At long last New Zealand is going to have an effective capital gains tax. The Prime Minister does not want to call it a capital gains tax but that is what it is. Houses bought as investment property will have their capital gain taxed if they are sold within two years. A two-year liability is very low but it can easily be increased if it does not slow the rate Auckland house prices are rising. The significance of the Government's adoption of this tax should not be under-estimated.
New Zealand has had a capital gains tax for years but it was not enforced unless a taxpayer declared a property had been bought for capital gain. It seemed too hard for the Inland Revenue Department to prove that was the intention of investors in rental houses, even when the rent did not cover their costs. The IRD possibly did not try very hard because there was no political drive to tax capital gains in this country. Quite the opposite.
Until very recently New Zealand's political climate has been deeply averse to taxing capital as income. The most tentative suggestion would bring outrage. The public was perhaps fearful that all houses would be taxed though owner-occupied homes were exempted in most schemes. Whatever the reason, a tax that is a fairly common strand in the revenue net of other countries was a "third rail" issue in this one. Neither of the main political parties would touch it and even tax advisory panels would shy away, pronouncing capital gains too "difficult".
If there is any politician who deserves history's credit for changing this climate it is the former Labour leader David Cunliffe. As Labour's finance spokesman he was instrumental in putting capital gains tax into the party's policies for the 2011 election and kept it there as party leader at the election last year. The fact that National did not make a major issue of it in 2011, and did no more than trip Mr Cunliffe on details of the policy last year, suggests some within the Government were coming around to it.
One of them was probably the Finance Minister. In public comments Bill English has long sounded less reluctant than his leader to the use of taxes to cool the housing market. Sunday's announcement was a sudden change for John Key who as late as last week was still denying the need for any steps to discourage the demand for investment property, attributing prices entirely to an insufficient supply of new houses.
Now that the Prime Minister has performed a pirouette, Labour's leader needs to do likewise. Andrew Little was too quick to disown capital gains tax when he became the party's leader. It was not the reason Labour had lost the election. Now he is reduced to quibbling that the Government's move will not stop foreign investment in houses here. Perhaps not, but its decision also to require house purchasers to have an IRD number will be a check on the scale of foreign interest in our houses.
Foreigners are frequently surprised to find housing a tax-free investment here. The peculiar hole in our social equity is sacrosanct no longer.