OVER RELIEF
Most countries with a realizaon-based CGT provide for roll-over relief – if you sell a capital asset, you normally pay
CGT, but if you use the proceeds of sale to purchase a similar asset, the liability is deferred unl you sell that second
asset
o
This is aimed at reducing the lock-in effect – so with a realizaon-based CGT, people are no longer incenvized
to not sell their asset; they can sell their asset and defer liability
o
However, roll-over relief has problems:
It is complex
It is inequitable
There are heavy administraon and compliance burdens
o
A beer way to do it may be to tax capital gains at lower rates than ordinary income (rather than provide roll-
over relief)
This would sll migate the lock-in effect while being simpler than roll-over relief
If CGT is charged on an accruals basis, there is no lock-in effect, so there is no need for roll-over relief
DE MINIMIS EXEMPTION
Most countries’ CGTs provide for a
de minimis
exempon – if you only make a small capital gain, you don’t pay tax
o
However, there are issues with this:
administrave cost (the cost of running the IRD);
compliance burden;
yield.
In New Zealand, there is a parcularly strong reason for having a de minimis excepon
o
This is because in New Zealand, most people never file a tax return (due to the convenience of withholding
systems like PAYE etc.) – it would be seriously inefficient if you had to file a tax return for every small capital
gain
o
But where would be the threshold? Maybe $10,000 per person per year?


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