Of course, the left wants a capital gains tax…

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There is an old 4 bed room house in Epsom I drive past that has been left to deteriorate, uninsulated, mouldy and damp, rusty roof and leaking gutters set in overgrown unkempt grounds. It was sold to an overseas owner five years ago it now belongs to another overseas owner who paid $500,000 more for it and has it in the hands of a letting agency. Rent has come down by $80 a week to $915 a week after it was empty for months. It is not alone, there are many other examples throughout Auckland.

 

In the meantime, the QV of this property has reached $2.5m. If they find anyone desperate enough to take it on, and only if they manage to rent for a full year, it would yield a 1.9% return before any of the usual costs.  After interest deductions alone, large rental losses can be expected at a cost to the NZ taxpayer. This house is clearly not held seriously for rental, not does it add to the affordable housing stock.

 

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When we look at the Tax Working Group final report we must ask- what was the problem to be addressed?  What did Labour really want? Grant Robertson wrote the TWG a stern letter once he had seen the interim report. In it he instructed the TWG to “consider a package or packages of measures which reduces inequality, so that New Zealand better reflects the OECD average whilst increasing both fairness across the tax system and housing affordability”.

 

Let’s remember NZ has been top of the pops for some time in the unaffordability stakes.

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The TWG does not spend much time outlining the problem but Inequality and housing affordability are linked.  The compounding of net housing assets at the top parallels the compounding of net misery and debt at bottom with little understanding of how the two ends are connected in a finite planet.  A serious misallocation of housing resources has resulted from an over building of excessive housing for better off that has sucked out the lifeblood of the building sector and bid up the price of materials and skilled workers at the expense of affordable housing. The New Zealand housing boom reassembles the Irish one, but  without the crash…. yet.

 

Much as I greatly admire the work the TWG displayed in multiple technical documents on the internet, they didn’t address the Minister’s request.

 

The TWG’s Capital Gains Tax (CGT) CANNOT address the compounding growth in the wealth divide. It will only capture gains made after the date of valuation and only if gains are actually realised on sale. Moreover, it is only if the house is not a family home and only if a myriad of inevitable exemptions such as for roll over don’t apply. The best we can expect is for the poposed CGT on housing to mildly slow the growing divide if we are lucky.

 

The TWG proposes tax reductions as part of a revenue-neutral package by raising the bottom income tax  threshold to make things fairer, but when the increased tax thresholds are analyzed on a  household equivalised basis, Treasury shows they are worth the least to the poorest households. About 5 times more goes to the highest income decile than the lowest.

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TWG have essentially given us two choices: a comprehensive capital gains tax on absolutely everything that seems a one-way ticket to political oblivion, OR a more limited one on residential housing that leaves out the family home.

 

Yet Grant Roberston’s letter to the TWG went on to request that the TWG

“Examines whether a tax on realised gains, or the Risk-Free rate return method  (RFRM) of taxation (or a mix of both) is the best method for extending a potential capital income tax on specific assets- with the goal of extending New Zealand’s tax system is fair and balanced”

The final report simply falls short. Over 95% of it is about CGT and the RFRM is not given a fair run.  The RFRM has many advantages over a CGT on housing. It has a clear rationale for a start in that it treats a person’s net equity in housing the same as if the money were invested in the bank at say 3-4%.  In effect it says to landlords if you cannot generate this modest rate of return what are you doing in the business of renting?  The plus for landlords is no more expensive accountants and disputes over what is deductible. For society, there can be no more expensive taxable losses, no more interest write-offs from gearing up to buy and no incentive to have houses lying empty or under-rented.

But there is the rather important issue of the family home. In 2000, in response to the Mcleod Tax Review Issues paper Michael Cullen as Minister of Finance took the family home off the table and tossed out the RFRM.  He has not been challenged in that view.

 

The TWG should have had the courage to tell the government that the family home cant be left out entirely regardless of whether a CGT or a RFRM is considered.  With suitable exemptions, the vast bulk of owner-occupied sales can be ignored. But a full exemption for $20m mansions is a very bad idea. Under the RFRM, net equity of $1 million per person in a family home could be exempt.  Younger mortgaged families would find they were not affected, while older owners of more expensive mortgage-free homes (over $2 million for a couple) may have tax to pay.

 

We should have had a properly worked up RRFM option. As if leaving the door open, Cullen did say:

 “The Government doesn’t necessarily need to make a straight call over whether or not to adopt the Group’s preferred model for taxing more capital gains. It could choose to apply it to only some types of assets or stagger the inclusion of different assets over time. It may decide to apply the deemed return method to property. All these options are open to the Government.”

 

Unfortunately, the analysis of the RFRM is superficial. One of the papers argues that in theory it should not matter if a CGT or RFRM is applied (under given strict assumptions about how Capital Gains are accrued). Technically the CGT and the RFRM are posited as two methods that are ‘equivalent’. But we don’t start at the beginning of the world with a clean slate: we start with a world where decades of capital gain have already accrued for the wealthiest.   The RFRM is capable of addressing the wealth divide in way that a CGT on future realised gains only, cannot.

 

The Minority report written by three of the 11 taskforce members clearly thinks there is a case:

“If unaffordable housing is the problem, the capital gains tax proposals are unlikely to provide the solution. If gains from residential property are to be more fully taxed, then this could be done with some modifications by extending current rules, including the bright-line tests. Alternatively, we consider that a simpler option could be to apply the risk-free return method, or something similar, to residential housing.  This method taxes net equity in an asset at a fixed rate each year.   Extending the tax base in this more limited way would generate much of the revenue expected from the comprehensive capital gains tax contained in Volume II. “

Why has the minority view not been taken seriously?

 

23 COMMENTS

  1. Quite so. Curiously, we already have a tax in NZ that mimics the RFRM and does not exclude the family home: it is called Rates. The rate varies in different places: on my home, it is about 0.5% of asset value per annum.
    An extremely low-cost way of introducing an asset tax on property would be for the Government to impose a tax on local authorities of say 50% of the Rates revenue collected. The local authorities then double their Rates and remit half to the Government. Compliance costs are negligible and avoidance is impossible. Local authorities already have deferral schemes for asset-rich but cash-poor owners and exemption for deserving landowners (churches, Maori authorities, etc). A bit of legislative tidying would be needed, such as requiring council to levy rates on capital value rather than land value. But since New Zealanders already accept Rates as a basis of taxation, the huge issues that arise from a completely new tax such as CGT would be avoided.

    • RFRoR taxes are not really similar to rates. Rates are based on the value of the property while RFRoR taxes are based on the homeowner’s equity.

      • Yes thank you Mikesh. You have to pay rates even if you are mortgaged to the hilt. Most young families would not be affected by a RFRM

      • I see that as an advantage. A $5M mansion with a $4.1M mortgage would not be subject to a tax based on equity with a $1M exemption, but pays rates based on the value of the mansion. That seems to me a better design, as (1) it discourages investment in high-value consumption property; (2) it does not encourage people to load up with debt in order to avoid the tax; (3) the compliance costs are negligible, as the councils simply remit a proportion of the rates that they collect (rather than requiring property owners to prepare a RFRM return).

        • Even so, someone with a 4.1 million mortgage will be paying rather a lot of interest, which would probably be more of a burdon than the tax would have been; and of course the bank would be paying tax on the interest.

          • Yeah. The other supporting factor for a capital gains tax is payments are picking up from mergers and acquisitions and more of the plumbing stocks behind the way payments work in the finance sector so Visa and stuff like that combine and I think that’s just a long term support for what kiwis spend there livings on and how well we do that. All the banks, all the big NZX companies have no debt, lots of cash on the books and leadership needs to be informed of any changes to tax at the earliest and when ever you see risk we’re always looking for runners. If there is softening in the economy it’s more likely to hit everything else than finance and corporates and they’d have much more expensive share prices just on metrics, just putting that out there.

            So yeah, while there is a soft ini in the U.S housing market, and a softning in the Aussie and NZ housing market. We shouldn’t forget that the brief for the tax working group was to make taxes more fairer.

            • It’s difficult to see your point, Sam, since much of your comment is hard to follow. However (1) I don’t think it’s true that NZX companies have no debt, and (2), calculation of capital gains on shares will involve a much more complicated process than calculating capital gains on properties

  2. And why was a financial transaction tax taken off the table? we wouldn’t even need to worry about a CGT or alternatively GST if we implemented one of those

    • Exactly why do we have the total refusal time and time again to bring in a Financial Transaction tax. Hell Jim Anderton and the Alliance suggested it back in 1986 when Gst was brought in . The FTT tax option was dropped because the banks at the time refused to handle the processing of the transactions. Probably the same now the answer is the big money people and the banks and big corporations would be hit big time and they will be leaning big time on The Government .

    • The FTT concept seems to presuppose that we wish to disadvantage or punish financial transactions. But do we? I know that some pretty unworthy shenanagans have been apparent within the world’s finance sectors, but presumably they are not all bad. Finance does have a role to play in an economy, so why would one wish to punish the good just to discourage the bad?

  3. Probably very few of those in favour of CGT have ever resided in places where CGT exists, because although CGT sounds fair and simple, it can get complicated.
    In the Australian CGT system, you have to keep track of dates when you acquired or increased ownership of assets, the capital gains or losses and what can offset those, and the intervening cpi increases. The main winners are probably tax accountants.

    And even if the CGT comes in, what will happen to it at the next change of government. You don’t need to be nostradamus to see that extra funding from CGT, that is directed into essential services, after the decade of neglect, are simply going to be cut back again, and the money saved will go into income tax cuts.

    Entrenched homelessness is a symptom of everyone on the housing ladder being pulled down, buy speculators climbing roughshod over everyone else, because they can. Fewer people now own homes, and fewer people who do will ever pay them off, and rents now take up so much income that it’s difficult to save a deposit.
    So after any sudden unexpected setback, those on the bottom rung can slip off and become homeless, and that ends up costing more, than if you had put in the resources to stop them becoming homeless. CGT alone will not fix this, just as CGT has not fixed it in countries.

    A solid state house program, and a shared equity option for buyers, and better implementing current measures such as the bright line test, would do more, more quickly, and more simply. Wouldn’t cracking down on those who own strings of houses, readily achieve one of the aims of CGT, to reduce money going into speculation? Owning many homes makes no more sense to NZ, than a having a harem of wives would, in the days of Henry the eighth. Why have harems of houses? Buying rental after rental by those able to do so, shouldn’t be a career option.

    How about a variable bright line test, levied at a rate under the control of the reserve bank. The levy could vary depending on the house, the location, and whether the buyer is the occupier or an investor, and how many houses the buyer already has. This could readily curb excessive speculator demand, and may help get prices affordable. Say, a minimal bright line levy in periods of a soft housing market, with the levy increasing during bubble conditions, and increasing exponentially for a persons buying over 2 houses, to curb speculation. And don’t apply it to apartments, so that speculators and foreign buyers are still left with something to speculate on.

    The bright-line test was Nationals idea, so expanding it would be more politically palatable, than a whole new CGT regime. Don’t let National go into 2020 with a large CGT stick to hit Labour with. It’s not rocket science. If there was the political will, then theoretically the government could actually give everyone in the country a basic apartment. Just as another govt once landed a person on the moon, because there was the political will to do so.

    If anything, the powers that be should simplify the tax system, instead of adding more layers. Nobody in NZ can avoid either of the 2 bureaucratic behemoths of the IRD or MSD, unless you’re independently wealthy, or get income from illegal activity. There are probably bean counters in those 2 organisations right now, devising ever more complicated forms to be completed. And if you try to apply for NZ super, having worked in various other countries, it becomes a complete nightmare. No wonder so many try to get by on illegal activity, and end up filling up the gaol system. The question should not be why there are 10,000 people in gaol, but why there are not 110,000 people in gaol. If life outside of gaol was made a little more straightforward, maybe prisoner numbers would recede accordingly. How National has consistently been so gung ho on ploughing millions and billions into bigger and better gaols (aka burning money) never ceases to amaze. They just can’t do it quickly enough.

    • “The bright-line test was Nationals idea, so expanding it would be more politically palatable, than a whole new CGT regime. Don’t let National go into 2020 with a large CGT stick to hit Labour with.”

      I tend to agree. Labour should immediately extend the 5 year bright line rule so that we use the existing structure to bring in a capital gains tax on all houses whose current base line price is established by a sale. This way they can shame National into leaving it alone as an election issue, get re-elected then revisit broader and better approaches such as RFRM in the second term.

      • Perhaps the bright line test should be made inapplicable to land!ords who consistently meet the RFRM criterion during their tenure.

  4. It has not been taken seriously because it is an absurd idea.
    Ignore the fact that people with holiday homes or larger properties will be forced to “mark to market” despite potentially not having the funds, it is also an administrative nightmare despite your overly simplistic view that it is not.
    If none of this puts you off the idea, the very fact that such a move would doomph Labour to defeat in 2020 should.
    Take off the idealistic blinkers of what “should be ” and deal with the realities of what is both reasonable and possible.

  5. Firstly a capital gains tax will not effect the main issues which is our massive immigration drive for the last decade which means that approximately for every Kiwi citizen born here there is either a tourist, a foreign person living here on a work/student permit, or another new permanent resident or citizen being created here. Our birth population is static so we should not have any housing issues at all but for government policy on immigration.

    Secondly many people ‘investing’ in NZ are not doing it to make money but to hide money from their home country and ‘invest’ it in ‘gold bricks’ because their home country is unstable or socially punitive so they can’t trust their investment there. Personally I don’t blame them, (unless it is from criminal activity) but it is clearly creating massive problems wherever the money flows to ordinary people .

    The UK has a stamp duty and CGT but still they have a massive housing affordability issue because they had a massive immigration influx while expanding the EU and also encouraged high wealth people to buy housing there which made developments cater to them rather than ordinary people who there is less profit to be made. They also did the Thatcher approach to sell of social housing.

    If they do bring in a CGT tax it will like everything the government does create much higher rental shortages, advantage those who don’t work in NZ, pay the lowest tax rate if they do, and can alter their tax rate through being domiciled overseas. It also does nothing to address the growing amount of ‘cash’ economy people operating here, who have never put in a tax return in their lives in NZ and can easily operate here under those circumstances..

    Around Auckland there are practically zero houses will make enough return for a legitimate investment and increasingly none around NZ. So what happens… rental shortages intensify and you can’t get a rental in Auckland… New apartments are overpriced as people are expected to pay for the dysfunctional industry that is about quick and dirty profits, not accountability.

    And by the sounds of it the old house will be unable to be rented past July 2019 because it will not pass the rental standards… so it will go back to being empty. Whose doing to spend tens of thousands of dollars upgrading it for renting when you can just sell it on…

    In China they do not rent out houses, it is not part of their culture. If they buy a house, they leave it empty if they are not using it, as do most people from the Middle East etc.

    Also the capital gains taxes will not effect satellite families living here. One I know have both parents working overseas, they bought the grandparents in from China and because the child is a NZ citizen (but born overseas to recent migrants one of whom gained citizenship here before leaving) it can move to NZ to learn English, freely use the kindy, health care and educations system, while the parents pay taxes in China where they work.

    From my reckoning families can then buy one house each and leave them empty without paying capital gains taxes if they claim they are the ‘family home’. While the legitimate investor who pays taxes in NZ and uses the property for social good, aka renting it out, will be taxed twice.

    OZ and Singapore investors are not considered overseas investors as part of the crack down of foreign ownership, neither are overseas students, or anyone temporarily living here… so you can come to NZ for a crap course, buy a house here and not pay CGT on the gain if you live there, likewise there maybe tax agreements in place so that Singapore investors will pay less or no taxes compared to the Kiwis? Essentially it is a joke.

    Does not exactly seem to be a solution to the rental shortages or fair!

    • All good points SaveNZ and probably more pertinent to those of us who live in Auckland and witness these abuses first hand on a regular basis.

      One partial solution I’ve wondered about would be the government declaring that anyone who owns residential property in New Zealand, regardless of their immigration status (whether they be citizens, permanent residents or foreigners), to be New Zealand residents for tax purposes. This would require all property owners, no matter where they reside or what their residential status is, to be liable for New Zealand income tax on their worldwide income. This arrangement would of course take New Zealand’s double taxation obligations into account.

      It would certainly go a long way to solving the problem of satellite family tax avoidance. If every property owner were required to provide an audited and verified summary of their worldwide earnings (at their own expense of course), and pay New Zealand income tax on those earnings, the idea of holding residential property in this country while avoiding contributing to its tax base becomes far less attractive or feasible.

      • Thanks SIMONM. In my view the only way to get taxes out of the growing abuses and cash economy is to have any taxes obligatory and impossible to avoid, like for example a stamp duty on assets sales.

        Also to make sure that permanent residency/citizenship takes longer such as 10 years and the people are subject to a full IRD audit to make sure they will not be a burden on NZ taxpayers if they become permanent citizens here.

        Also our immigration laws need to stop allowing others to ‘piggy back’ off one persons residency when they will be burden on Kiwi taxpayers. Instead there should be another category where people linked to that person can live here but they have to pay their own way.. and not have access to welfare here, voting or free health & eduation through marriages, siblings, and aged parents categories.

        In the case of the satellite family I know, they got in 25 years ago without speaking English, then the ‘dad’ left and the remaining partner was able to claim abandonment and go on a DPB. Then her children including other children were able to come over and bring their spouses and their children and their grandparents. So we had a family that never paid any taxes bring in 10 other people who never pay taxes either but use all of NZ services. Of course they have plenty of money all stashed away and live in multimillion dollar houses.

        Clearly it is not sustainable the government’s inability to tackle this growing problem as well as the satellite families having their kids and elderly care paid for by NZ taxpayers.

        It is a joke with how our country is going that we still rely on ‘self assessments’ and ‘honesty’ with taxation.

        All that is happening is that the criminals are getting richer here, many people are happily living on no income while being rich, while the smaller and smaller taxpayer pool are getting poorer and rental property scarcer and living costs rising.

        There is also the issue of so many people having multiple passports… the child I mentioned earlier from the satellite family and getting their free education here in NZ, has 3 citizenships already and their parents 3 passports under different names.

        The constant changes at the border in identity should have been remedied a long time ago in NZ because so many people in the criminal courts have multiple names and identities that they use to rip off the system and other people here. Still zero action from government – how many people are still on welfare benefits here for example while working overseas?

        The passport issues also came to light with the Sroubeck where documents released under the Official Information Act show he arrived in the country twice but did not appear to depart in between. Doh! Been happening for 30 years! Not exactly a puzzle to outwit customs/immigration here.

        Just a few of the criminals being apprehended here with multiple names/passports or businesses committing frauds here…
        https://courtnews.co.nz/2019/01/30/tax-bill-ballooning-to-1-3m/
        https://www.tvnz.co.nz/content/tvnz/onenews/story/2019/03/07/hold-filipino-shipping-agent-escapes-jail-time-after-225k-un-tax.html
        https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12171615

        The NZ government response is to continue to give out residency even if the people are in Jail and liars and make the NZ taxpayer support overseas criminals careers over here for the rest of their lives!

        It’s a joke including allowing 3 year ‘open’ work visas for students which are going to massively increase housing shortages here (and presumably if they buy a house they pocket the capital gain as their main residence!).

        Not only because of all the fraud this is creating but also a disgusting ‘transactional’ approach to education here that is diminishing the NZ tertiary standard . Soon bonafide Kiwis will decide to get their degree from overseas with more ‘legitimate’ overseas universities as the NZ ones plummet down the rankings or their names become questionable.

        Who wouldn’t pay $30k to get a free passport, lifetime access to welfare, free health and education for your kids and then be able to get other family members over to gain the same advantages???

        https://www.stuff.co.nz/national/crime/107073384/the-big-scam-the-tip-of-an-immigration-scam-iceberg

        The our governments only response to the massive deficit is to tax more honest people paying ‘taxable income’ in NZ… instead of a crack down on criminals and fraudsters operating here between their country of birth and NZ and to stop the amount of people who have access to NZ passport and welfare within a few years, when they and all their relatives become a massive burden on NZ taxpayers in the future with satellite families.

  6. Flipping is what a lot of Asian Investors do with real estate in keep the market buoyant and increases equity in their housing investments, also selling amongst themselves.

  7. Ever heard of Vivianne Westwood? If not, she’s a fashionista/Malcolm Mclaren/Sex Pistols?
    Anyway. She said something I thought wise when talking about 9/11.
    “ I don’t care what they say, I believe what my eyes see. And they saw a demolition job”
    When I drive around Auckland I see a swindle. I don’t care what $-experts say, I see swindles. Literal, actual swindles.
    The problem for us, however, is how to get a clear view of the swindles. If we saw a fellow dressed in black, wearing a black ski mask, carrying a swag and a crow bar climbing through a broken window of an evening we’d probably safely assume “ Burglar!”
    But if we see real e-snake signs going up on a house not much more than a small thing wearing makeup with it’s skirt hitched up on some Ponsonby street corner we assume “ Hmmm?? Wonder what that’ll go for? Should see what I could get for mine?”
    The greatest swindle of them all is surely the one where everybody’s convinced they’re not getting swindled at all while their pockets empty out. ( 1984/asset sales/BNZ tanked to line pockets/etc.)
    I was on an intersection on Great North Rd the other day and on that intersection there was a luxury car dealership on each corner. Ferrari, BMW,Merc, etc. The tyre fellow who was doing tyre things for me said “ Man! Them rich people don’t come around here these days like they used to. The dealers are discounting Ferrari’s and I’d be out of business if my tyre supplier wasn’t offering two for one deals.”
    Now? See? Lets do a Vivienne Westwood on that, shall we? Do we see people lucky enough to be able to buy Ferrari’s ? Or do we see the mystique of owning a Ferrari used to buy debt pimped by the big four banksters on instructions from the Fed Reserve?
    When adern finally lets go of the tear ducts of the poor victims and those closest to them from Slaughterhouse Christchurch and walks into the banksters and kicks their teeth in we’ll keep getting swindled to a point where we’ll wake up one day in some one else’s country.

    • We’re already in someone else’s country, and the real estate / finance industries are nothing more than clandestine ponzi schemes for the idle rich.

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