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Capital gains tax back on the menu?

Wednesday, August 19th 2009, 10:27AM 4 Comments

by Philip Macalister

Tax reform is one of those phrases which we are all going to hear a lot about in coming months and one suggestion already being aired is a capital gains tax on property.

Property investor lobby groups made it clear before last year’s election that, vote for Labour and you vote for a capital gains tax on property.

Vote for National and you’re safe, they said.

The argument went that Labour was keen on a CGT and so too were its likely support partners, the Greens and the Maori Party.

Well hello; investors got their National-led government and its Finance Minister Bill English seems interested in the idea of a CGT on property, or some form of land tax. Yes, he has acknowledged that it may be hard to get through the National party caucus, but I am sure if he wants to he will succeed.

While New Zealand may be out of line on this one with many of its peer countries, I am happy for that to be the case as there is little evidence a CGT works in keeping house prices down.

The other side of the argument which is difficult to fathom is that many argue Kiwis shouldn’t invest in residential property. Well if this group of more than a quarter of a million people aren’t prepared to own, finance and manage houses, who is going to?

Property investment is a legitimate form of investment. Investors are landlords and providing a service industry – accommodation.

Do we really want house prices to fall 30%? That would see a huge loss of wealth to the community and no doubt put some major strains on the economy.

While I don’t think the people making these claims have much credibility with their forecasting, the fact that they get so much air time is scary.

Leave these things like CGT on property alone. Previously the playing field was tilted in favour of property investors, however changes in recent years, such as KiwiSaver and the PIE tax regime have evened up the score.

It will take time for people to shift and change their investment patterns, but it will happen – slowly.

Instead of a CGT on property, more effort should be made in strengthening and deepening the capital markets so there are other investment opportunities.
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Comments from our readers

On 29 August 2009 at 4:56 pm Simon Hepple said:
You mentioned that the playing field has been evened up with the new PIE regime and that property provides a useful service to society for tenants.

I do not dispute that landlords provide an extremely useful function in society, but no more useful than a farmer, a banker, a journalist or a teacher. That is not the point of what you are arguing against - a possible capital gains tax on capital assets.

The tax advantages that investors are looking for in property investment over direct shares or fixed interest, is the ability to negative gear against your own income. To make it even sweeter for investors to look at this asset class, you can even claim depreciation (currently 3% and who has heard of properties decreasing in value over the last twenty years!!), depreciation on chattels, computer costs, mileage for your car, telephone costs, etc, etc. Which of these expenses can I claim from my shares, fixed interest or managed funds? What makes property even more favourable for a PAYE taxpayer is that if I am on the 38% tax bracket, I am not even that interested in the yield of the property, in fact, I do not want it to make money as then I have to start paying income tax at this high level. I am better to sit negatively geared for 5 years plus and watch the capital gains, before using the property to purchase further properties, all of which remain negatively geared until retirement. In retirement, I start selling some of them off to use to repay the debt and due to the now lower income tax bill currently 19.5%, the tax situation is far better.

And you think the playing field is even for property investment?

A much better solution to a CGT or stamp duty is to only allow tax-losses to carry over into a year in which the property is actually making money. Or even better get rid of the ability to claim depreciation each year.
On 11 September 2009 at 3:09 pm Lee said:
Great piece. Well written.
On 22 October 2009 at 10:29 pm Selwyn Pellett said:
Fix all our problems at once. There is no silver bullet but the mix of solutions are not that difficult to put together.

Stop giving PAYE deductions to property speculators (ring fence losses as Australia does)

Bring in Capital Gains Tax (CGT) on everything other than the family home (as Australia does)

At introduction of CGT exempt all current investment so that CGT is not retrospective (as Australia did)

Capital Gains Tax only applies on the difference between inflation and the realised value (as Australia does)

Progressively introduce compulsory superannuation (as Australia did)

Increased contributions in times of pending inflation and reduced contributions during recessionary periods (as Singapore does)

Adopt a managed dollar as part of our monetary policy, against a basket of our trading partners that ensures both price stability as well as protecting our tradable economy (as Singapore does)

Recapitalise Kiwi Bank to take market share and hard wire its behaviour to the needs of the RBNZ thus reducing the negative impacts of the big four Australian Banks on our economy

When we have addressed the current distortions then we should consider promoting ‘winning behaviours’ through the tax system (as Australia does)

In case anyone wants to know Singapore’s growth last qtr was 15% ours 0.1%

But in the last 22 days our dollar to the USD has increased 5.6% Singapore’s just 1.6% and Taiwan’s -0.6%. Of course its the USD right? Perhaps it’s our monetary policy?
On 12 November 2009 at 11:46 am Maria I said:
Hi All,

I do like the Selwyn Pellett opinion but do not believe that it can be implemented in NZ due to different interest between the tycoons. Simon painted landlords as nasty, greedy crowd and suggest that the expenses don’t have to be deductible. On the other hand if you consider the shares and the PIE’s you will see that they have no ongoing expenses at all and you investing just your free cash so there is nothing to be deduct. The property on the other side has multiple expenses as mortgage interest, maintenance, rates, insurance, vacancies all of which have to be summed against the rental income. Just to put as addition that the building depreciation is deductible when the property is sold.
As per Mary Holmes opinion that I share introduction of CGT will lead to initial withdraw from the property investment market that will flood the market with ex-rental properties, which will lead to decreasing of the volume of rental properties and subsequent rise of the rents. Further more as the expenses will be not deductible the rental properties will be left in most of the cases negligent as only mandatory repairs(as broken pipe) will be performed and the rates and mowing will be move on the tenant behalf. It will lead to decreasing of life style of the tenants, as there will be no renovations for an decades. CGT will introduce a double side knife as investor will be forced to substantially decrease its rental income, or as most of the case increase his rental loss and then when sell the property will be charged again on the equity. On the article in Hamilton newspaper was even mention proposal with yearly tax of 4% on the equity value. So if the house is 350 000 and the mortgage is 200 000 will have 4% X 150 000 = 6000 equity tax that will be added to the investor income and taxed.
As conclusion, I think that introducing this tax without giving alternative protection alternative for people shrewd enough to think and put a lot of affords to secure their future and retirement will be very unfortunate and punishing on top of every others embarrassments that they have to deal within the current taxation system. Cheers, Maria
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Kainga Ora - First Home Buyer Special - - - -
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