Housing rent likely to rise with capital gains tax

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Rents are likely to rise if a capital gains tax (CGT) is introduced in New Zealand, which could have far-reaching ramifications - among others - for the housing market, says Drew Herriott of accounting firm Grant Thornton.

Friday, October 2nd 2009, 3:06PM 1 Comment

by The Landlord

"If rents do rise and people cannot afford the increase, what sort of pressure is this going to put on Housing New Zealand to supply affordable housing? There already appears to be a shortage of affordable housing in the Auckland area, this will only make it worse," he says.

"The pure return on a rental property is not great. Generally, a rental property investor will factor both timing tax advantages (depreciation) and capital gains into their investment decisions."

"If an investor buys a flat for $300,000 and rents it for $300 a week, they are looking for that property to appreciate to say $400,000 over the next five years. If a tax is now introduced on that capital gain, then the $300 rental will not stack up, it will have to increase."

With much debate already in Parliament about a CGT, Herriott believes it is only a matter of time before some form of tax on property is introduced.

"I think we can take it as given that the privately-owned family home will not be included in such a move, but rental properties will be in the government's sights for two reasons," he says.

"Firstly, they will be looking for ways to take steam out of the property market as New Zealand and the housing sector recovers from the recession, and they will also be looking at other ways to fill up their depleted tax coffers."

New Zealand already has a robust tax on a number of property transactions, involving speculation and this was given further teeth in the 2007 budget, which increased investigation enforcement into this area.

However, Herriott believes the government has some pressing income needs.

"In the year to June 2009 the Crown had to make $2 billion worth of tax refunds to companies, approximately twice that of 2008, while personal tax refunds were also up 15%."

He believes the government coffers could deteriorate even further over the next three quarters, when considering the expected tax take for the June 2010 year.

"Hence the necessity to find other forms of income and the focus on capital gains."

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