IMF's capital gains tax proposal 'dead on arrival'

A capital gains tax aimed at encouraging more investment outside housing is among the International Monetary Fund's recommendations for New Zealand.

An International Monetary Fund proposal for a stringently enforced capital gains tax for New Zealand would work in theory but politically the idea was was likely to be "dead on arrival", commentators said today.

A capital gains tax aimed at encouraging more investment outside housing and the introduction of a debt-to-income limit on mortgage lending are among the International Monetary Fund's recommendations for New Zealand to support its solid economy and sound financial system.

The global body of 189 member countries, set up to foster international monetary co-operation, was largely upbeat about New Zealand's economy in a preliminary statement at the end of a two-week visit by officials, saying there was "strong expansion driven by record high net migration, strong construction activity and accommodative monetary policy" and growth was set to stay above trend heading into 2018.

IMF mission chief Thomas Helbling told a briefing in Wellington that targeting bottlenecks in the housing supply, redirecting savings from property into other investments, beefing up support for innovation and continuing to pursue trade liberalisation would help lift potential growth for New Zealand.

Matt Goodson, managing director of Salt Funds Management, said the capital gains tax proposal was fine in theory "but the IMF does not have to win an election this year", he said.

"On a theoretical basis it would make a lot of sense, although at this point of the cycle, given the high basis cost of many people's houses, it would probably not do too much, but in practical terms it would be dead on arrival," he said.

Goodson said a capital gains tax could get complicated, particularly if it was applied to farms, which are a combination of a home and a business.

Introduction of a more stringent capital gains tax would also mean death and gift duties.

"It [a capital gains tax] is easy to say quickly, but it's more complex in practice," he said.

Goodson said removal of the current, favourable, tax treatment afforded to property investors - such as the tax deductability of interest costs and local authority rates - would make a more meaningful difference for the economy than a capital gains tax.

John Kensington, a partner with KPMG in Auckland, said any government would require a "phenomenal" majority to usher in a capital gains tax but that he agreed with the principle behind one.

Kensington said the favourable tax treatment of property was one reason the local capital market was less developed than it could be.

"If we had a bigger and deeper sharemarket, that would not be a bad thing," he said.

However, he said any party who wanted to introduce the measure would need a lot of fortitude as it would be "political suicide".

Kensington said "it would not hurt" if property was treated the same as every other class.

A tweak to the country's existing capital gains tax such as extending the brightline test on property sales was seen as addressing both housing issues and supporting savings and other investments, Helbling said.

"There is a sense that the asset allocation in New Zealand households has a bit too much emphasis on housing versus other investments. We think a capital gains tax at the margin would help," he said. "We think small distortions there would probably be beneficial in the sense of redirecting savings towards other instruments and deepening the capital markets."

The IMF's outlook for New Zealand's economy was favourable, but household debt remained high and was a risk to financial stability.

On the financial sector assessment, IMF mission chief Alejandro Lopez-Mejia said the programme found New Zealand's financial system was generally resilient to severe shocks but that the regimes could be enhanced.

A spokeswoman for Finance Minister Steven Joyce this evening said:

"The Government has introduced a 2 year bright line test to tax people investing in housing to make a profit, and a residential land withholding tax on overseas-based investors. Both are in place now."

There were "no plans at all for a wider capital gains tax on properties like the family home or business", she said.

- additional reporting: BusinessDesk