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The Nats have been at it again; spinning their misleading bullshit to discredit Labour policy.
This time, Revenue Minister Todd McClay, has been busy issuing media statements that there is no need for Labour’s proposed Capital Gains Tax because, well, evidently, we already have one.
On Sunday 25 May, McClay was quoted as stating,
“Where somebody buys a property or buys shares with an intention of the capital gains being accrued … if their intention is to make a gain from the capital, their normal income tax rules apply, and therefore there is a capital gain.”
Earlier in the month, McClay had made the same assertion,
“When people say New Zealand doesn’t have a capital gains tax on property it’s not true – we do have a capital gains tax, and it applies to speculators.”
Which is strange, because when Labour first released it’s CGT (capital gains tax) policy in 2011, the following were in favour;
The Dominion Post
NBR
Herald on Sunday
Gisborne Herald
Waikato Times
The Greens
The IMF
The OECD
and columnists and commentators,
Paul Little
Mike Hosking
Gordon Campbell
Anthony Hubbard
Patrick Smellie
Vernon Small
Corin Dann
Andrea Vance
John Hartvell
Matthew Hooten
John Roughan
Duncan Garner
John Armstrong
Bernard Hickey
Gareth Morgan
plus Academics, tax experts, economists, and Treasury.
Those opposed to a CGT were National, ACT, and Landlords. Unsurprisingly, really, when you think about it. National, ACT, and Landlords represent the capitalists and speculators in our society and they would welcome a tax on capital gains like turkeys look forward to Christmas.
So if we already have a Capital Gains Tax – why were so many in favour of introducing a law specifically for it?
This blogger would hazard a guess that National and ACT oppose a CGT because it would make up for the seven tax cuts since 1986. These seven tax cuts have seriously reduced government revenue and constrained center-left governments from implementing social policies that would return this country to being a decent social democracy.
Imagine if a CGT in five or ten years would deliver sufficient revenue to fully fund a free tertiary education system in this country. It would drive another nail into the coffin of the neo-liberal policy of user-pays.
Hence why National and ACT absolutely loathe Labour’s policy.
If a CGT was introduced, the catch-cry of right wingers – “but where will the money come from!?!?” – will be muted – if not silenced forever.
But is McClay correct? Do we currently have a Capital Gains Tax?
The answer is, ‘Yes’. And ‘No’.
The current taxation policy on capital gains is haphazard; ill-defined; and open to interpretation. This IRD web-page illustrates how vague the law is on this issue,
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Residential property Whare nohoanga
.Mistaking property dealing for property investment
Property investor is a collective term for property speculators, dealers and investors. However, they are each treated very differently under tax law.
- Factors to consider when determining your status
- What is an investor, a speculator and a dealer?
- If you are not clear on your intentions for buying a property
- How long do I need to hold the property to make it a capital gain?
- How many properties can I sell before it is considered taxable?
Factors to consider when determining your status
Three main factors can determine your status as a property buyer for tax purposes:
- your intention when you buy a property
- the patterns of your previous property transactions
- your association to a builder, property dealer or developer.
The category you fall into isn’t determined by what the property is called or how the activity is described. For example, it may be marketed as a “rental investment” with strong “capital gain” potential, but your firm intention or prior pattern is the factor that determines its tax treatment or if you’re involved in or associated with someone in the business of building, dealing, developing or dealing with land.
If you’re an investor you buy a property to use it to generate ongoing rental income and not with any firm intent of resale. The property is a capital asset and any later profit or loss from selling the property is capital and isn’t taxable (apart from clawing back any depreciation, which is now recoverable).
The rules may be different if you’ve been associated with a person or entity involved in the business of building, dealing, developing or sub-dividing land.
If you buy a property intending to:
- resell it, or
- you intend to sell it after making improvements to it
you’re likely to be a speculator or a dealer. Renting your property temporarily doesn’t change your tax treatment either – you’re still a speculator or a dealer.
What is an investor, a speculator and a dealer?
Investor
If you’re an investor you buy a property to use it to generate ongoing rental income and not with any firm intent of resale. The property is a capital asset and any later profit or loss from selling the property is capital and isn’t taxable (apart from clawing back any depreciation, which is now recoverable).
Property investors sometimes refer to a “buy and hold” strategy. This approach is most likely to mean you are a property investor for tax purposes.
Investors will investigate and analyse future revenue streams, and any gain made on the sale of the property is incidental. Their investment is soundly based on a return from the rental income.
Investors pay income tax on their net rental income but generally not on the eventual sale proceeds of the property.
Note
The rules may be different if you’ve been associated with a person or entity involved in the business of building, dealing, developing or sub-dividing land.
Find out about special tax rules for associated persons.
Speculator
You might think profits from selling property are always capital gains so you don’t have to pay tax on them. But, this isn’t always true. If one of your reasons for buying a property is to resell it, whether you live in it or rent it out, you’re speculating in property and your profit is likely to be taxable. And, if you sell that property at a loss, the loss may be tax-deductible.
If you’re a speculator you buy a property always intending to sell it. The property is treated like “trading stock” and your profit or loss from selling the property is taxable. Speculating can be a one-off purchase and sale of a property. Speculators may also receive rental income from the property before they sell it.
Property dealers or speculators will try to determine and analyse the property’s future price movements because that’s what the deal rests on. Any rental income is secondary.
To be a speculator, you need buy only one property with the firm intent of resale.
Dealers and speculators must pay income tax on any gain they make from reselling their property. If they declare a loss, it may be tax-deductible. They must also pay tax on rental income they may earn from the properties.Dealer
If you’re a dealer you are similar to a speculator buying properties for resale, but you have established a regular pattern of buying and selling. This includes rental properties.
Some property buyers refer to a “buy and flick” strategy. This approach is most likely to mean you are a property speculator or dealer for tax purposes.
Dealers and speculators must pay income tax on any gain they make from reselling their property. If they declare a loss, it may be tax-deductible. They must also pay tax on rental income they may earn from the properties.
If you are not clear on your intentions for buying a property
Read our guide Buying and selling residential property (IR313)
If you’re buying and selling property other than a private family home, we recommend you get advice from a tax advisor with expertise in this area.
How long do I need to hold the property to make it a capital gain?
There is no time limit. If you buy a property with the firm intention of resale, it doesn’t matter how long you hold it – the gain on resale will be taxable (and any loss may be tax-deductible).
Example
You buy a property with a firm plan to resell it for a profit. The property market falls and you decide to hold onto it instead. You rent it out for 15 years and then sell it when the prices are again rising rapidly. Any gain on that sale 15 years later is likely to be taxable.
How many properties can I sell before it is considered taxable?
There is no set number of properties you can have before they become taxable. In some cases the first property bought and sold may be taxable if you bought it for resale. In other cases there could be a number of factors to take into consideration, such as having a regular pattern of buying and selling property, before a property is taxable.
The factors that may be looked at will vary because each taxpayer’s circumstances are different. For example, buying one property every two years may be considered a regular pattern for one individual and not another.
Find out more about what tax you should be paying
Date published: 30 Jul 2010
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Note the difference between Investor, Speculator, and Dealer;
- Speculators and Dealers are liable to pay tax on gains made from selling property.
- But an Investor is not liable to pay tax on realised gains.
The difference is open to interpretation, behaviour, and intent. Though how an IRD official can know the intent of someone purchasing a property remains a mystery. Telepathy? Time travel? A hot-line to one of our gods?
The issue is not made any clearer on another IRD web page;
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Selling property
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The things you need to consider when selling your investment property, selling your rental property or selling the family home.
What happens when you sell your family home
Selling a family/private home usually has no tax consequence. However there are some circumstances where you may have to pay tax.
What happens when you sell your investment property
Generally, you don’t need to pay tax when you sell your investment property except for any depreciation recovered. However, each time you sell a property it is important to consider if you are still a residential investor or are now a dealer.
What happens when you sell your rental property
Generally, you don’t need to pay tax when you sell your rental property except for any depreciation recovered. However, each time you sell a rental property it is important to consider if you are still a residential rental investor or are now a dealer.
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Obviously, there is no one-law-for-all. (Something which the ACT Party might like to consider, in it’s “one-law-for-all” policy, as it insists on dumping Treaty of Waitangi settlement claims.)
When John Key gave justification to amend statutes governing the GCSB, and extended the spy agency’s powers so it could spy on all New Zealanders and Permanent residents, he claimed that the original Government Communications Security Bureau Act 2003 was “not fit for purpose“.
When a tax law is so ill-defined that it is open to interpretation of “behaviour” and “intent”, then I submit that the current law on capital gains is “not fit for purpose”.
The National government can squeal all it likes, but the time has come for a capital gains tax and to close the Homer Tunnel-sized loop-holes that bedevil the current law.
After all, if we already have a Capital Gains Tax as Revenue Minister Todd McClay insists – then he won’t mind terribly much if the law is tightened up. We’d be formalising what McClay says already exists.
Right?
That’s making it “fit for purpose”.
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References
Radio NZ: Parties at odds over capital gains tax
MSN News: IRD targets ‘high end’ tax dodgers
Tumeke: John Key’s dagger and his 4 Horsemen of the Capital Gains Tax
IRD: Residential Property – Mistaking property dealing for property investment
IRD: Residential Property – Selling property
National Party: Draft intelligence community legislation released
Previous related blogpost
A Capital Gains Tax? (14 July 2011)
ACT intending a “serious assault”? (17 July 2011)
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Above image acknowledgment: Francis Owen/Lurch Left Memes
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= fs =
What you are essentially stating here is that Todd McClay is right in that realised gains from selling capital assets are taxable but you don’t think it is being applied thoroughly enough. That seems to me to be a case of tightening the enforcement rather than introducing another tax.
That stated I have no problem with the concept of a capital gains tax although it should really be applied on unrealised rather than realised gains as it would discourage asset price bubbles developing as people leverage rise in property values to build up investment portfolios. It should also not have any exclusions for assets like the family home as that just enables loopholes and makes enforcement more complex and difficult.
Gosman – not sure if it’s a “new tax” that is being suggested, so much as removing the ambiguity of the current law.
It would simply being making it a “level playing field” when it comes to capital gains.
On the issue of applying it to the family home – Gareth Morgan has made the same suggestion. Personally, I believe it would make things far easier and ensure that there were no loop-holes in creating the level playing field.
However, politics is the “art of the possible”, and I doubt if the electorate would be sufficiently sophisticated to understand the practicalities of eliminating exemptions to a CGT.
Regarding “a capital gains tax although it should really be applied on unrealised rather than realised gains as it would discourage asset price bubbles developing as people leverage rise in property values to build up investment portfolios” – good point.
There was discussion on just this point (I think it was Matthew Hooton? Not sure) who asked how it would be implemented if house prices rose one year, and fell the next (as they did in the late 1990s).
However it shouldn’t be beyond our abilities to work out the intricacies of such a policy.
It is definately a new tax. The problem is it is on realised capital gains on investment property, which as you have pointed out are already covered to a degree. This means it is unlikely to raise as much as some would hope. As for the impact on altering ivestment behaviour it could potentially have the oposite effect to one that was intended. Investors might instead hold on to property foir longer or leverage their property portfolio to buy more property rather than sell property to realise the gains. In short the proposed tax is not as cut and dried as the left like to make out.
It would have to be sold sooner or later. Otherwise, taking your property portfolio to the grave seems the height of human folly and absurdity.
If the (un)Fair dividend tax was fair and reasonable for overseas share, then why isn’t a CGT (on unrealised gains, as per the FDR) so unfair?
It’s seems to be housing must be (at all costs and illogical arguments) allowed to be a tax haven for the wealthy to hide their money tax free.
You couldn’t expect a party with a leader who’s speciality is foreign currency speculation (sorry, I mean foreign currency TRADING) to support something that would nip a lot of them in the pocket.
Indeed, Mike. Turkeys voting for an early Christmas is the phrase that springs to mind…
Other nations have comprehensive capital gains tax and that doesn’t discourage speculative behaviour on activities like curency trading much if at all.
A financial transactions tax will solve that problem. It’s high time we taxed “hot money” sloshing around the world!
How do you know that Gosman.
For all we know their housing costs could me MUCH much higher, if they didn’t have a CGT in place.
And (on the rare chance) if it doesn’t have any ‘effect’ on housing, then let’s ONLY put a CGT on foreign buyers of housing in NZ. Why should they get a free ride in NZ when they can’t in their own country?
We have laws against murder as well.
But we still have murder.
So your point against having a CGT is no point at all.
Perhaps the CGT rate should be the same as company tax – 28%. That might put a dampener on speculative activity.
Combined with a Financial Transactions Tax (which would be a new tax), it would go some way to addressing specultive activity which is harmful to our economy; parasitic; and damages our export sector.
One thing is for certain, we cannot allow the status quo to remain and the finance sector is in dire need of reform.
One of the disadvantages of CGT is that it would only be 15% whereas speculators would normally pay tax, on their gains, at their usual tax rate, which most of the time would be much higher. However I don’t know whether the CGT would be applied on top of the depreciation clawback, or whether the latter would be deductible against it.
All in all I think a land tax would be preferable since it would be collected on a regular basis, would be difficult to dodge, and would encourage more efficient use of land.
I find myself swearing at the radio or TV interviewer when they let the National party spokesman GET AWAY with that pathetic line of……….. we already have a CGT on housing.
The obvious come back is, (unless your salary-job depends on you ONLY asking the party lines questions !!) that if intent was such a logical, powerful and sensible word to have in the law, why don’t we have it in other laws.
e.g …….Honestly office my intent wasn’t to speed. ……OK says the police office, on your way son, SO terribly sorry for the inconvenience.
The MSM is SO involved in propagating this Governments propaganda, they TRULY should be ashamed of themselves.
There are propaganda ministers in history and around the world today, that would LOVE to have the NZ MSM as their ‘watch dog’ (fourth estate).
Could not agree with you more Kevin.
When you look at the line up in all forms of media,whether it be TV ,print or radio,all the key positions are held by radical right wingers.
Either they are selected in the first place for their obvious political leanings or they are so maniacally psychco about their radical beliefs that they bully their way into these cushy well paid positions allowing them to continue propagating their deluded bile.
They are all big on telling every one else that they are not doing their job properly (except John Key of course),but the reality is they themselves are grossly substandard.
New Zealand ,long term,will pay a huge price for their obvious bias ,lack of ability to think critically and lack of professionalism!
I don’t have any problem paying a CGT. My objection is based on the lie Labour are telling to introduce it…that it will lower house price increases. It won’t.
Intrinsicvalue – when has Labour said that a Capital Gains Tax will lower house prices?
There are multiple instances where tax law is defined by intent. The specific definition is defined by the courts rather than in the statute. I’m no tax lawyer, but I’m sure any half decent accountant could tell you the difference between what is and isn’t speculation.
It seems to me Tamati that any law that is so open to subject interpretation by vested interests is open to abuse. We don’t allow interpretation of criminal law to be defined by intent (except murder/manslaughter) so why tax law? Why should the rich person with the best accountant/lawyer be allowed to get away with something you or I couldn’t?
The issue of fairness is paramount here I think.
Frank – you need more analysis.
1. Capital gains tax has made no difference in any other economy (and dont get confused about the multiple of income versus prices – thats a totally different matter).
2. Capital gains will have to apply to ALL ‘unearned’ investments – shares (which are not covered in many other countries – you have to dump the ‘intention’ rule currently used here. If you dont dump it , then the same will have to apply to property….)
3. This may come as a surprise – but people do have to live somewhere – it doesnt matter who owns the property – houses are generally used to live in. With rent auctions taking place, then the only direction rents will go with a capital gains tax – is up!
4. With rents going up – we will hear more calls for extra welfare.
5. When house prices DROP – then there is a tax deduction – everyone forgets that – and many are saying NZ is heading for a property price bubble.
6. There has to be a reducing scale. eg: if one held a property for 50 years, then tax would take most of it and the property owner would be behind inflation – thus requiring welfare from the taxpayer.
This would also have to apply to superannuation schemes – which would mean the stupid situation of “why plan ahead”. In countries with capital gains tax they simply use investment vehicles to bypass the idea of capital gains tax being levied on the saver.
7. There will emerge mechanisms that allow the residents or owners to call the property their ‘home’ – thus bypassing any tax. This is especially the case if the ‘family’ or ‘primary’ home is excluded from the scheme. It doesnt take too much imagination to see a situation where the parents finance the property for siblings to live in. Its a ‘home’ for the kids (or kid) and maybe as they are trust beneficiaries then the house can be described as their ‘home’. The avenues would be endless.
8. And its probably an unelectable idea.
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