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Capital Gains Tax in New Zealand

AUTHOR: The Professional Trustee Team

POSTED: 21 August 2014

I thought in an election year, political parties were meant to put forth policies that would aid and assist Kiwis, policies that would entice citizens to cast their vote in their direction. How mistaken could I be, or is that Labour being mistaken?

Yes the old chestnut of the introduction of capital gains tax is being spouted again, this time as a policy Labour will implement if they win the election on 20 September 2014.

CAPITAL GAINS TAX - WHAT DOES IT MEAN?

Labour's motivation seems to rest on the premise that if capital gains tax is introduced, Kiwis will stop investing in property and instead invest in other more productive investments. They believe this will not only aid the economy but also act as a curb on house prices rising, making it easier for first home buyers and others to get a foothold in the property market.

Under Labour's policy, capital gains tax will be set at 15 percent on any net gains experienced on the sale of a property after the introduction of the tax. The family home will be excluded from the net. Just to reinforce its policy aim of diverting funds from investment in real estate to other productive vehicles, it intends to disallow landlords from claiming losses on their properties against their personal income.

Capital gains tax won't just be applied on property sales. Labour intends to apply the tax to net sale proceeds generated from the sale of businesses where they are sold for $250,000 or more.

WILL CAPITAL GAINS TAX WORK?

I have to wonder whether the introduction of the proposed capital gains tax would in reality achieve the objectives of Labour?

Currently, those who have an intention of making profits from the sale of realty are taxed on the profits they make. Accordingly, no extra revenue will be added to the government coffers from these particular pockets. Nor, some say, will the imposition of the proposed tax lead (in the early stages) to a great chest of gold bullion being collected. Given this, it's hard to see how this tax aids the economy as Labour is purporting it will do.

Would Labour's second objective be accomplished by the tax? Would it lead to funds being diverted from property investment into other assets, resulting in the curbing of house prices? Doubtful, I think.

Throughout New Zealand, the housing market is fuelled by demand. When demand is high and supply is low in respect of any necessary economic good, prices go one way. Housing is no exception to this rule.

In certain parts of our country such as Auckland, demand for housing has been way ahead of supply for some time. Supply hasn't kept up with demand for a variety of reasons, including the lack of available, affordable land and resources.

Escalating land cost, rising legislative fees (e.g. council fees), climbing construction and material costs, a decrease in the supply of qualified labour and consequently, an increase in labour wages, have all lead to a disincentive of individuals and developers to build. Supply has therefore been affected.

On the flip side of the coin, increased internal and external migration through to New Zealand, especially that coming into Auckland, coupled with the availability of cheap credit, have fuelled demand. Thus the imbalance between supply and demand is born. The implementation of a capital gains tax will not in my view, serve to remedy this state of affairs.

POSSIBLE POLICY EFFECTS

If people have to pay a capital gains tax, they are likely in the first instance to hold off selling their properties. This will cause an even bigger shortage of supply. Migration is not expected to drop in the short run and thus an even greater imbalance will occur. How does this help act as a curb on property prices rising? It doesn't, which means it certainly won't be easier for first home buyers to buy after the tax has been introduced.

In the long run, people will simply factor the capital gains tax they must return to the IRD into the price they want when they put their property on the market. Assuming the market meets their desired sale price, house prices will be pushed upwards. On no account will this help the first home buyer secure their own abode. Ultimately, unless the question of supply of housing is addressed, the imposition of the capital gains tax will not meet Labour's objectives.

Implementing Labour's capital gain tax policy may also have unwanted consequences. Judging from other countries' histories when the tax was introduced, many professionals will be kept busy and in good fees attempting to find ways to avoid the tax.

We must also be cognisant that New Zealand is made up of small businesses. Will applying a capital gains tax to the sale proceeds generated from those businesses act as a disincentive for people to get into business in the first instance? Probably. The majority of business owners in New Zealand go into business with the view that the business, and the eventual sale proceeds derived therefrom, will in some proportion fund their retirement. Less proceeds to use in retirement could place an even greater burden on government in respect of superannuation payments. Maybe this will be avoided if rollover relief is available like it is in Australia. Self-managed super funds might also be introduced which in my opinion, could be a very good thing for Kiwis.

SUMMARY

In summary, I don't think introducing a capital gains tax into our legislative environment is the right thing to do. Labour seems to me to have misunderstood the problem. It's proposing a solution which does not address the underlying issues I've raised, and possibly will lead to unwanted and unintentional consequences.

The policy also ignores our culture and our social values. Housing per se has been our way of saving. The majority of New Zealand's don't favour putting their hard-earned dollars in stocks, shares and bonds. The stock market crash of 1987 still reigns prominent in many a Kiwi mind. Let's hope when New Zealanders go to the polls they won't vote with the mistaken belief that Labour will introduce a policy that will deliver all it's touted to offer, including a larger degree of fairness and equity to all.

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The Professional Trustee Team

09 522-7955

info@gra.co.nz

© Gilligan Rowe & Associates LP

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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.

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