The Herald reports:

Justice Minister Andrew Little has flagged that referenda on cannabis law reform, euthanasia and MMP reform could take place at the same time.

All good issues for referenda but three at once will mean hard for any one issue to get the attention it deserved.

Speaking to TVNZ’s Q&A programme last night, Little said a Cabinet paper on the cannabis referendum was with colleagues at the moment but the detail of the referendum’s form, whether it’s binding or not, had yet to be decided.

The Government is planning a referendum on cannabis for personal use before or at the 2020 election as part of its confidence and supply agreement with the Green Party.

“There’s a Cabinet paper that’s being reviewed by various Cabinet ministers at the moment and I would hope that we’ll make decisions before the end of the year,” Little told TVNZ.

“One of the issues is, is it binding, is it not binding. There’s still the question about the timing of it and various other questions as well. But it’s certainly my strong preference … that by the end of this year we’ll have those principal decisions determined so we all know.”

It’s a waste of time if it isn’t binding. The only useful referendum will be one that triggers a specific law to come into effect. People need to know exactly what they are voting for.

Little said a referendum on the question of euthanasia could also be held at the same time, following discussions with ACT leader David Seymour, who has been driving the issue, and a willingness by New Zealand First to support Seymour’s End of Life Choice Bill if it went to a referendum.

“It is possible that there would be a referendum on euthanasia as well,” Little said.

The bill will be reported back in March 2019 and later that year there will be a vote on whether to include a referendum with the bill.

He also flagged a possible referendum on changes to the MMP system of representation.

“It has been floating around that if we’re going to do a bunch of referenda, why wouldn’t we put this question about whether we want to make those final tweaks to MMP, reduce that 5 per cent threshold to 4 per cent, get rid of the one-seat coat-tailing provision.”

Also known as the Save Winston and the Greens campaign.

Shalom Kiwi reports:

Fast forward four months to the high-profile Vodafone Music Awards, when the recipient of a lifetime music award, Dean Hapeta of hip hop group Upper Hutt Posse took to the stage and, in a rambling speech, called for war against Israel and “death to all oppressors”.

The left labelled the two Canadians at hate speech that must be stopped. So let’s look at what Hapeta said:

all of our armed forces and military that have been fighting in these fake wars in Afghanistan and Iraq for oil, for USA imperialism – get outta there! What you need to be doing is going to Palestine to fight against the racist terrorism of the Israeli state. That is where all of our fighting energy needs to be.

First he calls for the NZ military to be used to destroy the state of Israel.

“Death to all oppressors!”

And he explicitly calls for anyone he deems an oppressor to be killed. Not removed from power. But killed.

Rather than be condemned, Shalom Kiwi reports how many on the left said they approved on what he said.

That weekend RNZ ran an entirely favourable, soft interview with two members of Upper Hutt Posse on its Music 101 programme  and read out listeners’ messages defending the speech. Maori Television similarly ran an uncritical piece highlighting the group’s activism.

So it’s fine to use hate speech, if it is for a cause the left approve of.

But, you say, Hapeta was just defending the rights of the Palestinians! He’s anti-oppression, not anti-Jew!  Let’s examine that. Hapeta took to the stage and, in his moment in the spotlight, took the opportunity to call not for peace, tolerance or coexistence but for violence against the one tiny Jewish state, thousands of miles away.  The final words were “death to the oppressors”, and he left little doubt about who he saw as the “oppressors”. In a world of conflict and turmoil, in a region wracked with ancient tribal grievances, hegemonic jostling for power and layers of geopolitical complexity, Hapeta’s solution to righting those problems is to annihilate those troublesome Jews. Sounds familiar.

And he has form against Jooows

The summary of this is:

Rather than championing the oppressed, Hapeta is denying Jewish emancipation and self-determination. He denies Jews’ very existence as a people, spreads harmful lies about them and calls for violence against them. He’s not fighting oppression, he’s an oppressor.

And to conclude:

Jews are too vividly aware of the recent murder of 11 of their people in Pittsburgh at the hands of someone steeped in the same conspiracies and hatred that appear in Hapeta’s online comments.  Jews are too aware of the reality that, around the world, attacks on Jews are steadily rising in frequency. When people make Jews out to be the source of all the world’s evils, and incite harm against them, it should be called out.  Those who vociferously condemn hateful views on other sides of the political spectrum should apply the same zero-tolerance approach to marginalisation or victimisation of all minority groups.

Well said.

The Herald reports:

Housing and Urban Development Minister Phil Twyford has rejected calls from National MPs Judith Collins and Nikki Kaye to immediately beef up the law in $50 billion apartment sector.

Twyford thanked Collins and Kaye for their draft bill to amend the Unit Titles Act but said much more work was needed and he would not be taking the proposal forward at this point, although reform was planned “in due course” when priorities and resources allowed.

“I appreciate your approach to work together on this issue,” he said. But the Government had other housing priorities right now, making residences healthier and creating the new Urban Development Authority.

That’s a pity. I was hopeful there could be bipartisan progress on this issue.

Stuff reported:

Only seven of 10 KiwiBuild homes in Wanaka have sold.

The  development has been controversial – the ballot deadline was extended because only 20 applications had been received.

Now it has been revealed that only seven sales will proceed.

You expect at some stage there might be some under-demand for Kiwibuild houses, but to have it flop at such an early stage is very embarrassing.

Economist Gareth Kiernan said the lack of demand for the properties reflected their price.

“Yes, they’re cheaper than your average house in Wanaka, but still not really in the realms of ‘affordable’ for first-home buyers who have been ‘locked out’ of the housing market. I’m increasingly of the view that high land prices are the primary cause of the housing affordability problem. 

“The government’s approach, to date, of backing the construction of smaller, lower-spec houses makes minimal difference to affordability, because the construction component of the package is not really the issue.”

He said it was more intensive housing developments, reducing the amount of land accompanying each dwelling, that made housing more achievable.

“But [this is] unlikely to be a palatable option to most potential buyers except in Auckland. I’ve seen little evidence that the government knows how to address the land supply issues that have contributed to the surge in house prices.”

Land supply is the key. Get that right and the other issues are minor.

The Herald reports:

An Auckland youth worker who preyed on a 12-year-old girl, coercing her into performing sexual acts on him, gloated on social media by predicting he would escape a jail sentence.

Devonte Vincent Walter Mulitalo, 23, had pleaded guilty to one charge of sexual connection with a young person under 16, and a second charge of indecent communication with a young person.

The former youth worker, who was 22 at the time he abused a 12-year-old girl, was yesterday sentenced to home detention.

But just weeks before sentencing, the 23-year-old posted a sickening image to social media mocking his victim – and gloating that he wouldn’t be going to jail.

In his post, Mulitalo was handcuffed and dressed in a prison outfit, captioning the photo: “When y’all thought I was going in but then the game changed. #Wegood #Halloween2018” accompanied with a middle finger emoji.

Surely the Crown must appeal his home detention sentence and introduce this as evidence.

Despite his disturbing post on social media, Mulitalo wrote an apology letter to his victim which was presented to the court.

“He is genuinely remorseful,” said defence lawyer Panama Le’au’anae.

I bet you he didn’t even write the letter. Someone would have written it for him.

After meeting the 12-year-old, Mulitalo began telling the girl how much he liked her.

Initially he hugged her, but that moved on to kissing and further into other sexual acts.

Mulitalo would tell the girl to lie and say she needed to go to the toilet and meet him in a shed.

He would give the other children lollies and let them play video games to keep them away from the shed.

Mulitalo tried to get the girl to have full intercourse with him but she refused.

He also started meeting her outside of Youth Town and would drive her to places where he would continue to abuse her.

He sent her photographs of his penis and videos of him masturbating.

Mulitalo was charged after his colleagues found the lewd images on the girl’s phone and alerted police.

She was 12.

Stuff reports:

If elected, and if the Government legislated a capital gains tax, National would get rid of it, Bridges said.

He also said National would increasing funding for core public services like health, education and transport.

“So when we see tax relief for every New Zealander replaced by a $3 billion regional slush fund which resulted in $160,000 of trees being mulched, or a $2.8b fees free policy that saw 2400 fewer students in tertiary education, and at least $250m on 190 working groups because the Government didn’t do the work in Opposition, we know they’re not spending wisely.

As I understand it the Government plans to pass the legislation for its capital gains tax before the election, but to take effect from 1 April 2021. So if the Government is not re-elected then the CGT law will be repealed.

The Herald reports:

Labour MP Louisa Wall is standing by comments that TERFs – or anyone who doesn’t support the rights of trans-women – should not be allowed at the Pride Parade.

Wall, who is openly gay and an advocate for LGBTIQ rights, used strong language against Trans Exclusionary Radical Feminists while speaking last week during a private Pride hui.

“The whole gender identity issue, and trans-exclusion, is huge … None of us want to see the exclusion of our trans-sisters,” Wall said in her speech.

“My whole thing is that I don’t want any f****** TERFs at the Pride Parade.”

Wall was secretly recorded and the audio has been uploaded to the Speak Up For Women website, who called it “hate speech”.

“We demand that our MPs promote respectful dialogue on women’s legitimate concerns with proposed changes to the Births, Deaths, Marriages and Relationship Registration Act,” a post on the website said.

“The word ‘terf’ is hate speech used to belittle and threaten anyone who rejects the premises or conclusions of transgender ideology. It is used to dehumanise and incite violence. New Zealand deserves better.”

The left always say they believe in diversity, except they never believe in diversity of opinion.

Here a Labour MP says that if you’re a lesbian who has a different view to her on transgender issues, then you’re not welcome at the Pride Parade.

Of course the Pride Parade has every right to decide for themselves who is and is not invited. They can be as exclusive or inclusive as they want. But if they decide they want to be exclusive, then they shouldn’t promote the parade as being about inclusivity.

In her speech, Wall also thanked the Pride board and its chair Cissy Rock for listening to the community before banning uniformed police from the parade.

Except 75% of those who turned up to the forum were against the ban.

Newsroom reports:

Police are investigating an incident following a Young Nationals event in central Auckland last week in which a teenage woman reported inappropriate touching and behaviour by a male Young Nats member.

The incident occurred after the group’s Christmas drinks at the Brew on Quay bar last Tuesday. At least two MPs attended the event.

It is understood the woman, aged 17, and some friends went to the young man’s apartment near the bar as they were moving to another karaoke venue. They say he had told them he was a wealthy political party donor and there were drinks at his place.

God. Who uses a line such as “I’m a wealthy donor”. Puke.

The woman was taken to a room where he allegedly grabbed her face, tried to kiss her and keep her from her friends, at one stage pulling her away from them by her wrists. When she got out of the room and left the flat she was pursued across a road and to a fast food outlet’s toilet area as the man allegedly continued to try to grope her.

She reported the matter to police, who involved detectives who took a statement from her over one and a half hours – and then took her to tell her parents what had happened.

Good on her for going to the Police.

Newsroom has been told the National Party has suspended the Young Nats man involved, barring him from any further events. Another organisation has also blacklisted him from future gatherings.

The woman is not a Young Nats member and was a guest at the event. An MP made aware of the allegations says he called and counselled her and promised any support she might need.

Good.

Last night a National Party spokesperson told Newsroom: “We were made aware of an alleged incident that took place at a separate location, after the conclusion of a Young Nationals event last week. The person who brought the issue to our attention gave no further details, or names of those persons involved. 

“In line with our health and safety policies, we acted quickly to offer any support and advice to the person who raised the issue, and this information was passed onto the alleged victim. 

Also good to hear.

At this stage (there may be more to come out) it looks like appropriate actions have been taken.

Todd Niall at Stuff writes:

Why are ratepayers in Auckland’s poorest communities, and taxpayers, subsidising a council-owned Uber-style service for one of the city’s wealthier areas?

A great question.

Auckland Transport’s (AT) latest innovation, called AT Local, is a 12-month trial using six electric vehicles that locals living within 3 kilometres of the terminal can order and pay for through an app for $3 a trip.

There’s quite a few companies who can provide this service.

The council-owned agency bought three new electric eight-seater vans at $100,000 each, and will add three of its own electric cars in the peak periods.

The Government’s transport agency NZTA will pick-up the running costs of $475,000 or more, to see whether it works.

They are spending a million dollars for something they could easily contract a private company to do.

The AT Local ride-share service can’t be paid for using the region’s electronic transport ticket ATHOP, and can’t be used by under-18s.

Would making the bus trip to the Devonport ferry free of charge, if connecting to the ferry, attract more users and cut drop-offs? No one knows.

Would offering discounts to users of existing services like Uber, be much cheaper? 

Yes it would.

If it reaches its ambitious target of 200 trips a day, is that relevant to how it might work in the city’s poorer, more transport-deprived areas?

AT will be hoping for more success than an earlier mini-bus innovation.

In 2014, when it’s main offices were located both in Henderson and the downtown, it decided that the buses and trains connecting the premises weren’t good enough for it’s own staff, and trialled a minibus, expecting to make big savings in reimbursed private car use, and use of fleet vehicles.

After six months, the minibus had reached an average of 2.5 staff per trip, had run over budget at $140,000, and was scrapped, having consumed the equivalent of 50 average residential rates bills.

You would think they’d learn.

Hamish Rutherford writes:

Sir Michael Cullen, head of the Tax Working Group, seems to want to limit public debate over the possible extension of a capital gains tax.

After a critic raised concerns of the implications of proposals in the working group’s interim report, Cullen was dismissive.

Critics should wait for the tax working group’s final report in February, he said. The interim report may be the only thing the public has to work off, but Cullen said that the Tax Working Group’s own work had moved on and all the problems are being solved.

This Kafkaesque shutdown came after Wellington businessman Troy Bowker made alarming claims about the possible costs introducing a tax would have on small business, predicting the cost of compliance would be billions of dollars.

This shows why Sir Michael was the wrong choice to be chair. He is a politician and is driving a political agenda.

Trying to shut down debate until their final report, means the Government can consider the report in secret and decide upon it, before the public even get to see it.

Bowker claimed the tax working group’s preferred method for introducing the tax – creating a “valuation day” after which all assets captured by a new tax would immediately be taxable – would create huge compliance costs, with all businesses needing to be professionally valued on a given day.

Valuing things like commercial property is as easy as valuing your home – just look up the rateable value. But valuing businesses, especially small businesses, can be much harder. Much is tied up in the knowledge and contacts of the key employees, which is tough to put a price on.

Although Bowker’s assessment of the possible costs was guesswork, the tax working group’s own interim report appears to back up his argument.

Warning of substantial compliance costs, the report stated there would be a need to value all assets, as at a particular day. “This will impose a significant cost on many taxpayers for certain asset types”.

Cullen swiftly went on the attack, describing the warnings as “scaremongering”. Rather than defend the proposals that the working group has released to the public, Cullen pointed to solutions which exist, so far, only in the minds of the working group’s members.

The secret solutions!

Cullen has also floated the idea that while extending a capital gains tax in the way proposed may indeed require a mass valuation of businesses, it would not be nearly as onerous as imagined, because a degree of guesswork will be acceptable.

“Provided the valuation is reasonably fair, it doesn’t matter too much at that point of entry into the system. From the long term revenue perspective, whether it’s entirely accurate, as long as it’s reasonably fair, it doesn’t matter that much,” Cullen said on Friday.

This approach is both highly pragmatic and unusual.

Cullen saying the IRD will be okay with valuations that are “reasonably fair” is about as reassuring as Steven Joyce saying that the National Party’s campaign advertising was “pretty legal”.

The IRD is hardly known for taking a ‘close enough is good enough’ approach.

This is fantasy stuff. The thought the IRD will just accept good guesses as valuations is daft.

For those outside the working group though, we are supposed to simply sit and wait. Cullen has a solution to the problems, rendering the interim report of the working group meaningless.

For a process which is meant to be about improving the fairness of the tax system, this is a rather authoritarian approach to debate about how to achieve it.

Tax Working Groups can do very valuable work, when they are run by tax experts rather than politicians. A Tax Working Group run by the political mentor of the Minister of Finance has less credibility.16

Stuff reports:

Immigration Minister Iain Lees-Galloway did not get legal advice when making his decision to grant Karel Sroubek residency.

National’s immigration spokesman Michael Woodhouse says the revelation points to the file being a simple deportation case, where a “shocker” of a decision was made.

“No legal representation and a comprehensive file suggests to me that Immigration New Zealand (INZ) did not anticipate this being anything other than a straightforward deportation process.” …

New documents now show it took him 45 minutes – and within an hour, he also considered one other deportation liability file.

In written questions to the minister, Woodhouse asked if an INZ lawyer and the minister’s private secretary attended the meeting, where he made his decision on September 19.

Lees-Galloway said there was no lawyer, but his secretary and one INZ staffer attended the meeting.

In his answers, Lees-Galloway confirmed the meeting was held about 4:30pm and when asked how long it took, he said: “From memory it was approximately 45 minutes.”

I suspect Immigration NZ were stunned when the Minister granted residency.

Far more deserving cases have been turned down, as also reported by Stuff:

A “law abiding” chicken farmer is devastated he’s fighting to stay in New Zealand when Czech drug smuggler Sroubek was granted residency.

Jeremy Hedderwick came from South Africa 14 years ago. His Kiwi wife, Raewyn, died from cancer last year. Hedderwick says he’s on antidepressants because his situation is “emotionally tortuous”. 

“A criminal has got residency and I’m a law abiding person,” Hedderwick says. “I’m 65, but working as hard as any 20-year old.”

Sroubek, who was jailed for drug offences, was granted residency by Immigration Minister Iain Lees-Galloway. 

So the law abiding chicken farmer whose wife just died of cancer gets deported while the convicted drug dealer gets residency!!

Newshub reports:

Restaurateur John Palino has announced he’s running for Mayor of Auckland for the third time.

Mr Palino has run for Mayor twice before, in 2013 and 2016, losing both times. He came closest in 2013, coming second to Len Brown. In 2016 he came fourth behind Vic Crone and Chloe Swarbrick.

In 2013 Palino got 108.928 votes or 32% of the vote.

In 2016 Palino got 22,387 votes or 6% of the vote.

A year out from the election he’s the only candidate on the right to announce he’s running, perhaps boosting his chances.

Nobody else has announced they’re running yet, although incumbent Phil Goff and former Labour Party MP John Tamihere have both suggested they will.

“The whole key is whether or not there is other people running ’cause we’re just going to split the vote,” he said.

I’m pretty sure there will be others running.

HDPA writes:

It’s going to end up costing us $2.8 billion a year to help mostly white kids study. That’s actually more than all of the teachers in this country are asking for. If asked to choose between subsidising students and paying teachers properly, you bet most people would choose the latter.

If Labour is truly pressed for cash and truly responsible with the country’s finances, it should cancel its plan to make the second and third year of study free.

The students don’t need it. Give it to the teachers. Or the nurses. Or the midwives. Or the police. Or anyone who actually needs it.

Spending is a matter of priorities. Labour is going to spend more on free fees for students than they will on any other policy.

The Listener editorial:

It was a further disgrace that New Zealand First and Labour chose to politicise the tragedy at the last election, with Winston Peters promising to be one of the first to re-enter the mine. His swagger implied that cowardice, not caution, was the problem. Never fear, Peters would go where Mines Rescue had not been allowed to tread. This determination to re-enter the mine flies in the face of the only positive development to have come out of the disaster – a new zeal for health and safety. To unnecessarily risk more lives in the same mine, however much some of the families want it to happen, undermines the very principle this tragedy so firmly established: that safety is paramount.

Through all this, some of the victims’ families have heroically battled on, determined to see responsibility sheeted home somewhere, somehow. Their efforts have been laudable. The idea, however, that a team will be able to find in the devastated, burnt mine evidence that will lead to a prosecution seems illusory and the recovery of human remains sadly unlikely. Regardless, politicians have for years kept the families’ hopes dangling. This seems more cruelty than kindness. The closure the families seek might be further advanced had it been given more of a chance.

The $36 million cost of re-entry would not be worth mentioning, even to those who think the money could be better spent on reducing the rising road toll or child poverty, if the chances were higher that it will serve any purpose except political triumphalism.

Little has spoken of “knowing when to call it quits”. Arguably, and regrettably, that point has probably passed. There must be no more lives put at risk.

Can only agree. It will be $36 million wasted to score political points.

Troy Bowker writes in Stuff:

If the Government manages to push through the recommendations of the Tax Working Group (TWG), the 450,000 or so small business owners in this country will be hit with massive compliance costs.

Small business, meaning all sole traders and including businesses with up to 20 employees, are the back bone of the New Zealand economy.

Their contribution to our economy is enormous. Together small businesses employ roughly 30 per cent of our entire work force and contribute roughly $65 billion to New Zealand’s annual gross domestic product.

So what will be the impact?

In order to implement Labour’s controversial capital gains tax (CGT), the TWG have proposed that every business in New Zealand must be valued by a professional valuation expert all on the same day.

This is not only ludicrously impractical, if not impossible, but the cost to be piled on businesses to comply with this will be horrendous and in some cases crippling.

Cullen has responded that it might not be on the exact same day, but regardless it will be huge extra costs for every small business in NZ, and huge revenue gains for accountants and valuers.

The compliance costs forced upon small business will run into the billions – I estimate $10,000 on average for each small business, meaning $4.5b of costs forced upon them by Labour tax policy.

And that isn’t even any extra tax revenue. That’s just the compliance costs.

The TWG is recommending that CGT applies to assets already owned on the date the law comes into effect.

Making CGT apply to assets bought after the tax becomes law is by far the easiest and fairest way to bring in the legislation. It avoids the messy and expensive exercise of coming up with a value for these assets.

This method is also fairer on taxpayers since the new tax only applies to assets bought after it’s introduced so individuals and businesses know what tax they might be on the hook for at time they buy an asset.

That is the simple solution, if there is to be a CGT. Only apply it to future assets.

The three strikes law is having an impact despite the fact so many judges are reluctant to impose the third strike penalty of maximum sentence without parole.

Let’s look at the case of George Pomee.

1. 1st strike: two aggravated robberies in November 2013. Given 23 months jail.
2. 2nd strike: another aggravated robbery in April 2015 (so he must have been out on parole). Given 16 months jail which would have been without parole.
3. 3rd strike: Two more aggravated robberies in August 2017, so would have been very soon after release.

All the aggravated robberies had violence and the last one a gun and threatening to kill. I understand 16 convictions in total by age 24.

The judge said that if not for the three strikes law he would have given him six years and three months prison with parole eligibility in three years and one month.

Ideally he would have got 14 years with no parole but the judge said this would be manifestly unjust. I don’t think so as the offender has shown a pattern of the same offending soon after release.

But even with the judge refusing to give the full third strike, the offender still gets a 14 year jail sentence with no parole eligibility for five and a half years years.

So thanks to the three strikes law his parole eligibility is 66 months instead of 37 months.

And if he doesn’t get parole we’re safe from him for 14 years instead of six years and three months.

Stuff reports:

Greenpeace head and former Green Party co-leader Russel Norman said it was “disgraceful” NZ First had veto power over appointments for a review of an industry they were clearly close to.

“It’s completely unacceptable for a party whose leading member is bankrolled by Talley’s to be vetoing panel appointments,” Norman said.

He noted the previous Government had finally agreed to put cameras on boats, a decision put on ice by Nash.

“We now have a case where the Labour/NZ First Government is taking a worse position on fishing than the National Party.”

Yet the Greens sit in Government and do and say nothing in return for the baubles of office.

The Herald reports:

Auckland’s longstanding Santa has overwhelming backing after being ditched ahead of tomorrow’s Christmas parade.

Neville Baker, the man behind on the beard on the main float in the Farmers Santa Parade for the past five years, was fired for saying he would not hire women to play Father Christmas.

A Herald online poll has found nearly 90 per cent of people believe the My Santa director should not have been fired from the annual Christmas parade that attracts hundreds of thousands of children and families.

Yep the PC police strike again. What idiots they are.

If they insist that Santa Claus or Father Christmas can be female, then I look forward to them also saying you must be able to cast women to play Muhammad or the Buddha.

Also why restrict the Easter Bunny to rabbits. A ferret should be able to be the Easter Bunny also.

Personally I don’t care the gender of someone playing Santa Claus is, but to sack Neville Baker because he believes it should only be portrayed as a man is massive overkill.

An interesting report from Netsafe based on a survey of 1,000 New Zealanders about if they have experienced hate speech online.

The definition of hate speech for the survey was:

any technology-mediated speech or digital communication that offends, discriminates, denigrates, abuses and/or disparages a person(s) on the basis of a group-defining characteristic such as race, ethnicity, gender, nationality, sexual orientation, religion, age, disability, and other

So it is not abuse generally, but abuse based on a group characteristic.

The prevalence of online hate speech was not huge. Only 11% said they had experienced hate speech online in the last year. The breakdown by demographic was:

• Gender: 13% of men and 8% of women so men face more hate speech than women
• Ethnicity: Pakeha/European 9%, Maori 13%, Pasifika 13%, Asian 16% so Asians face the most hate speech online

A guest post by Anthony Morris:

Taxing capital gains is equitable

It is equitable as well as efficient to equally tax all forms of income generated from capital – whether that is interest, rent or capital gains realised after a short or long time. This is clearly not the situation currently. Take the example of two rental properties of identical value purchased with the help of a mortgage – one has high rent so generates a good annual cash return but gets little capital appreciation, and the other has low rent so barely breaks even after expenses but gets good capital growth. If they are both held for 10 years and then sold, the seller of the high rent property has paid considerably more in income tax than the seller of the low rent property who gets a big tax-free capital gain on sale. It could be that both investors have put in identical amounts of capital and earned identical amounts of cash, but one pays far more tax than the other – where is the equity in that?

Taxing capital gains on realisation causes problems and will raise little revenue initially

Capital gains are generally lumpy, being irregular and often large (like the sale of rental properties). Taxing these capital gains only when realised (when a sale occurs) causes a number of problems like discouraging sales of capital assets (lock-in) and giving an advantage from tax deferment. It also means there would be no significant revenue raised for some years from taxing all realised capital gains – assuming only gains accrued after the tax change is introduced are taxed (as qualifying assets are sold).

Delaying taxing capital gains until realisation makes the tax impost hugely uncertain

The delay caused by taxing capital gains only when realised also makes the amount of the tax hugely uncertain. A ‘retirement nest egg’ rental property could well be owned for 20 years before selling for example. Trying to look ahead over such a long period means it will be very uncertain how much tax, if any, will apply to the gain on sale. It is inevitable that several different governments of different political hues will come and go over such a time frame. The taxation of capital gains is a contentious issue so there is bound to be ongoing lobbying for various concessions and exemptions that will make their way into the regime.

The delay and uncertainly will severely blunt the effect of taxing gains on realisation

The delay and uncertainty that comes from taxing capital gains only on realisation means investors are highly likely to heavily discount their possible capital gains tax liability when thinking about the price they will pay for a capital asset they intend to hold for a while. People are generally not good at acting rationally when making decisions about the longer term anyway – which is why there are usually various incentives or compulsions for saving for retirement.

This inevitable discounting of the impact of the future taxation of capital gains may explain why capital gains taxes appear to have done little to lessen house price inflation in many countries around the world.

Taxing capital gains as they accrue creates a different set of problems

An alternative to taxing capital gains on realisation is to tax them as they accrue – like taxing annual increases in value. While this would mean investors would start paying tax on any capital gains almost straight away, this option brings a whole different set of problems. First there is the practical difficultly of fairly determining how much gain has accrued each year.

Secondly, there is the serious potential liquidity problem of taxing the accrued gain on an asset that has generated little or no cash. The accrued gain could in some years be huge compared to the ‘cash return’.

Example A

An Auckland rental property of $1 million might rise in value by 15% in a good year so generating an accrued income of $150,000 compared to its net rental income of maybe $31,000! Even assuming there is no mortgage against the property, at tax rate of 33% that would leave a cash deficit of $39,270 or $755 a week!

Not surprisingly, the Tax Working Group (TWG) is not proposing to tax capital gains as they accrue.

A less problematic alternative is taxing deemed returns

A kind of compromise between taxing capital gains on realisation and taxing them on accrual is taxing deemed returns like the TWG is considering for certain classes of assets. If applied more generally, a deemed-return tax would take a capital asset like a rental property and assume the risk free rate of return is earned, maybe 2.5% of its value, and treat this as income earned regardless of actual expenses. An alternative could be to deem a higher rate of return, reasonable for the asset class, and allow expenses to be deducted.

There still has to be a valuation process but getting total precision with the value would not be as crucial as with taxing accrued gains (when the difference between the current value and value in the preceding year would be all important). The rating valuation system may generally give a sufficiently accurate value.

Taxing deemed returns would still create significant liquidity problems for some

Applying a deemed rate of return tax wouldn’t produce the lumpy income that taxing accrued gains would. However, while taxing deemed returns would produce a reasonably consistent income figure, it could still impose significant liquidity problems. Rental properties, for example, often do not break even after expenses and interest. While some landlords are willing to have properties that make a loss for several years or more because of the likely capital gains down the track, imposing a substantial tax impost each year in addition to having to cover the loss could hit them hard.

Example B

Applying the deemed rate of return approach to a $1 million Auckland rental we might use a risk-free rate of 2.5%. This gives a deemed income of $25,000 per year or $480 a week. A reasonable rent for such a property might be $700 a week with expenses of $100, leaving $600 a week profit and generating a return of 3.1% so the deemed income approach leaves the landlord better off, at least in a year with low property expenses.

Example C

If the $1 million rental is purchased with a mortgage for 60% of the price, an interest rate of 5% and term of 20 years, this gives a weekly repayment amount of $911 – a shortfall of $311 a week but if it is changed to an interest-only mortgage the cost is reduced to $577 a week which allows the rental to just break even. There is virtually no surplus cash to pay tax on the $480 a week of deemed income – which with a marginal tax rate of 33% generates a tax liability of $190 a week or $8,250 for the year.

A better alternative would be a ‘minimum provisional capital income’

A more pragmatic proposal for extending the taxation of capital with less likelihood of causing a significant liquidity squeeze would be to deem a ‘minimum provisional capital income’ (MPCI) to be earned from qualifying assets. The rate for calculating the MPCI could be set at a very low percentage like 0.5% of the value of the capital asset. It would mean at least a minimal amount of regular income is attributed to qualifying capital assets, with an eventual ‘wash up’ on the realisation of those assets. The MPCI works like an advance payment of capital gains tax.

Since a MPCI would apply from day one, investors would take notice but at the same time the low amount of minimum income imposed means it should not be an undue burden. Because it is a minimum, it also wouldn’t apply if the asset was actually producing taxable income greater than the MPCI.

Example D

If the MPCI calculation rate is 0.5% then our $1 million Auckland rental property generates a minimum provisional capital income of $5,000 or $96 a week, which at a marginal tax rate of 33% gives a tax liability of $1650 or $32 a week compared to negligible taxable income and tax for income tax purposes when there is a $600,000 5% mortgage.

Example E

If the mortgage on the rental is $200.000 then the interest cost is $192 a week, leaving a surplus for tax purposes of about $400 a week or $20,000 a year. The MPCI does not apply in this case as the minimum income of $5,000 is surpassed.

Since the MPCI is provisional, there is a wash-up when the asset is sold and the exact gain (or loss) determined. Any incremental MPCI already returned (the difference between the income otherwise calculated for income tax purposes and the higher income of the MPCI) is allowed to be taken into account. This incremental MPCI goes into a capital income credit account (CICA) each year to be carried forward until the asset is sold.

Example F

To illustrate how the wash up works we go back to our $1 million Auckland rental with a $600,000 5% interest only mortgage generating no income for income tax purposes, so has the whole $5,000 of MPCI (on which tax is paid) going into the CICA each year. If this happens for 5 years in a row (for the sake of simplicity) and the property is then sold for a capital gain of $200,000, there is $25,000 in the CICA to credit against the realised gain so the taxable gain on wash-up is $175,000.

Example G

If market is flat market so there is no capital gain then the $25,000 in the CICA is used in the sale year to offset any other taxable income of the taxpayer. Any amount not able to be used is carried forward to use in following years.

MPCI calculation rate can be gradually increased and reduced if necessary

Because the MPCI is provisional, the rate applied to calculate it doesn’t have to be set in reference to anything and can easily be varied from year to year. This allows a ‘suck and see’ approach with an initial very low calculation rate applied to see what happens to qualifying capital assets. The rate can be gradually ramped up over time so investors are not unduly shocked, and any falls in the price of assets it hits the hardest are limited. The rate can be reduced if necessary.

Dealing with intangible assets

The MPCI would apply only to intangible assets that can be easily valued so not business goodwill, for example, unless it was purchased goodwill.

Dealing with capital losses

The TWG acknowledge if capital gains on qualifying assets are always taxed then there is an equity argument for allowing the recognition of capital losses, but this has to be managed to discourage gaming. Capital losses at wash-up could be restricted to being gradually realised over say 5 years.

Example H

If we take the circumstances of Example F but there is a capital loss on sale of $10,000, the balance in the CICA of $25,000 is allowed as an immediate reduction in taxable income. A capital loss of $2,000 is also able to be used in that year with a further $2,000 loss able to be used in each of the following 4 years.