In the final of a five-part series on the effects of a capital gains tax, ANNE GIBSON looks at what it could mean for property.
Profits on selling property are generally untaxed. If you buy a rental, and later sell it at a profit, you will usually get to keep all the gain. Only the bright line test demands that gains are taxed, at your applicable tax rate, if you sell within five years of buying.
What will the Government's final policy look like?
At this stage, the answer is unknown. The Tax Working Group's key recommendations were to tax capital gains made on investment housing, shares, business assets and some intangible assets, but to exempt the family home and certain personal assets such as jewellery and art.
The tax would not apply to past gains in a property's value, but only to the increase after some future "valuation day". As recommended, the tax would be paid at the taxpayer's marginal rate
Who likes the idea?
Dominick Stephens, Westpac's chief economist, says: "It would improve housing affordability, lead to a higher rate of home ownership, help remove the heavy skew we have towards land-based investments, and eventually lead to a more diverse national balance sheet. It would also improve incentives to engage in paid work if income tax was reduced."
Stephens says property is more lightly taxed than other forms of investment. Treasury and Inland Revenue estimate that property investors pay 29.4 per cent of their after-inflation returns in tax, while bank depositors and owners of dividend-paying shares fork out a hefty 55.7 per cent.
"We tax the income earned on investments very heavily, but we tax the capital gain earned on investments hardly at all," he says. Bank deposits, for example, yield only income and are therefore taxed heavily. By contrast, property investments return little in the way of taxable net income and more in the way of tax-free capital gain, Stephens says.
"This has made property investment incredibly popular and that popularity has been one factor pushing house prices higher. Another quirk of New Zealand's tax system is that property investors enjoy more favourable tax treatment than heavily indebted owner-occupiers. Property investors enjoy tax deductions for mortgage interest and property maintenance whereas owner-occupiers do not."
What landlords say
Andrew King, chief executive of the NZ Property Investors' Federation, is crying foul, saying landlords are already heavily taxed plus they pay local body rates.
"The Government accepted that a CGT will not reduce house prices but will put pressure on rents," says King. "It will have a dramatic effect on businesses and all investment decisions and make our tax system highly complicated without earning much extra. A watered down CGT that just applies to rental property is also unlikely because there are no real benefits but a high risk that rents will rise."
If a CGT is introduced, it should be on all asset classes, he says, but not at the owners' tax rate - which is what the Tax Working Group has suggested.
Aaron Quintal is a corporate tax partner at EY. What issues does he see with a CGT on rental properties?
"The big issue for rental properties is the same that faces all assets: valuation. Even if the Government says you can rely on your rateable value, everyone is still going to want to get an independent valuation to see if it reduces their potential tax cost. Even if the cost per property is not huge, the sheer volume of rental properties and second homes makes this a huge task."
• What concerns does he have? "Broadening the tax base will generally reduce distortions but not always. If a reasonably principled boundary - we don't tax capital gains - is replaced by a more arbitrary boundary - we tax capital gains on rental properties and holiday homes, but not on the family home so long as the land is less than 4500sq m - then it is unclear whether we remove more distortions than we create. So any revenue eventually raised by the CGT is not free money for the Government," Quintal says.
"Asset prices go up and down. CGT revenue is cyclical and with the Government allowing the offset of losses against other income, when asset prices drop, the Government's books take a hit. A CGT is like the Government taking a 33 per cent stake in every rental property. If house prices go down, all taxpayers will share the pain."
• Does he think the Property Investors' Federation concerns are valid? "The work done for the TWG was unclear about the impact on property prices, but was pretty clear that it expected rents to rise. If the after-tax return to landlords is falling, especially with the new rules ring-fencing rental losses, it is inevitable that landlords will try to raise rents if the market will bear it."
• Are there any points in favour of a CGT on rentals? "The taxable returns landlords have been making have been less than the Government bond rate; in many cases, rental properties are being run at a loss. This has only been sustainable because house prices continue to be propped up by owner-occupiers who don't make their house-buying decisions based on a property's rent yield.
"This means housing is a rare asset where long-term capital gains can outstrip the underlying income. If there is a sustained and regular gain being made, there is a fairness argument for this to be taxed. But how much complexity and compliance cost do we introduce to bring about that fairness?"
• What complexities could be created? "Boundaries are what creates tax complexity. What is the family home? What if someone has flatmates for part of a year, puts their house on Airbnb while on holiday, or have a room where they run a business?"
• Does he agree with the family home being exempt? "I don't think anyone in the world taxes the entire family home capital gain. But it does drive one obvious distortion - the mansion effect. If someone wants to get property market exposure to save, they can buy a rental property or a bigger family home. Obviously there are limits, but not every dollar pulled out of the rental property market will go into shares or businesses."
Tauranga property investor Sharon Jackson says she's worked hard to get to where she is, and asks why landlords are being targeted. By Kiri Gillespie
A Tauranga property investor says the Government is landlord bashing with its proposed capital gains tax.
Retiree Sharon Jackman owns several properties and although she understand the logic behind a CGT, she feels its proposed implementation is "unfair".
"I don't know why they are landlord bashing," she says.
"You would think they would be happy we are providing accommodation for people because the Government aren't [doing a good job] are they?"
Jackson says back in 1971 there was a significant Government campaign which encouraged New Zealanders to start saving as there were concerns there would not be enough money for a national superannuation scheme in the years to come.
"They really pushed that we needed to provide for ourselves and we heeded that message. Over the 40 or so years since, we worked hard and lived prudently and put a bit aside. I don't see why we should be punished for that."
Jackson says she is not panicking and is not rushing to sell, but will be watching the Government "very, very carefully".
"... it's how they will implement that, that's a concern for me."
Another landlord, who would not be named, says he does not believe the proposed CGT would come into effect.
"I'm not worried because I don't think it will happen. Look at how quiet Jacinda has been since she proposed it. If they go ahead with it, it will be the death knell for [Labour].