Labour has unveiled one part of its highly anticipated tax policy, but questions remain over the rest of its tax and spend plans.
The party has said it would tax capital gains rather than wealth. But crucially, it can’t say which expenses it would allow property owners to deduct.
Labour has pledged to introduce a flat 28% capital gains tax on commercial and investment residential property.
The date from which any gains would be calculated would be July 1, 2027.
So, if an investor bought a property for $1 million in 2019, had it valued at $1.1m in 2027 and sold it for $1.3m in 2030, they would book a $200,000 gain.
The investor would then deduct eligible expenses from the $200,000 and pay tax on the sum left over.
The pinch is, Labour hasn’t confirmed whether it would allow investors to deduct mortgage interest as an expense, as they can now.
Labour removed investors’ abilities to do so when it was last in Government.
Because interest can be a very large expense, restricting these deductions could see some investors face much larger tax bills than would be the case if these deductions were allowed.
Labour leader Chris Hipkins and finance spokeswoman Barbara Edmonds declined to comment on the matter, saying they would unveil any other tax policy they will take to the election at a later date.
Accordingly, they didn’t say whether they would allow commercial and industrial building owners to deduct depreciation as an expense.
Labour backed the coalition Government removing building owners’ abilities to do so – increasing their tax bills by around $500m a year.
Consultant accountant Geof Nightingale recognised these were all separate issues, but believed the proposed introduction of a capital gains tax only strengthened the argument for Labour to once again allow commercial and industrial building owners to deduct depreciation as an expense and for it to maintain the status quo by allowing residential property investors to deduct interest as an expense.
Nightingale said other business owners could write off their interest expenses, so property investors should be able to do the same. This would keep the tax system consistent.
He also believed depreciation should be recognised as a legitimate expense, as wear and tear do in fact see office buildings, hotels, etc lose value.
Looking at the bigger picture, Nightingale described Labour’s proposed tax as “narrow” for not capturing other assets, such as shares.
While he preferred a more comprehensive tax, he accepted that where Labour landed was simpler and less politically fraught.
The 2018/19 Tax Working Group, which Nightingale was a part of, recommended a capital gains tax be applied more broadly, but at a lower rate.
He believed Labour’s proposal would still even the playing field between property investors (who currently pay tax on their rental income, but not their capital gains – unless they sell within two years of buying) and savers and investors in the sharemarket (who pay tax on their interest and dividend income).
Nightingale accepted the distortion in the policy was the exemption for the “main” home.
He acknowledged someone who only owned one house, but didn’t live in it, could be treated as an investor under the rules and taxed.
Hence, he believed the exemption should be for one home per person.
The New Zealand head of Chartered Accountants Australia New Zealand, Peter Vial, credited Labour for choosing a policy that would be easy to comply with.
However, Vial noted it wouldn’t necessarily be a big revenue generator for the Government in the short- to medium-term.
Labour estimated the policy would bring in $385m of tax revenue in 2028/29, with this rising to $1.35 billion beyond 2030.
Under the proposal, the capital gains only starts being counted from 2027 (Nightingale believed it would be unconstitutional for gains to be calculated from before the policy was introduced).
Furthermore, property prices have typically fallen following the Covid-era bubble and significant gains in the near future aren’t guaranteed.
Some investors who bought when prices peaked in 2021 may be taxed for booking a gain between 2027 and their sale date, despite them selling for less than what they bought for.
Nightingale said provisions could be made in the law to prevent this, but this would add complexity and reduce the tax take.
A key component of Labour’s policy is its commitment to ensuring all capital gains tax revenue is invested in health – including giving everyone three free GP visits a year.
With the sustainability of the country’s finances front of mind, consultant economist Cameron Bagrie was supportive of Labour’s capital gains tax, but believed it was “absolutely nuts” for it to spend much of this revenue on free GP visits for everyone.
Bagrie stressed the need for government spending to be more targeted.
Labour estimated the free GP visits would cost $490m a year, but reduce the costs associated with people ending up more unwell than they would’ve been if they’d seen a doctor sooner.
More broadly speaking the chartered accountants’ industry group raised its concerns over the costs facing New Zealand as the population ages.
It pointed to Treasury analysis, which shows that more than half of New Zealand’s total tax take comes from individuals paying income tax, but that this pool of taxpayers is shrinking.
Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.