Capital gains tax: landlords express relief for $150b of housing

Andrew King opposes CGT on investment properties. Photo/Doug Sherring

The head of an organisation representing about 7000 of New Zealand's 270,000 landlords expressed relief at the Government's capital gains tax rejection, saying $150 billion of property or a third of homes was are at stake.

Prime Minister Jacinda Ardern has just announced the Government rejected the Tax Working Group recommendations to tax residential investment property gains and said Labour would no longer campaign on the issue.

Andrew King, NZ Property Investors Federation executive officer, said around 270,000 landlords owning 464,000 residences for more than 1m tenants could have been be at the centre of the changes which were predicted to hit the rental sector hard.

"A great decision. I applaud the Government for realising this was not the right or fair thing to do. It wouldn't help first home buyers and would negatively affect more than 1 million tenants by increasing costs," King said.

The federation strongly opposed capital gains tax on rental properties, telling the Tax Working Group last year that landlords were already heavily taxed, the new regime would not bring down house prices and landlords already paid $1b-plus annual taxes.

"Apart from providing accommodation for a third of all New Zealanders, the rental
industry pays annual tax on a net rental income of around $1.5 billion, pays rates and
supports many other industries such as insurance, property management and many
trades," the submission said.

Most tenants, or around 85 per cent, rent from private landlords and pay around $64m/week which amounts to around $3.3b/year.

King, today in Melbourne, argued for the existing system to continue.

"The current broad-based system is working well. Contrary to public opinion, rental property owners do pay tax and have paid tax on approximately $1.4b of rental income in each of the last five years," his submission said.

Maintenance, property upgrades, insulation, insurance, rates and other costs should be taken into account, he argued.

But others had supported the tax on investment properties, for example, Westpac chief economist Dominick Stephens.

"It will 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.

Dominick Stephens of Westpac supports CTG on investment properties. Photo/Craig Cooper

Stephens was adamant that property has been more lightly taxed than other forms of investment.

Treasury and Inland Revenue estimate that property investors pay only 29.4 per cent of their after-inflation returns in tax, yet bank depositors and owners of dividend-paying shares pay a huge 55.7 per cent, he says.

"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.

"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," Stephens says.

Capital gains tax on rental property: landlord boss reacts. Photo / Getty Images

Aaron Quintal, a corporate tax partner at EY, says 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," Quintal worries.

Broadening the tax base will generally reduce distortions but not always, he says.

"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," Quintal says.

Whether it will lower house prices remains uncertain. 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," he says.

Ashley Church, a property commentator, said exempting the family home removes credibility from changes.

"There's simply no compelling logic for heavily taxing one group while completely exempting another," Church said in a OneRoof video. And he says it gets worse because the TWG recommended landlords pay the top tax rate of 33 per cent on any gains made.

"This would give NZ one of the highest CGT in the world," he said, describing what he called an outrageous scenario where someone who bought a $650,000 property which then sold for $970,000 would pay tax of $107,250.

Any tax should be low and broadbased, if the Government wanted to make the tax system fairer, Church said.