It seems that every journalist in this country believes that the introduction of a Capital Gains Tax will miraculously fix the overheated housing market, yet no one ever bothers to explain exactly how this will happen. Apparently, it just will.
It won’t. Here are some of the reasons why.
Capital Gains Tax (CGT) is a long haul tax. In Australia, it took 15 years after its introduction for the tax to produce significant revenue. When it is introduced here (I say ‘when’ because the media are constantly pushing for it, to soften up an opposing public), it will take a similar length of time before the revenue it produces outweighs the costs of collection.
But that is not a reason not to introduce the tax. It is simply a realisation that must be faced by the government that opts to implement it; that they will get no benefit from the tax at all. Only future governments will get that.
We already have several forms of CGT in existence in New Zealand. One is the FDR rules (“Fair Dividend Rate”) which apply to owners of foreign shares and investments. Another is the Bright Line Test, which is a form of CGT on housing. Any house purchased other than as a family home after March 28, 2018, and sold within five years of purchase will be subject to tax on any profit made on the sale. This applies to holiday homes, sections, AirBnB properties and rental properties.
So, if we already have CGT on the sale of all residential properties (other than the family home), if sold within 5 years of purchase, then how much difference will a full CGT make when the family home will be exempted from that too? The extension of the Bright Line Test from 2 years to 5 years has made no discernible difference to the housing market, so why would the introduction of a full CGT?
Taxes cannot be applied retrospectively. This is something many people do not understand. If CGT were to be introduced in April 2021, all affected assets would be revalued at that date, and the tax will only apply to gains made after that date. Many people seem to think that a CGT will capture gains made since the original purchase of an investment property, even if that was decades ago, but this cannot be the case. This is the reason why there will be so little revenue from the tax in the first 15 years or so. The day the tax is introduced marks a new start for the calculation of capital gains, and the government will not get one brass razoo on the gains prior to that date.
Tax is always a factor in asset buying decisions. People considering buying investment property already ask about the likelihood of a full CGT in the coming years. Once it has been factored in as part of the risk of an asset purchase, tax becomes less daunting. So it will be with CGT. The Bright Line Test is factored in by most investors these days. Capital Gains Tax will rightly be seen as just another cost to the investment process and will be treated accordingly.
Also, it is mostly ignored that CGT will not only apply to housing. One of the favourite calls to arms of the mega-rich, such as Gareth Morgan, demanding an end to inequity, is that he wants people to abandon housing as a form of investment and invest instead in ‘productive assets’. But productive assets will be caught by CGT too, whether it be shares, equity funds, Kiwisaver funds or investments in business.
One of the biggest anomalies of the version of CGT that Michael Cullen proposed through the Tax Working Group was that a hairdresser selling her business for $30,000 would pay CGT on the sale, whereas the owner-occupier of a Herne Bay property that just sold for $2.6 million would not pay a cent. Forgive me, but if that is Cullen’s idea of fairness, count me out altogether.
Furthermore, Cullen’s idea of ‘fairness’ was to exempt owners of racehorses and art collectors from the tax. We all know that racehorse owners are generally extremely wealthy; so too are art collectors, but Sir Michael is one of the latter and heaven help us if people like him should have to pay the tax. Such blatant hypocrisy and outright cronyism make a mockery of the whole thing. For reference though, most countries do include sales of art, collectables and other valuable assets in their CGT rules, and so they should… but here, apparently, not all ‘rich pricks’ are alike.
We will end up with a Capital Gains Tax. It is only a matter of time. If you accept this, as I do, then all efforts should now be put into ensuring that the tax is designed to be fair and equitable to all affected parties, and not just another big stick with which to thrash landlords. Personally, I like the system in the USA for taxing capital gains, as it acknowledges that capital gains are often windfalls and allows gains to be taxed entirely at an individual’s marginal tax rate, rather than at the rate for the applicable income level, as would have happened under Cullen’s proposal.
So exactly what is there about any of this that suggests that a CGT will cool the housing market? Absolutely nothing. We have a supply problem. We have too many people wanting to buy houses than there are houses available. Taxing people on the gain they make on the sale of a house will not make more houses available.
In fact, it may have the opposite effect; it may encourage owners of investment properties to hold onto their properties, which could mean that there are fewer properties for sale, not more.
A capital gains tax will do nothing to fix the overheated housing market. Only solving the supply problem will do that, whether by infill housing, more apartment blocks or councils releasing more land (now, there’s a thought). But this is one of this government’s favourite ploys: create a mantra (“hard & early”), say it over and over, get others to repeat it ad nauseam and before you know it, everyone parrots the same line and it becomes an Orwellian truth. By this point, it doesn’t matter whether it is true or not. Everyone believes it and that is all that matters.
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