Scope of CGT likely to narrow

It’s been less than a week since the TWG released its final report into the future of New Zealand’s tax system – and recommended the introduction of a broad-ranging capital gains tax.

Public debate has been raging since then and Government ministers, including the Prime Minister, have been at pains to emphasise that they haven’t made a decision on the TWG’s recommendations yet.

In his first big economic speech of the year at the Chamber of Commerce and Massey University business breakfast on Tuesday, Finance Minister Grant Robertson reinforced this again, saying – repeatedly – that the Government was not “bound” by the TWG’s report.

The Government does not have to adopt all the TWG’s recommendations, rather it can pick and choose, and it is now working to come to a consensus within the Coalition, he says.

Like the Prime Minister, Robertson says the Government is aware of the concerns of small business owners and farmers about the impact of a capital gains tax and will be taking that into account.

But he also returned to the theme of the need for greater fairness and balance in the tax system, pointing to Westpac chief economist, Dominick Stephens’, words on the TWG’s recommendations.

Stephens says a capital gains tax would erode the incentives for investors to purchase residential property – which would help lower house price inflation and encourage investment in more productive options.

This is all ringing alarm bells for many property investors who are concerned that the Government is preparing the way for a modified capital gains tax which would target rental properties.

NZ Property Investors Federation executive officer Andrew King says they are concerned that the Government has decided to play favourites on the assets it imposes a capital gains tax on.

“It could well be that a capital gains tax is introduced but the scope of it is narrowed down to rental properties, and maybe shares and baches.”

King says the NZPIF doesn’t think a capital gains tax should be introduced at all – especially at a 33% rate and with no allowance for inflation. But if one is, it should be comprehensive and encompass all assets that generate capital gain.

“We don’t see how it is fair to privilege one asset over another and exempt the income on one asset but not on another.”

In his view, doing so would be a politically motivated move driven by the assumption that all rental property owners are “fat cat speculators”.

“And that’s just not true. Most rental property owners are ordinary people who own one or two rental properties and who provide other people with accommodation to live in.”

If a capital gains tax is introduced it will simply exacerbate the existing shortage of rental accommodation, King says.

“Some investors will sell up before the tax hits in in 2021 but most will simply hold their properties for longer. The big thing is people will be less likely to buy rental properties going forward.

“That means there will be an ongoing decrease in rental stock and that will push rents up. So a capital gains tax won’t do tenants any favours.”

Gilligan Rowe & Associates managing director Matthew Gilligan agrees that the Government is likely to come up with a more moderate version of the TWG’s recommendation on capital gains.

“The TWG’s recommendation was very hard line and would impose some of the highest capital gains rates in the world – and people are outraged.

“I think the Government is going to come in with a much more politically sympathetic position. I’d be amazed if they went ahead with it in its current form.”

Gilligan, who is an investor himself, is not unsympathetic towards a tax on property but says it should be less complicated than what has been proposed.

“Extending the bright line test on residential property sales from five to 10 years would be a better way of going about it.”

The Government is scheduled to release its final decision on the TWG’s recommendations in April.

Read more:

Capital gains tax on the cards 

Outrage over CGT recommendation