Editorial: Capital gains tax can make a difference

Property investors, lawyers and tax accountants used to always argue that a clear, simple capital gains tax was a contradiction in terms. Photo / Jason Dorday

Editorial

At the beginning of this month, New Zealand acquired an effective capital gains tax. At least, it could be effective. It taxes any house bought since October 1 and not occupied by its owners if it is sold within two years. That two-year "bright line" gives property lawyers and tax accountants a simple test of liability.

Property investors, lawyers and tax accountants used to always argue that a clear, simple capital gains tax was a contradiction in terms. They convinced generations of politicians. As recently as the election last year, when the Labour Party proposed one, Prime Minister John Key scored debating points with questions about its application to holiday baches and inherited homes that Labour's David Cunliffe could not instantly answer.

When Mr Key announced the bright line test in May he probably expected to hear of all sorts of "complexities" in the months before it took effect. Oddly, he did not. Parliament's select committee heard only semantic quibbles as the legislation went through last month. The law makers have been untroubled by the application of the tax to baches, inherited houses, matrimonial property divisions or anything else.

The tax will apply to holiday homes, as it should. If a bach is bought and sold within two years it was probably bought for an expected capital gain. Who buys one for one or two summer holidays? Likewise it seems reasonable that a house acquired in a divorce settlement should be taxed if sold within two years. A house retained for the good of children is unlikely to be sold within that time.

Equally, it seems fair that a house inherited on the death of a parent will not be subject to the tax. A property acquired in those circumstances is likely to be sold well within two years and the released capital is the inheritance. Having long ago abolished death duties, it would be inconsistent for the country now to tax a deceased estate.

The most complicated element of the tax may be the basic exemption for owner-occupied homes. Sellers who claim the exemption will not be asked to provide proof that the house was their main home. Conveyancing lawyers might suggest they keep power bills or the like in case the IRD audits them. And if the house has been rented, the department will have a record of tax deductions on it.

But it would seem more practical to keep a register of residence and check every house sale against it. That would prevent speculators claiming the exemption by occupying each house for a short time before they sell it. At least, the exemption cannot be claimed for more than two sales every two years. But a register of everyone's primary residence would seem no more onerous than the information to be collected on overseas buyers under the other housing market legislation that took effect on October 1. They will need a New Zealand bank account, IRD number and tax records from their country of residence.

We will see whether these dampeners on house prices will have the desired effect. There is reason to hope so.