Why a capital gains tax should capture the family home

By Mark Lister

A capital gains tax is back on the agenda by the sound of it, if we see a change of government. This should worry property owners more than share investors, as they probably have more to lose.

Shares are misunderstood in New Zealand. Many people think the market is somewhat of a lottery, and the only way to do well is by being lucky enough to pick a few winners that go up in value.

The reality is quite different. Over the past 20 years' NZ shares have delivered a return of 8.5 per cent per annum. However, most of that return is from boring old dividends rather than capital gains, 71 per cent, to be precise.

That's important, because it means a capital gains tax would only impact the other bit. The vast bulk of the return already attracts income tax at the investors' marginal rate. In short, share investors are already paying tax on more than two thirds of their return, which is probably a lot more than many property investors.

It's harder to quantify how the returns for property are split between rental income and capital gain, but I suspect they are skewed much more toward the latter.

The gross dividend yield for the NZX 50 index is 5.5 per cent, whereas the average rental yield across New Zealand is just 3.8 per cent. In Auckland, it's even lower at only 2.8 per cent, according to QV.

Contrary to popular belief, it seems shares are often the asset class of choice for investors looking for steady income. Property arguably holds more appeal to those after a quick capital gain and looking to make use of easy leverage.

Most share investors I come across are investing for income, rather than chasing big capital gains. They want a passive earnings stream that will grow steadily and keep pace with the cost of living.

Fortuitously, the local market is quite useful in this regard. It is dominated by predictable businesses that generate strong cash flows and pay a good portion of these out as dividends.

These companies have already paid tax on their profits so rather than be taxed a second time, investors get something called an imputation credit. This means the cash dividend they receive is, for the most part, tax paid. It's actually a very good system, and we are one of the few countries to do things this way.

A capital gains tax might have some merit. It would certainly force people to focus more on the cash flows an asset generates, which theoretically should mean things are valued more appropriately.

It would need to be implemented sensibly though. That means making it free from exclusions (including the family home), otherwise such loopholes leave it open to exploitation and accounting trickery.

Labour leader Jacinda Ardern, however, has ruled out including the family home in any capital gains tax policy.

It should also go hand-in hand with a corresponding decrease in our income tax rates. That's the whole point right? To tilt things away from the wage and income earners, and shift more of the burden onto those focussing solely on capital gains?

- Mark Lister is Head of Private Wealth Research at Craigs Investment Partners. This column is general in nature and should not be regarded as specific investment advice.