Capital gains tax: What the experts think

Rents could rise and house prices fall if the government goes ahead with a capital gains tax, says the Tax Working Group.

The group, which today released its recommendation for a CGT to be applied on assets such as land, shares, investment properties, business assets and intellectual property.

Any gains on the sale of these assets would be added to the seller's overall yearly income and be taxed normally at realisation – meaning a CGT would only take effect when it becomes law.

Other assets – such as the family home, cars, boats and art – would be exempt from a CGT.

As part of its work, the group looked at the impact on the housing market.

It said that while theory suggested that extending capital gains taxation would increase the ratio of rent to house prices due to either rents rising or house prices falling or a

combination of both New Zealand's constrained supply would limit the impact on rents.

Modelling suggesting there would be rent rises but it was difficult to predict given the number of unknown variables.

It also looked at the impacts of similar tax changes on housing markets in other countries like including Canada, Australia and South Africa but did not find significant rent rises.

"The group has not observed significant increases in rents relative to prices in those countries - to the contrary, rents actually fell relative to prices.

"While there are only a small number of examples to observe, there is no evidence of a general rise in rents or a fall in prices following the implementation of capital gains taxes."

But on balance the group said it expected the extension of CGT would lead to "some small upward pressure on rents and downward pressure on house prices.

"These impacts are likely to be small in relation to the impacts of more fundamental housing policy initiatives, such as the Government's KiwiBuild programme."

National Leader Simon Bridges said the working group's recommendations went further than just suggesting a CGT.

He said there were eight taxes recommended, including a tax on agriculture, water, the environment and waste.

"This is an attack on the Kiwi way of life," Bridges said.

"This would hit every New Zealander with a KiwiSaver, shares, investment property, a small business, a lifestyle block, a bach or even an empty section."

ACT leader David Seymour was also critical, saying the working group's recommendations were "offensive to New Zealand values".

"This tax will reduce savings and investment in productive assets – the very assets an economy needs to grow and prosper – by doubling them."

OneRoof editor Owen Vaughan said the recommendations weren't surprising given recent conversations around the tax advantages property investors enjoy.

However, he noted it would add to uncertainty in the market.

"If the Government decides to adopt the proposals, then we could see some investors quickly withdraw from the market," Vaughan said.

"In the short term this could put pressure on the rental market, which the group acknowledges in its report.

"The group concludes that market pressures will constrain attempts to push rents above what landlords are already able to set, and that tenants will find home-ownership more affordable than renting as a result of a lowering of house prices."

He said this was consistent with other countries.

"That's the experience in other countries with similar forms of capital gains tax, but recent polls suggest that the Government will have job convincing Kiwis that the changes are nothing to fear, especially in the shadow of falling house prices in Australia, even though the triggers of the chaos there are nothing to do with capital gains tax."

James Wilson, Valocity Director of Valuation Innovation said:

"Until such time as the Government indicates which recommendations will be adopted and full implementation details, it is still too early to ascertain or predict a full impact on the housing market and I expect the 'wait and see' mentality already evident in the market place to remain”

"One observation that could be drawn from the recommendations is the fact that with the family home remains exempt from any capital gains tax whilst other residential investment and asset classes are included, home owners may be motivated to simply keep re-investing in the family home - extensions, renovations etc - rather than invest this money into more productive assets, such as a small business."

Bindi Norwell, chief executive at REINZ, questioned whether the administrative burden and cost to implement GCT was worth it given that the report "even recognises that any impact on housing affordability could be small."

"Especially as CGT coming at the end of a raft of legislative changes the housing market has faced recently including the foreign buyer ban, ban on letting fees, insulation, healthy homes and ring fencing," she said.

She added: “We’re also disappointed that the rate of CGT is an individual’s marginal tax rate and that there will be no reduction in the rate such as is seen Australia and the US. This means that New Zealanders will effectively be paying a much higher rate of capital gains tax than individuals in other OECD countries.

“However, it is positive to get confirmation that the Tax Working Group has recommended that the family home is excluded from CGT and that the calculations of gains are not to be retrospective. Additionally, it’s great that some relief in the form of rollover provisions for small farms and businesses has been proposed."

Andrew King, chief executive of the New Zealand Property Investors Federation, said the recommendations weren't a surprise.

"They were set up to bring in a capital gains tax that wouldn't affect the family home."

But he said the proposals would penalise those who saved and invested and encourage people to either spend their money or put it into the family home.

"Basically it's a disincentive to those who want to save money and invest money - they get punished."

King expected the proposed changes, which still require government sign-off, could push up family house prices as people upgraded their home rather than investing in property and drive more people to sell their investment properties resulting in fewer available pushing up rents.

"I can only see that rent is going to go up and that is bad news for tenants."

He said that drove people to move in together resulting in crowding.

"Rents are going to be more expensive. Overcrowding is going to increase."

King said property investors were already selling up because it was getting harder to be a landlord and because of concerns about government plans to ringfence losses.

"There are lots of things causing people to leave."

He said there probably wouldn't be a drop in the number of rental properties but new supply was not coming into the market to meet growing demand.

"It won't be there. There will be a shortage of rental property, higher rents and overcrowding.

But Richard Wagstaff, president of the Council of Trade Unions, said taxing the income from capital gains was an important piece in the puzzle making New Zealand a fairer place.

"Those who complain about taxing this income like all other income, are those who are currently able to play the property market as if it were a game of monopoly."

Wagstaff said so many working Kiwis were struggling to buy a single home because of the way that the wealthy few could use this subsidy to speculate.

"With wages receiving a falling share of the nation's income it is increasingly important that taxation of income from capital is made fairer,"

"Working Kiwis deserve a better deal and now the government needs to show what they are made of and show that they truly do care about making ours a fairer system."

- New Zealand Herald