Taxing capital gains not the Kiwi way, developer and investor says

Thursday, 21 February 2019

Taxing capital gains is not the Kiwi way, one property developer says, and that shouldn't have to change just because other countries have it.

The Tax Working Group has revealed its recommendations for reform of the tax system, including a broad-based tax on capital gains from investments.

That would be matched with income tax cuts.

Working group chairman Sir Michael Cullen said it was wrong that wage-earners were taxed on their full income while 'you can earn income from gains on assets and not be taxed at all'.

* What would capital gains tax mean in reality?

* How a capital gains tax could affect you

Sir Michael Cullen says it's not fair that people pay more tax on their wages than they would if they bought and sold investments.

* Tax Working Group may prove a frustration for Labour**

The capital gains tax proposed by the working group would apply to profits on investment property, land, shares, business assets and intellectual property, but not the family home and personal possessions.

Property developer David Whitburn said it should not be assumed that it was a problem that New Zealand did not have a capital gains tax while others countries did.

'We don't have nuclear ships here. It's okay that we are different from other countries.'

He said, if introduced, such a tax would put some people off investing in residential property.

It would be expected to reduce house values, he said, which would affect investors' equity in their properties.

But it would also have an impact on homeowners. 'They are in the same market. It will concern all owners, not just property investors.'

Another investor, Nick Gentle, said it seemed the working group had proposed big changes so that the Government could step back from them and look as though it was compromising.

He said he was not worried about the property market effect. 'I'm a full-time property investor and the idea of a capital gains tax has never really fazed me. I invest for the long-term – 10, 20 or 30 years. If you're running a business, then you need to invest for cashflow and that has always been taxed.'

He said there were deeper fundamentals driving the property market than a search for capital gains.

David Whitburn: 'It's not the Kiwi way.'

'It'd be like when the National government removed [the ability to claim] depreciation. The market took a breather for a few months and then was back on again.'

Exempting the family home and gains through inheritance complicated the tax, he said. If someone's parent died and left them a house worth $1 million they could still inherit that tax-free, but if an investor died and left a portfolio of properties, gains when they were sold would be taxed.

But he said a bigger concern was whether such as capital gains tax would put people off investing in other businesses that created jobs and income for New Zealanders.

Property Investors Federation chief executive Andrew King said it was unfair to penalise people who opted to save and invest their money. People were already paying tax on the income from their investments.

There would only be so far that investors could put rents up to make up for the tax, he said, and that would mean some would sell their properties. That could create a shortfall of rental housing at a time when more was needed.

Tony Alexander, BNZ chief economist, said new investors would be discouraged and existing ones might sell before the tax took effect.

'However, rents would face new upward pressure at a time when they are already rising strongly and this would have social consequences the government may not wish to generate whilst also increasing the bill for the accommodation supplement.'

He said some investors would lower what they were willing to pay for a property.

'However, given the offset of higher rents, the fact that Auckland's housing market peaked over two years ago so many investors waiting for capital gains may already have opted out, the actual market impact is likely to be limited.

'Note that some investors will choose to keep hold of their properties for a longer period of time, perhaps not selling until their regular income falls away and their marginal tax rate falls to a lower level – say in retirement.

'And we must remember that the outlook for interest rates has declined yet again and the low level of funding costs means investors may still choose to leave their funds in housing – especially as they will pay capital gains tax anyway on any shares they might alternatively purchase for their own portfolio.'

Gareth Kiernan, chief forecaster at Infometrics, said property would be less attractive - but so too would other investments.

Investment property is already subject to tax on capital gains when it is bought and sold within five years, which he said had removed a 'significant chunk' of the speculative investment previously associated with the housing market.

'The ability to borrow to invest in property means that it will still maintain an advantage over other investments in terms of the potential returns that can be generated, assuming that prices rise over time – you can't really leverage to buy shares, for example.

'Perhaps the most significant effect is that investors will have an incentive to hold onto property for as long as possible, rather than sell it, because the taxes are only payable on realisation. So it might lead to slower rates of turnover in the investor portion of the housing market over the medium term.'

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