The Labour Party caucus has agreed to campaign on a 28% capital gains tax (CGT) that will be used to fund three visits to a doctor for each New Zealander every year.
The CGT excludes family homes, farms, KiwiSaver, business assets, inheritance, and other valuables.
It is only on investment or second properties and appears to capture a holiday or second home, even if that property is not held specifically for investment purposes.
While the tax excludes business assets it includes any commercial property a business owns.
The tax rate will be 28% to align with the corporate rate, so that property transactions are taxed like other business activities, Labour says.
If elected to the treasury benches next year the tax will apply at the sale of an asset and be charged on any gains after 27 July 2027.
Valuation mess
While it’s a bad policy Gentle says unlike the interest deductibility debacle, where people making a loss got tax bills, this won't tip anyone's finances over.
He says if it is introduced investors will need a bigger portfolio of assets to cover their retirement in the future – an unintended consequence.
“Targeting a tax to this level means workarounds, what-ifs, bubbles in other types of assets and very complicated guidance from IRD and treasury.”
He says there will be a complete and utter mess when establishing property values in 2027. Many valuation models don't pick up on larger numbers of bedrooms, more than one housing unit etc. Many investors may have to get a valuation done on their properties.
Gentle believes if introduced, the CGT will reduce rental supply particularly if people don’t want to be accidental landlords when they can’t sell their properties for the price they want, if it opens up future tax implications.
CGT could slow down rate of capital gains and tax collectedCotality chief property economist Kelvin Davidson says the big question is how much tax will the CGT actually raise?
Labour has forecast revenue of $100 million for 2027/2028, based on a model developed by the 2019 Taxing Working Group with an updated asset base and assumptions.
This rises to $385 million in 2028/2029, $965 million in 2029/2030 and $1.35 billion in 2030 and in the years after that.
The tax will raise an average of $700 million a year across the forecast period.
In Davidson’s view the fact there is a CGT in some way slows down the rate of capital gain and that then limits the tax take as well.
“Also a CGT in other countries has not stopped house prices rising. It is not as though it kills capital gains, but it can slow them down.”
He says if Labour is elected next year, the CGT will only apply from 27 July 2027, so there will be a long-term lag before there is any substantial amount of tax is gained. “If an investor decides to sell within a year of the CGT being introduced the capital gain in a that period might not be that significant. It will take a while to ramp up.”
He says a CGT does have some benefits over other types of taxes for the Government in the sense investors who are selling have got the money to pay it.
Davidson says the CGT may not necessarily be Labour’s goal. It could be about trying to disincentivise people from buying rental properties. “It then becomes a circular debate. If you discourage people from buying rental properties where does the rental stock come from?
“Labour will probably say if it stops lots of investors buying properties, then house prices will drop and more people will be able to afford to buy them. There is a limit to that because there are always going to be people who want to rent and need to rent.”
Buying a house for most people doesn’t happen overnight. “Even if prices are lower, house buyers still have to satisfy the bank to get a loan and all the other stuff that comes with that.
“It is not a straight swap – one for one – or turn the switch on and off. There is going to have to be some discussion around this,” Davidson says.
Unless Labour is elected next year, it is a bit academic, but there does need to be a wider discussion around tax. “It does, however, feel like the tax system will be less favourable for property in the future.”
Labour’s issue with landlords rears its head again
New Zealand Property Investors Federation (NZPIF) PR and advocacy manager Matt Ball is not surprised at the tax as Labour seems to have an issue with people who provide rental homes.
He is, however, surprised commercial property is included.
The 28% rate is quite high in his estimate. “From my understanding in Australia, individuals get a 50% discount on their personal tax rate if they've held the property for more than 12 months.
That can be tax as low as 9.5%. And having a look at other countries, the proposed 28% tax rate here seems to be at the higher end.”
Ball can’t see the point of the policy if it is just going to take money from property investors and then pay it back to them in the form of free doctors’ visits. “It is a transparent attempt at being populist and a pointless money go round.”
He says the hurried announcement from Labour just makes property investors feel targeted again. “It makes people feel that providing people with rental homes to live in is looked down upon by Labour and isn't considered a useful productive activity when in fact it is.
“A CGT is a disincentive to invest in providing rental accommodation which people in New Zealand need. “It was recently established by the New Zealand Initiative that private investors can provide rental accommodation at a much cheaper rate than any Government does.”
Investors are already thinking about what they should do, Ball says. He has already heard from rental home owners, who are revising their exit strategies. “They're thinking about selling up, they're nervous about a change in government and what it could bring.
“Fortunately, people have options. They can sell up but unfortunately in the long term that will reduce the number of available private rentals and rents will rise. That is how it works.”
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