TAXATION 1: Capital Gain Tax Analysis and Discussion

This report provides a detailed analysis of capital gain tax (CGT) in Australia. It begins with an introduction to capital gains and CGT, followed by a discussion of CGT in the Australian context, including its history, application, and calculation. The report examines arguments for and against CGT, consider...Read More

Running head: TAXATION
Capital Gain Tax
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Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................2
Capital gain tax in Australia:..................................................................................................2
Argument on capital gain tax:................................................................................................6
Capital gain tax and Smith’s four principle of taxation:........................................................7
Benefit and disadvantage regarding capital gain tax:.............................................................9
Conclusion:..............................................................................................................................11
Reference:................................................................................................................................13

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Introduction:
In any kind o business or profession, gain or profit plays an important role.
Capital gain is a part of such gain or profit. The term capital gain denotes the amount of profit
cropped up from the transaction of capital asset. Any land, building, vehicles, intellectual
property rights, leasehold rights and machineries are come into the purview of capital asset.
However, certain taxes are levied on the total amount of capital gain that is known as capital
gain tax. The tax amount is different in various states and implementation of capital gain tax
is not mandatory in case of all the countries. In case of equities, it can be observed that the
national and state legislations are accompanied with the fiscal obligations. Capital gain is
included under the provision of taxable income (Burkhauser, Hahn & Wilkins, 2015). There
are certain processes by which the capital gain of an individual can be calculated. A person
has to pay the capital tax in each year and first step of the calculation includes the rate of
amount paid by the individual in last year. The imposed tax rates can be of different types
such as long-term, short-term and super-long-term. Countries that come under the definition
of Organisation for Economic Co-operation Development or the OECD countries have
introduced this tax system.
Discussion:
Capital gain tax in Australia:
Australia is an OECD country. Development of capital gain tax has been
introduced in Australia in the year 1985 during the governance of Keating government.
Capital gain tax is applied on capital gain income along with certain specific exemptions such
as family home (Evans, Minas & Lim, 2015). The operations of capital gain tax are derived
from the capital gains and it can be observed that it makes the income as taxable income and

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it is calculated on each year basis (Dowd, McClelland & Muthitacharoen, 2015). A discount
up to 50% is available in case of the novice and superannuation funds of 33.3% can be
available in such circumstances. Capital losses are simultaneous to the capital gain. If the
person could not gain any profit from capital goods, the same will be treated as capital loss.
The calculation of capital gain tax is quite well structured in Australia.
Source: (Oecd.org, 2018)
The consumer price index plays an important role in the calculation of the capital
gain tax. The cost of assets should be held for one year, as capital gain tax cannot be
calculated if assessed for less than one year. According to section 102 of Income Tax
Assessment Act 1997, when a person has gained or suffered loss due to CGT assets, the tax
has been imposed at that time. The term capital asset denotes any property or any equitable
rights that does not come under the definition of property (Easton, 2018).
Capital gain tax can be applied on all the assets however; there are certain
exception to the rules that are given as follows:

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 CGT will not impose on any goods that are from the pre-CGT stage that is
manufactured before 1985.
 CGT will not levy on the residential complex of the taxpayer and the same will be
applied on the first two hectares land adjacent to the main building.
 Assets like boats, furniture and digital goods that worth $10,000 should not be come
under the purview of CGT.
 No tax should be applied on the personal use asset.
 Cars and motor cycles are excluded from the application of CGT.
 There are certain assets that are excluded from the provision of the income tax such as
assets acquired from gambling. These assets are also not come under the shadow of
CGT.
 Certain designated government schemes are excluded from the list of CGT.
According to section 104 of Income Tax Assessment Act 1997, there are total 52
CGT events present in Australia. The calculation of CGT depends on cost base. The cost base
can be divided into three parts such as reduced cost base, simple cost base and indexed cost
base. In Australia, the tax related to capital gain has played an important role and the share
market of Australia was impacted by the capital gain on large basis. Rapid increase in the
Australian Security Exchange has been observed in the year 2007 and a global financial crisis
has been observed due to the evolutionary change in the net capital gains. It has been
observed that the income acquired from the net capital gains are more volatile compare to the
other income provisions.

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Source: (Static.treasury.gov.au, 2018)
The superannuation funds are also affected by CGT system and the share market of Australia
was crashed due to this. The red bars are representing the unrealised capital gain; grey bars
represent the net gain; blue bar represents capital losses and the net unrealised gains are
presented as red circle.

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Source:
Argument on capital gain tax:
Capital gain tax has secured an important position in the monetary market of every
country and the share market and the dividends are quite depended on the same. However,
there are arguments on the imposition and application of the same in different countries.
McArdle had, in his book, mention about the concessional process of capital gains.
According to him, the rate of the tax should be based on the capital income. However, this
thought has been criticised by many scholars. According to Burton (2017), the people have
no clear vision about the necessity of capital income in case of concessional rates. Further,
objection has been made regarding the system where McArdle has mentioned that even the
capital income of a rich person will be assessed in the similar way like the middle class
people. One of the most discussed topics on capital gain is to identify the reasons for the
imposition of lower tax rate in capital gain (Bertram, 2018). Different conceptions have been
made in this case and the argument is based on five categories mainly such as inflation, lock-
in, double taxation, and mobile nature of the capital and consumption process.

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Capital gain tax is depending on the valuation of the cost of the asset. It is obvious to
state that the cost of the assets is high in case of inflation. Therefore, the rate of the capital
gain tax is also increased along with the value of the assets. The concept of inflation is quite
effective in case of deciding the rate of the capital gain tax (Burton & Michel, 2017).
However, there is certain other conception regarding the imposition of capital gain tax.
According to Easton (2018), if the investors will lost their interest in selling the assets they
are holding, the rate of the capital gain tax will increase automatically. Tax avoidance will
increase the tax burden and the position will be considered as the lock-in. The asset-holder
are getting benefitted when the assets are upheld by them for a period of one year. Arguments
on capital gain tax have been shunned on the basis of double taxation process. It has been
observed in both Australia and New Zealand that the companies have to pay two types of tax
on their income and profit. It has been observed that the companies are giving tax on either
capital gain or dividends. High marginal rate of investment has helped the countries to
acquire low rate of capital gain tax. It is important to avoid the double taxation system by
making an investment pool for the companies where the extra profits can be saved and the
same can be used in other sectors in legitimate way. McAedly was very much cautious about
the imposition of tax on the wealthy people that will overburden in nature. He has focussed
on the mobile nature of the capital gain tax. However, he has failed to discuss about the risk
factors that can be cropped up during the money moving action. Therefore, it has been
observed that there are many arguments take place regarding the applicability of tax. It can be
said that aligning capital gain tax rate will help to secure the high rate of amount from the
rich with low negative consequences (Fabling et al., 2014).
Capital gain tax and Smith’s four principle of taxation:
According to the political commentators of New Zealand, if the process of capital
gain tax implemented in New Zealand, it will be regarded as political suicide. However, a

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recent spree has been observed among certain politicians who are supporting the introduction
process of capital gain tax. In 2014, the Labour Party of New Zealand has announced that
15% CGT should be levied and the concept of CGT is a part of the political agenda in New
Zealand. However, in this section, a brief discussion will be taken place that reflects the role
of Adam Smith’s four principle of taxation in case of CGT regime.
The four principle of Smith are equitable, convenient, certain and efficient. According
to equitable principle, every state should support the government and the respective
government will protect the state. Further, it has been demanded that the rich should
contribute more tax compared to the middle class families. The equity has been divided in
two ways: horizontal and vertical. According to both the equities, the rate of tax will depend
on the taxpayer’s ability to pay. It is necessary that the assessment process of tax should be
easy and the tax should be collected straightforward. Te rate of tax are r4equired to be fixed
and imposition of tax should not be over burdened. However, these four principles can be
applied successfully if the following can be maintained in a proper way:
The rate of the tax should be assessed in such way that it can produce sufficient
revenue for the government. The taxed money should be used for achieving social and
economic objectives. The inefficient allocation of resource must not be encouraged by the
taxation system. Now, it is to be analysed whether the taxation of capital gain tax of New
Zealand has followed the above-mentioned principles or not. The policy statement of CGT in
New Zealand is comprehensive in nature and it has been mentioned by certain tax expert that
lack of proper application of CGT in New Zealand will cause complexity. The income tax
rate of capital gain in New Zealand is 10.5% to 33%. At this point in the paper it is worth
noting that although the capital gains tax rate proposed by Labour is lower than the tax rates
on ordinary income, a situation which would not normally be viewed as increasing
progressivity and meeting the vertical equity criterion (and is subject to criticism discussed

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following), since New Zealand presently does not tax capital gains, this is a move toward
(vertical) equity. This fact is acknowledged by the New Zealand Treasury in July 2013 who
observed that a CGT could have (positive) implications for both horizontal and vertical
equity; with respect to the latter probably making the tax system more progressive.
Benefit and disadvantage regarding capital gain tax:
In New Zealand, the structure of capital gain tax is not well maintained. It has been
observed that the people have to pay tax for their residential house without any tax liabilities
(White, 2017). This caused serious impact on the tax income and the government has to face
large revenue losses due to this. The value of the properties is also increased due to the
revenue loss and the acts of the government for not taxing the capital gains. The tax system of
New Zealand has been biased and a steady decline in the taxable income has created
substantial revenue losses.
Source: (Victoria.ac.nz, 2018)
The orange line shows the rental losses and blue line shows the rental profit since the year
1981. This declination in the rental loss has created serious adverse impact on the labour

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productivity and wages. The members of the stock exchange are also protested against the
long-term capital gain tax and they opposed the exemption process of the tax. There are
certain negative impacts on the high tax rate. It is obvious to state that high tax rate will
encourage the companies to relocate their store outside New Zealand and they will start their
business in a place where the rate of the tax is quite low (Mints, Pastilles & Gum, 2017). If
the company tax rate will be decreased, the non-residents of New Zealand will be benefitted
from this. The tax treatment is different in New Zealand and opportunities of tax reduction
are depending on the income groups (Gibbons, 2018). Therefore, the middle class families
are facing similar tax criteria where the rich people are facing different taxation criteria. The
people of New Zealand can alter their taxable income and considerable freedom has been
given to them regarding the tax rate.
Source: (Victoria.ac.nz, 2018)

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Conclusion:
Therefore, it has been observed that capital gain tax has certain positive and negative
impacts. The OECD countries have introduced the tax system differently and the outcome of
the tax system is different in nature. In New Zealand, different criteria are being followed and
the rate of tax is differed here. Taxes are assessed on the basis of net income and companies
have to pay double tax for their profits. It has been observed that double taxation may
increase the revenue culture and help the government to gain more profit in this section. On
the other hand, the companies have to face lots of challenge due to this and it has been
observed that the companies are moving their businesses from New Zealand and start up the
same in a country where the rate of tax is lower in nature. Capital gain is included under the
provision of taxable income. There are certain processes by which the capital gain of an
individual can be calculated. A person has to pay the capital tax in each year and first step of
the calculation includes the rate of amount paid by the individual in last year. The imposed
tax rates can be of different types such as long-term, short-term and super-long-term. Certain
exemption have been imposed on the long-term capital gain tax in New Zealand and the share
market of New Zealand has opposed the view as they are incurring loss from the same. In
other OECD countries like Australia and USA are not that much affected by the CGT
process. A serial growth has been observed in USA since 2007. The complex character of tax
in New Zealand has created many losses and it should be structured in a systematic way. The
taxation system should follow the four principle of Adam Smith and there should be clearness
in the system. On this context, it is to be said that every country should have implemented
certain policies on the capital gain tax, as lower tax rate can be provided in capital gain only.
The lower tax helps an individual to alter the tax liability at the end of the year. The rates of
the capital assets are depending on the capital gain tax and therefore, it helps to control the
increase and decrease of the capital assets. There are two types of capital assets present-

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short-term asset and long-term assets. The personal tax rate in New Zealand is around 33%
and the rate of GST is 15%. Capital gain tax helps to acquire more profit to the taxpayers.
However, the government of New Zealand has adopted certain steps to abolish the system of
double taxation.

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