Capital gains tax plan for lifestyle property owners could affect tens of thousands

Red flag goes up in capital gains tax proposals for lifestyle properties.

The desirability of living on a lifestyle block has suddenly lost its gloss going by Real Estate Institute NZ calculations on the high number that would be caught by the capital gains tax proposed by the Tax Working Group.

Under the proposal, land larger than 4500sqm would not be subject to the family home capital gains tax exemption.

REINZ chief executive Bindi Norwell said the institute data showed 92 per cent of lifestyle blocks sold in New Zealand last year were bigger than 4500sq m.

The median size of lifestyle properties sold in that time was 20,000sq m. There are 178,778 properties classified as "lifestyle" in New Zealand.

"If this is indicative of a normal year's sales, then going forward a similar portion of the market is likely to have to pay CGT on the portion of their land that is greater than 4500sq m," Norwell said.

The Tax Working Group proposes CGT would apply to profit after the sale of residential property, businesses, shares, all land and buildings except the family home, and intangibles such as intellectual property and goodwill. The tax rate would be set at the income-earner's top tax rate, likely to be 33 per cent for most. It's proposed CGT would apply after April 1, 2021.

The Tax Working Group's proposals have been widely condemned as punitive. National has called them "an attack on the Kiwi way of life" and business groups say the costs would outweigh the benefits.

Working group member and PwC tax partner Geof Nightingale says the true potential picture of a lifestyle property CGT isn't reflected accurately on social media.

He says "you get into very arbitrary territory" when designing a capital gains tax which excludes the family home and having to define what a family home is.

"The working group landed on 4500sq m because that is the current definition of land that goes with a house that presents for GST purposes when for example, a farm is sold.

"The working group also said 4500sq m was just a suggestion [when] you define what amount of land is reasonable for the occupation and enjoyment of the actual house - in some cases it might be less or might be more.

"That is going to be an area of real interest in submissions if the Government takes forward any of this proposal. What is the family home and what land comes with it is going to be the debate."

Nightingale said using the REINZ's median lifestyle block size of 20,000sq m as an example, it would mean the house included on 4500sq m of land would not be subject to a capital gains tax.

"But the 15,500sq m round it would potentially be subject to capital gains tax on any gain that related to that land."

In the hope of showing the "true potential impact rather than the discourse that's emerging on social media that once you're over 4500sq m the whole thing is taxed", Nightingale offered the following example.

"Let's say I bought a lifestyle property out at Helensville 10 years ago for $1 million, and it sits on 10,000sq m - so it's a four-bedroom house on 10,000sq m of land.

"If this [CGT] comes in on the first of April 2021, let's say that lifestyle property is now worth $2.5 million total, which is not unrealistic after this time.

"Along comes the valuer and says the value of the house and 4500sq m of land is actually $2 million and the value of the other 5500sq m of land left is half a million dollars.

"Then the cost base of your capital gains tax for those assets becomes half a million dollars."

"Let's say in 2023 that lifestyle property holder sells the whole block for $3 million. They are then going to have to apportion that $3 million.

"The valuer might say now the house is worth $2.2 million and the 5500sq m of land under capital gains tax is $800,000 proceeds.

"The cost base is established when the asset is transitioned into the regime of half a million dollars so you have a taxable gain now of $300,000 and that is going to be taxed at your marginal rate."

one roof

Nightingale said while the property owners were never going to say that was a good idea, the example showed the true potential impact.

REINZ's Norwell suggested it was possible the Government might retract the proposal to tax lifestyle properties on profit at sale or change the parameters once it knew just how many people would be affected.

"And you may find if it [CGT] does come in a number of people will sell their properties ahead of the date. Some properties will have been in families a number of years - it'll be heart-wrenching."

Norwell said a CGT could have what it called "the mansion effect".

"They will invest everything in their own properties and not put it into other assets. They'll have all their eggs in one basket and over-capitalise. In terms of an investment portfolio, that's probably not the best thing."