Australia provides an excellent case study looking at the best ways to implement a capital gains tax. In the early 1980s, the Australian income rules for taxing capital gains were much the same as they are in New Zealand now. In some cases this even enabled Australian case law on the Australian legislation to be used to interpret the similar New Zealand laws. 
In 1985 Australia changed its course. It introduced a general realisation regime for taxing capital gains and losses. Below is an analysis of how Australia dealt with the 5 key issues outlined in box 2 and this is used to make recommendations on the implementation of a CGT in New Zealand. Table 2 outlines Australia’s CGT, based upon the parameters set in the previous analysis.
|Design Issue||Australia’s CGT||Advantages||Disadvantages|
|Realisation or accrual?||Realisation||Far more practical than an accrual based taxation which suffers from the potential lack of liquidity.||Less efficient than an accrual based taxation.|
|Treatment of primary residence||Primary residences are exempt from CGT.||Improves equity by recognising the right to home ownership for middle and lower income families.||Increases loopholes and reduces the integrity of the tax.|
|Gains from inflation||Indexed to inflation.||A more equitable taxation as the CGT ends up only taxes real economic gain.||Calculating indexation results in increased complexity.|
|Death||Assets transferred to beneficiaries are not treated as disposed of, but are instead treated as newly acquired assets for the beneficiaries.||Avoids an element of ‘lock-in’ as assets will eventually have to pay CGT when sold.||Still results in a delayed payment of CGT.|
|Transition||Assets exempt from taxation if purchased before CGT implementation||People did not have to search for documentation for assets purchased well before implementation date.||Created horrendous lock-in effect as people were unwilling to sell their pre-1985 assets.|
If we return to our initial parameters for assessing the impact of a capital gains tax, improving equity and efficiency, Australia provides a mixed picture. Assessing the impacts on economic efficiency is always going to be difficult, based on the fact that Australia’s economy is unique (as is any economy to a degree), and the fact that such situations rely on an inevitable subjective counter-factual about what may or may not have happened if a CGT had not been implemented.
What is easier to assess, however, is how progressive the CGT in Australia has been. Figure 3 clearly demonstrates that the capital gains tax has affected those in the highest income bracket.