Ahead of next Wednesday's Tax Working Group report release, the chief economist of one of our biggest banks and New Zealand's landlord chief go head to head over capital gains tax.

The gulf is wide in this business debate, with the economist saying the tax would improve housing affordability but the landlord boss saying it will make no difference.

FOR: Dominick Stephens, chief economist, Westpac

A capital gains tax would improve housing affordability, would lead to a higher rate of home ownership, would help remove the heavy skew we have towards land-based investments, and would eventually lead to a more diverse national balance sheet. It would also improve incentives to engage in paid work if income tax was reduced.

Property is more lightly taxed in New Zealand than other forms of investment. Treasury and the Inland Revenue estimate that property investors pay 29.4 per cent of their after-inflation returns in tax, whereas bank depositors and owners of dividend-paying shares pay 55.7 per cent.

Advertisement

Income from investment in taxed whereas capital gains are tax-free. Bank deposits 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 capital gain, which is tax-free.

This has made property investment incredibly popular and that popularity has been one factor pushing house prices higher.

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.

If the tax system has affected the price of property and the rate of home ownership in New Zealand, it stands to reason that further changes to the tax system could once again alter both.

The Tax Working Group is considering the possibility of a capital gains tax that would exempt the family home but would apply to other properties including rentals.

A property tax would be calculated as a percentage of the value of the property including the land and the house - equivalent to the 'capital value used to determine rates in much of New Zealand.

AGAINST: Andrew King, executive officer, NZ Property Investors Federation

Property, or any asset, should not be subject to capital gains tax. Property is perceived to be more lightly taxed in New Zealand compared to other assets, but actually, rental property is taxed more heavily than other assets with a higher marginal effective tax rate because of local government rates.

Rental property is also seen to have tax advantages over home buyers and this has led to a reduction in the rate of home ownership since the early 1990s. However, the removal of Government assistance for first home buyers in the early 90's is the more likely reason for falling homeownership rates.

The perception that rental property is tax-advantaged has led the Government to consider changing the law so that rental property owners cannot offset rental property losses on other income they may earn. However, claiming expenses against taxable income is a tax law that exists for all investments and businesses. Rental property pays tax on gross income less expenses just like every other business or investment. Occupier/owners do not have an income stream from which to deduct their expenses. When buying a home they receive the benefit of accommodation instead.

The two situations are completely different. Just because a rental provider can claim expenses from their rental income, this does not make buying a property easier for them compared to an occupier/owner.

IRD data shows that the rental property industry pays tax on approximately $1.5b of net rental income each year. A capital gains tax will increase rental prices, but it will not lower house prices.