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A good fight brewing on capital gains tax

Tuesday, July 5th 2011, 10:49PM 19 Comments

by Philip Macalister

Boy we are in for a good debate over tax if these reports that Labour plans a capital gains tax on investment comes to fruition.

I’d been thinking about the idea after reading a couple of piece over the weekend.

The themes which are emerging are that this National-led government doesn’t have a clear (or clearly articulated) economic plan. As an aside it is surprising how many National voters I have come across recently who say they won’t vote for the party this election.

It has, to its credit, revealed a plan to raise money by selling state assets to get the economy back into surplus. This too seems to have luke warm support. I wonder what happens in future economic cycles when we get into a hole and no longer have any state assets to sell. What will happen then?

Another option is to raise revenue by changes to the tax system. The most obvious one is a capital gains tax of some form.

Many, without giving it too much thought, will ridicule Labour’s supposed plan. It will be labeled a left wing, tax the successful, politics of envy sort of thing.

But wait a minute. If you explore the web you will find that many on the so-called right are supportive of the idea of a CGT.

So too are the other side.

We covered this issue in the previous election. The Greens and the Maori party supported a CGT.

Even the NZ Property Investors Federation had some sympathy for a CGT as opposed to other tax options targeted at property investors.

It’s also interesting to look at this in the light of changes the National-led government has made. Its changes to tax laws (depreciation and LAQCs) have neutered the capital growth/negatively geared investment strategy used by many property investors.

Now the standard strategy is cash flow positive with income, as opposed to capital gains. Under this scenario a CGT isn’t too bad.

There is some logic to a CGT. It is pretty much standard practice in other Western economies.

Put aside all the bluster and it may transpire that if this is what Labour proposes then it could be called real leadership and vision.

« Tenant skipping – a new approachIs CGT Labour's V-Day? »

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Comments from our readers

On 6 July 2011 at 11:57 am Kerry said:
and I guess the person who wrote the above article is a residential property investor?
and Mark Ellis pays CGT on his $18 million?
On 6 July 2011 at 12:00 pm Rajan said:
I strongly oppose CGT. Reason is that it targets only a certain section of the society (the property investors) to bear the responsibility of raising money for the country. Why tax people who have shown financial intelligence to earn money. We don't want to tax "smart" kiwis only do we? else they will be tempted to cross the ditch and we will be left with people who cannot make money! As a concept, its a lop sided and unfair approach. If the government has to raise money for the country, they need a plan that can be spread most evenly across the NZ population. Options should include raising tax on globally limited and imported resources like Petrol. It is one way to increase revenue and as a side benefit, drive the country to be more eco concious, reduce use of petrol guzzlers. Other options should include raising taxes on consumer products that increase health risks to New Zealanders, e.g cigarettes, spirits with high alcohol percentage and target some select extremely unhealthy foods. Again alternatives that will not only achieve the much needed revenue for the country, but also reduce healthcare costs in the future and play its part to create healthier society.
On 6 July 2011 at 12:01 pm A Holler said:
The CGT is a tax that has been discussed for many decades now and has not come to fruition. One of the reason is that the actual government pension pay out once somebody retires is far to little to be able to survive under normal circumstances.
This is why the real estate industry is existing or fueled by in NZ the way it works at present. The NZ government Kiwi Saver scheme has gone aground almost as typically NZ governments are fiddling with it. Confidence is decreasing and people are looking for other savings/investment models. Brick and mortar has proofed to be excellent seen the stats over the last 60 years and shows secure return. This labor pre election stir up is a "looking for sentiment" in the electorate as any party is trying to find out what topic could be a winner in the coming election. Unfortunately National is at present in the middle to sort out a already not functioning economy and of course it always easier when one is not in power to attack the horse which is stuck in the mud. The reality is that we all have to save and make somehow provisions for the retirement. A good government would applaud business entrepreneurship and support such action as essentially these are the people who are not feeding of ones back. The other reality is that our living costs are far too high and for many the reality is paying off bad credit. Saving for the bad days is a old tradition and has always paid dividends. One would already save lots of money by using the right priorities rather than buy always the wrong gadgets who do not appreciate value. Investing in conservative value increasing models is a strategy that has shown value over time. Unfortunately today's investors want to see value in a short time and with high returns, what usually is a risky business and ends in crashes which our world wide financial system has shown to all of us. We need to get back to basics and use what has proofed to work rather than trying things which are only based on a vogue short term fashion model.
On 6 July 2011 at 12:28 pm A Holler said:
Of course does Mark Ellis pays tax as one should not mix residential investments with commercial. Besides already today if anyone buys a rental property at the end when a sales occur there is a CGT. The proof of evidence with IRD at present are already today very stringent. If a property has been used for family purpose and this cannot be proofed otherwise sufficiently to IRD there is a resulting CGT.
The other issue that is rising in this debate who is actually paying in the end and is an additional tax with all its auxiliary running cost actually generating an income for the government. The reality is that taxes or any costs already are rolled over to the tenant either for residential or commercial. Lets focus on the real issues: rising health cost - why? rising transportation and energy costs -why? and how can we reduce them dramatically by having a healthier society by eating the right food and building the right homes who actually not waste energy but produce energy - that is where the savings are generated but not on a group of barely 200'000 NZ citizens.
On 6 July 2011 at 12:32 pm Andy said:
There are only two choices for home ownership - renting or owning. Many people do not want to or cannot buy their own home. Someone has to buy the house for them and let them use it for an agreed fee (Rent). There are only 2 options for this landlordship - Government (public) ownership or private ownership. The bottom line is that to save money the Government needs to move away from capital investment in housing for the poor. Therefore initiatives were put in place to get private investors to fund the housing stock - not only for HCNZ, but the whole economy. SOMEONE HAS TO OWN THE PROPERTIES THAT PEOPLE CHOOSE TO RENT. What is the point then of making this an uneconomic investment for them? There needs to be an incentive for people to purchase rental properties for the tenants. This investment is a long term investment. Taking into account inflation, improvements in the property, shifting locality popularity and opportunity costs will become a difficult and inequitable calculation.
There is already a tax on properties bought and sold as a course of business - on developers. This works well. There is no fit purpose to penalise the long term investor. As mentioned above - would Marc Ellis get taxed? And secondly - will that mean that a loss on a property will attract a tax loss?

I suggest a better alternative would be a tax on the profits made on the sale of a house purchased within 12 months (as is already in place).

To tax the capital gain on one investment property will prevent the investor from purchasing their next rental property, or they will not be able to trade up.

A capital gains tax on property will have a very negative consequence on the economy long term, and will cause more poverty than it cures. I can see that any tax gains from it will be spent on covering the increased welfare and administration costs.
On 6 July 2011 at 12:46 pm Kerry said:
I was not aware that Mark Ellis would pay tax on the sale of his shares. Why should you not mix residential with commercial.
The great hue & cry recently resulting in changing tax laws re depreciation etc has resulted in lack of rental accomodation resulting in increased rents and people looking at buying their first home rather than renting as rents are too expensive. Resulting in lack of listings and increased sale prices.
On 6 July 2011 at 12:57 pm Brett said:
CGT - No Thanks....and definitely not retroactive either ! The concept of expecting me to trust and invest in fat cats running things for the few (productive investment for growth... like Finance companies do you mean ?)is too hard to take. I agree with sentiments around people needing to be encouraged to improve their retirement financial position...not penalised. So that rules Labour out.
Sell Assets...especially core ones like Power related - No Thanks. Power is already too dear for retired people on a pension to afford to heat their homes...disgraceful. Dont make it worse by adding further profit motive on to a basic need. so that rules National out.
Brash - so that rules Act out.
Unless I am alone there are going to be some seriously cranky voters out there come election time.
Keep our NZ Assets, protect our future control of what we have and will need, and tax based on consumption, not what you earn or the value of your house ! No I am not affiliated to a party... I've just ruled them all out... no one is speaking my language.
On 6 July 2011 at 2:09 pm allan said:
i totally agree brett,labours just turned blue, and winston peters is looking good right now.
On 6 July 2011 at 2:29 pm Paulussie said:
I doubt Marc Ellis pays CGT on his $18 mil. Sam Morgan didn't pay any CGT when TradeMe was sold for $700 mil.

CGT might not be that bad if it is applied across all industries, not just landlords.

Could we then remove the anomaly of not being able to deduct building depreciation while we're at it please?

Would be even better to do this tax neutral. Government is too big as a proportion of our economy as it is, a big reason why we are laggards in the international arena.

But fat chance of that happening. Labour is only interested in taxing the rich and keeping the poor poor so that they get to govern. So stand by for this additional tax (as well as another top tax bracket they have in the offing for us!) Just watch Kiwis fly off to less greedy shores and yes, the poor will remain poor. Prepare to slide further down the OECD ladder when that happens :-(
On 6 July 2011 at 3:22 pm Kritzo said:
The rest of the world have had CGT since before the previous boom, and property investment is still as lucrative as ever in these countries. House values will rise to compensate for the additional 15%. It's almost like paying 15% GST on everything else. It will only penalise the speculators, whose not being taxed that hard at the moment anyway.

CGT is a good concept, and excellent revenue in a time where we need more sustainable sources of national income.
On 6 July 2011 at 3:35 pm Ian said:
Hey! you got to look at why it is thought that a CGT is needed. It seems to me it is 'needed' to fund the excesses of government. There needs to be a 'peoples tax' on government to ensure that government remains within managable limits. If more tax is needed then government is outsde its limits. Let's attack the cause rather than go along with the problem and thus ensure it gets even worse.
On 6 July 2011 at 4:49 pm Adam Cockburn said:
This is RISKY business... this tax will only raise money when the value of properties is growing. If the value of properties declines for any decent length of time, this tax will BANKRUPT the Govt. This initiative will not ultimately help average kiwis get into housing either - we have plenty of proof of that from overseas economies. Pull your head in and leave the free market to determine the value of housing - values and rents alike.
On 6 July 2011 at 4:52 pm Noel said:
CGT has hitherto being promoted as a tool to cool house prices during spectulative booms. Labour would seem to want to use it to punish the wealthy (eg the reference to the family bach). On the first point Aus and UK have CGT and it did little to calm housing boom. On the second many NZers have family baches. When I was a child it wasn't the preserve of just the wealthy. Many have now been passed to the next gernetation in complicated shared scenarios to mulitple children who are not wealthy (disclouse: that describes my situation). Also NZers move a lot (eg to UK) and thus rent out their house for a while (ie mixed use). As J.Key pointed out (love or hate him) any CGT will be hugely comlicated, a boom for accoutanting fees and the wealthy would likely find a way around it. I guess Labour are trying to appeal to emotion somewhere but we actually already have a CGT. It depends upon intention. This could simply be tweaked to be better defined (eg buying a negative cashflow house should be consdiered bought for Cap gains unless proven otherwise rather than other way around).
On 6 July 2011 at 7:44 pm The Landlord said:
Thanks for the comments. I wanted to clarify a couple of things.
Firstly there is a commonly expressed view that introducing a CGT is "political suicide". This is an intellectually lazy argument.
I reckon there will be far more support from both sides of politics than many expect.
Hence my comment about people questioning National. I hear this at property investor events (like one last night) and within the financial services industry.
If we do have a CGT it needs to be equitable and not targeted at just one group of investors.
Whether I agree with a CGT or not isn't the question. Rather a CGT will be introduced in New Zealand sometime - just like we will become a republic. When? I don't know.
On 6 July 2011 at 8:12 pm Graeme said:
Most correspondents miss the point. If you invest in property the value of that property rises over time. If you later sell it, and want to buy another property, you have to pay the new higher value for that too. So the investor has not made anything in real terms - it is a simply case of the value of the asset rising over time along with the value of any replacement.
I own a couple of classic cars - I sold one recently for 40% more than I paid for it three years previously. That didn't attract capital gains tax, and why should it? It was purchased as part of a hobby, and I simply rationlised my collection.
People are are right about the Nats going off course. I believe in partial listing of SOEs, because under that scenario their performance will improve to match listed competitors, and the return to taxpaers on the taxpayer investment will actually increase. But the latest energy reforms are a crock - another round of Bradford type botch ups that we are all paying for now, and will continue to pay for in the future. And rents are rising, and will continue to rise, as a result of ill thought out changes to rental investment taxation.
All of which is due to something unintended consequences - something politicians of all ilk are good at. Because the politicians doing this stuff are stauch in their respective blue, red, green or brown trenches, and are advised by career public servants who have never exisited like most of us in the real world.
I've voted National all my life, except for one burst at the old Bob Jones party and one at New Zealand first.
Sadly, thick and stupid (albeit in Key's case personable and likeable)as the current lot are, the alternatives don't look any better. In fact Labour are in a rapidly collaping hole, with no leadership, and none in the wings. Cunliffe has an ego bigger the Ben Hur, and Parker is an opinionated and basically stupid clown.
Which leaves me, and many of my friends, looking closely at options that are not in the best interests of New Zealand.
Frankly, I've had a gustsfull!
On 7 July 2011 at 12:15 am Brian said:
No thanks. Would farmers be subject to CGT when selling the farm? Why must we keep going through these cycles with a Robin Hood approach. Let's encourage property investors rather than trying to suck the energy out of them.
On 7 July 2011 at 6:57 am Patrick Rankin said:
If the PRESENT Govt. choose to reduce its state housing capacity whilst the percentage of renters in the population is increasing and introduce a CGT, we need to carefully consider the group within the population that will benefit, will it be the general population that voted such wise men to their public office? Did not think so. Well I guess Joe the plumber gets it in the gut again!! But then we get the Govt. we deserve dont we?
On 7 July 2011 at 10:09 am Creamof Someyoungguy said:

Ahhh New Zealanders, still arguing over mid to late 20th century concepts like capital gains tax. Ever wonder why your country went from being in the top five wealthiest countries in the world to just scraping in the top thirty?

The current taxation system in New Zealand slows liquidity as the middle class invest their entire future on a fixed, long term asset. Australia owns your banking system and your currency whilst the Chinese are looking to leverage the dragon into your commodities market.

Think BIG New Zealand, think big...

Not to worry though, you're about to win the world cup bro!
On 7 July 2011 at 10:57 pm Aaron said:
Simply Labours desperate attempt to gain votes by attempting to appeal to the disaffected looking to blame the so called rich who in my experience are simply average people who consciously plan and leverage the resources at their disposal. A distasteful commentary on the Labour mindset.
Commenting is closed



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