Treasury talks capital gains tax

June 4th, 2009 at 9:57 am by David Farrar

Brian Fallow writes:

The has renewed its call for reform of the tax system, including the issue of capital gains from property investment.

It wants the system to have a broader base and lower rates, Treasury Secretary John Whitehead told an Institute of Directors function yesterday. “And at the risk of being chased down by an angry crowd with pitchforks and flaming torches, yes this should include consideration of moving the boundaries to tax more capital gains – for example on investment property – and shifting more of the tax base towards consumption,” he said.

Without changes to the tax system, there was a real risk that the Government’s revenue base would be unsustainable in the medium term, given growing international competition for capital and skilled labour, and an ageing population.

“A key priority has to be reducing effective marginal tax rates and increasing the rewards for effort. There is a growing view that the high mobility of our skills base means high personal income taxes are especially harmful for New Zealand’s growth and productivity,” he said.

I used to be fervently against a on investment property. Since the credit crisis, partly caused by rampant borrowing for property, I have started to change my mind.

So long as other taxes were cut, so overall tax revenue does not increase, I think the time is right to now take a serious look at capital gains tax. And I say this as someone looking to buy an investment property.

“I know there is a lot of passionate debate on this matter, but capital gains or property taxes would be beneficial for encouraging investment in productive activity.

“A more complete capital income tax base reduces the impact of tax distortions on investment decisions, thereby improving the allocation of capital in the economy.” And greater reliance on GST – aligned with reduced income and corporate tax rates – should help strengthen incentives for savings, he said.

I don’t expect the Government to say they are in favour of a capital gains tax. But I do hope they will allow Treasury to work on proposals for how one could work, so it can be debated in the fullness of time.

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39 Responses to “Treasury talks capital gains tax”

  1. alex Masterley (1,510 comments) says:

    CGT, is one of those things we need to know about but as it would affect a core part of the governments support base I doubt that it would be pursued enthusistically if at all.

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  2. MyNameIsJack (2,415 comments) says:

    of course there should be a capital gains tax on speculative property. Why should it be treated differently to any other investment?

    I have investment property because of the tax advantages it provides, such as negative gearing while I own it and the great lump of profit when I sell. Nice.

    Would a CGT change my investments? Maybe. But I am still in favour of it being treated like any other form of income.

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  3. Alan Wilkinson (1,873 comments) says:

    “I know there is a lot of passionate debate on this matter, but capital gains or property taxes would be beneficial for encouraging investment in productive activity.”

    It won’t make the slightest difference. The housing bubble occurred all over the world irrespective of the capital gains tax environment in each country. It will simply change the vehicles and methods used for property investment.

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  4. virtualmark (1,513 comments) says:

    It will be interesting to see what the newly formed Tax Working Group come back with. It includes people like John Shewan and Gareth Morgan who’ve made a number of proposals over the years for broadening the tax base via measures like a CGT or property tax, for flattening the tax rates, and indeed for rolling the social welfare system into the tax system via a Guaranteed Minimum Family Income.

    Personally I suspect they’ll come back with some quite sweeping recommendations to introduce a flat personal, trust & company tax at no more than 30cents in the dollar, balanced out by a new capital gains tax across pretty much all asset classes, including property.

    I know that many here wish the Nats would just fall at the feet of His Holiness Roger Douglas and commence slashing and burning. I think Roger says a lot of sensible things. But I also think he has poor political instincts about just how fast and how far you can push your voters before they turn on you. I think the Nats are playing a longer term game here, aiming for at least 2 terms but targeting 3. I think we’ll see a lot of ground-laying done between now and the 2011 election, around things like tax reform, SOE partial privatisation etc, and then the Nats will look to introduce those more meaty changes in 2012-2014 when they have an explicit mandate for them.

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  5. virtualmark (1,513 comments) says:

    PS. Anyone want to guess what would have happened to John Whitehead if he’d floated those same proposals 12 months ago?

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  6. mike12 (183 comments) says:

    I would not vote for a party that introduced a capital gains tax on investment property – its the thin edge of the wedge and have spent some years in Oz where capital gains tax and stamp duty became a revenue stream very quickly.

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  7. Adolf Fiinkensein (2,889 comments) says:

    mike 12

    What sort of a dil are you? What the hell do you think the purpose of any tax is, other than to become a ‘revenue stream’?

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  8. GT (44 comments) says:

    I used to be against it too. But since the Labour Government came out with their tax on unrealised capital gains on equities in grey-list countries the new Government has my full support to create a fair and even investment environment. Property is an investment like equities, and should be taxed as such – this includes the family home, there can be no denying that the family home is also an investment. Whilst I don’t like taxes, and think that most emphasis should be placed on consumption, what I hate more is an uneven approach to taxation taken against investments. The people of New Zealand need something to make them think outside the property box, and CGT on property could be just the thing to encourage Kiwi’s to invest in more productive activities such as business – just as long as the approach is even across different forms of investment.

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  9. Luke H (73 comments) says:

    Hmm ….

    I used to be fervently against a capital gains tax on investment property. Since my favourite party, National, got into power and looks like it might back a capital gains tax, I have started to change my mind.

    [DPF: Actually National is against it. ]

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  10. double d (225 comments) says:

    talk to any Kiwi investor and they all say the same thing. Put your money into property as it will continue to rise in value. Easy tax free gains. Our Kiwi dream of owning our own piece of land is noble and good. but to continually buy rental property after rental property seems a crazy was to “develop” the economy. we need NZers to become financially more aware (sounds patronising but it is true) and start investing in other areas of the economy – although recent events in the sharemarkets and the state of our financial markets (“finance companies” etc) make this seem a hard sell. Until we have NZers investing in our economy, we will pay higher interest rates and be at the mercy of international markets

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  11. JC (949 comments) says:

    The bottom line is we are a country that can’t afford a tax based narrowly around income, if for no other reason than we are a relatively low income country with a large Govt involvement in the economy. Opponents of alternate taxes point out that other countries have higher income taxes, but miss the point that they still retain higher net wages than here.

    BUT… the reason we need to consider spreading the tax base is because we have allowed the Govt to be 40% of the economy.. we need to cut the cost of Govt by $20 billion and get it back to under 30% of the economy!

    JC

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  12. Simon (699 comments) says:

    Capital gains tax well over due. 20 year kids on $20,000 pay more tax than property investors scoring hundreds of thousands of dollars tax free. Capital gains tax is just a fairer system.

    Whoever introduces Capital Gains Tax will receive death threats which will probably be carried out.

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  13. RKBee (1,344 comments) says:

    I agee with GT… New Zealanders need to invest beyound property… but what else is there in NZ but property… as a save bet… for Mum and Dad investers.. and who is to blame for that.

    I would have liked a capital gains tax return on the labour Government, over the the last ten years… Or even get the promised tax cuts under National… But when does the tax payers get a break… never. just TAX TAX TAX.

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  14. stephen (4,063 comments) says:

    Ssooo what would the intended effect be of implementing a CGT while lowering income taxes? I can only speculate that the lowering would be at the high end…

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  15. Owen McShane (1,226 comments) says:

    The problem with a capital gains tax on improvements (as opposed to the land) is the problems in counting the actual gain.

    It is hardly fair to be taxed on the increased value due to inflation.
    And it is hardly fair to be taxed on increased value because of improvements – such as installing insulation. But how do you count do-it-yourself labour?

    So it should probably be limited to capital gain in the land (less inflation.) Capital gains taxes can be a real disincentive to the “makeover” home industry which we see on TV all the time, and yet these home handyfolk serve a useful function in upgrading our housing stock which otherwise slides into total obsolescence.

    So yes – but restrict it to land value less inflation.

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  16. Kimble (4,434 comments) says:

    Wilkinson is right. Australia has capital gains (with a 50% discount if you hold the asset over 1 year) and its property prices got juts as silly as in New Zealand.

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  17. KiwiGreg (3,250 comments) says:

    Every government who has looked at this in New Zealand back to the Lange/Douglas one (who were so in thrall to Treasury advice they actually put our a discussion document on a comprehensive CGT) has stepped away as quickly as possible. Look at the Valabh comittee work, the McLeod Task Force report etc etc.

    The issues are far more complex and nuanced then the sound bite “tax speculative property” conveys.

    @Simon Property developers are already subject to a tax regime and they are taxed as if the property development income was ordinary income so no change required there.

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  18. SK (37 comments) says:

    In reality there already is capital gains tax (just not called that) on property bought with the intention of reselling for a profit, as well as for subdividing and developments, usually if the disposal occurs within 10 years. This doesn’t catch property bought to rent out.

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  19. freedom101 (496 comments) says:

    The horse has bolted, at least for several more years. Property will be a miserable investment for the next wee-while. There’s no rush here.

    A much better change would be to deduct the inflation element from the tax on interest. If inflation is 3% and interest rates at 4% or 5% then savers are actually making a loss in real terms once tax and inflation are taken into account. Severely penalising savings in this way pushes people into high interest finance companies and property speculation. That’s the root cause of the problem.

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  20. Ratbiter (1,265 comments) says:

    Irrespective of whether a CGT would or would not have mitigated the rise of the credit crisis, taking away the special tax-free status of house capital gains (= income) would at least encourage a few investors into other areas, thereby reducing net demand for housing, which would be to the betterment of people looking for a first home…

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  21. KiwiGreg (3,250 comments) says:

    @freedom the flip side of that is to limit interest deductions to real interest as well. This was also proposed back when a comprehensive CGT was looked at. It got bogged down with the whole issue.

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  22. Alan Wilkinson (1,873 comments) says:

    Ratbiter, the only impacts would be to

    a) increase rents permanently,
    b) substantially increase compliance costs for Joe Public and income-streams for accountants and lawyers,
    c) marginally reduce house prices temporarily at the low end of the market during a short period of adjustment, and
    d) increase the number of naive NZ investors losing all their savings to the likes of Blue Chip and other dodgy finance companies.

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  23. Redbaiter (13,197 comments) says:

    “I think the time is right to now take a serious look at capital gains tax.”

    It isn’t. What its time for is to cut taxes on other forms of investment.

    Only socialists see every solution as more regulation and more taxes.

    Never mind. Go ahead. Might as well get these National Party losers chucked out and go back to the Labour Party. At least then the path to financial collapse will be more direct and quicker.

    Who needs a bunch of posturing fools claiming to oppose Labour when in opposition and then acting exactly the same when in government?

    (Imagine what they would have said if Labour had proposed this measure while in power)

    I am growing more and more convinced that the real culprit behind New Zealand’s steady descent into the abyss of socialism is the ideologically bereft National Party. They have not got a good idea to save themselves and do not seem to understand at all what their political mission might be.

    Utterly useless. Throw them out and let’s go back to Labour.

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  24. backster (2,152 comments) says:

    Unless a capital gains tax is introduced on investment properties, then we will return to the system, under the former government, whereby property speculation ran rampant at the expense of Productive Investment contributing to our current calamity.. The last Government couldn’t change it, because their leader was constructing her luxury housing portfolio.
    Unless a situation is reached whereby tax rates on productive investment is reached the value of signing Free Trade Agreements with low tax Asian countries escapes me.

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  25. MT_Tinman (3,137 comments) says:

    Twenty years ago, in similar economic times, a bloody fool from treasury by the name Don Brash put out a statement advising against home ownership because of it’s negative economic value.

    This treasury dickhead is obviously on the same stuff Don was then.

    The last Minister of Finance to raise capital gains tax was Caygill when part of the Palmer empire.

    It took the quasi-commies nine years to recover from that faux pas.

    Key ain’t stupid, this’ll be shelved.

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  26. Alan Wilkinson (1,873 comments) says:

    backster, I suggest most NZers, including most commenting here, wouldn’t know a Productive Investment if it bit them on the foot.

    Remember 90% of Angel Investments flop and those guys are serious, experienced investors.

    On the other hand most people can distinguish a dog of a property from a decent one and if they get it wrong they might lose a bit of money but rarely the lot.

    Like the Auckland City restructure, the benefits of a capital gains tax are a mirage but the costs are all too real. Those who understand least are the most dogmatic supporters.

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  27. dime (9,869 comments) says:

    what would happen if they got rid of negative gearing?

    rents would just go up?

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  28. freethinker (688 comments) says:

    Persauding investors to invest away from rental properties is fine but there has to be a suitable investment and NZ just doesn’t have such an alternative at the moment, and such investment vehicles require a better regulatory regime and a more proactive regulator – I will explain this to my grandchildrenin the hope their grandchildren will do something to achieve this. IN the meantime Bill, have a think about this one – no tax on interest recieved on a new special “Kiwibank deposit account” that is aligned back to back for mortgages on NZ residential owner occupied property with a minimum equity of 80% to provide a local source of deposits so reliance on foreign capital and foreign owned Banks is reduced. You could be real radical by funding an increased capital base for “Kiwibank” by a public issue of shares available only to NZ Residents with perhaps a limit on number of shares held that qualify for no tax on dividends and an absolute ban on foreign ownership. A lovely idea but just a dream I guess.

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  29. OldNews (38 comments) says:

    Broadening the base to include property while netting out any revenue by reducing income tax makes sense both from an equity and a growth perspective. As a country we cannot get richer by simply buying and selling houses with one-another. We need to sell things (both goods and services) overseas. Tax property more. Tax income (personal and corporate) less and then we’ll all be better off. This can be done with grand-parenting and transitional provisions to avoid perverse outcomes. But the crucial thing is ensuring that overall taxation is reduced or at worst kept neutral and that this is not an excuse to increase tax.

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  30. Alan Wilkinson (1,873 comments) says:

    Anyone who believes that “broadening the tax base” will not simply present a means for interventionist government to increase total taxation and government spending is hideously naive.

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  31. Sam A (18 comments) says:

    What OldNews said. Makes sense to me. If we must tilt the playing field, let’s tilt it towards productive investment.

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  32. bchapman (649 comments) says:

    I’m sure Labour regretted no having enough guts to do it. It hasn’t stopped property speculation in Oz as you still get to keep 60% of the profit. Its abscence in NZ has meant that property here has become massively overpriced relative to incomes.
    If sold to the electorate properly it could actually be a political plus (they were to gutless we are prepared to cop the flak etc..)

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  33. Alan Wilkinson (1,873 comments) says:

    Oh twaddle. Show us one country where capital gains tax stopped the recent property price bubble. The number of properties where any feasible CGT change would increase taxation is a tiny fraction of the total housing market and it will have zilch long term impact on prices.

    The same people who advocate CGT predicted house prices would collapse 30%. They are wrong on both counts.

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  34. Captain Crab (351 comments) says:

    MNIJ
    “of course there should be a capital gains tax on speculative property”

    If you are trading as a speculator then that income gets taxed. No need for CGT in that case.

    “I have investment property because of the tax advantages it provides, such as negative gearing while I own it and the great lump of profit when I sell. Nice”

    Well done. Youve just admitted to the IRD that your INTENTION is to sell and therefore you should be deemed a trader and taxed accordingly…….

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  35. Alan Wilkinson (1,873 comments) says:

    Captain Crab, nice one – on the button.

    For further illumination of the terminally ignorant, the current absence of a formal capital gains tax does indeed benefit productive investments and entrepreneurs. If you start up a new innovative company, build it up to a significant size and then sell it you are not taxed. Ask the Morgans.

    Under a capital gains tax regime they would lose a substantial part of the reward for their risk taking and investment of effort, intelligence and initiative. So much for encouraging Productive Investments.

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  36. KiwiGreg (3,250 comments) says:

    @Alan Wilkinson – agree 100%.

    In fact most overseas CGT systems (I should say most OECD ones as I dont claim universal knowledge) exempt the principal residence so dont really impact on the bulk of housing stock, if housing is your target.

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  37. Captain Crab (351 comments) says:

    Alan
    Yes, its a pretty good “own goal”. Amazing stupidity.

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  38. petal (706 comments) says:

    TAX CUTS
    NO NEW TAXES

    Oh hang on

    NO TAX CUTS
    NEW TAXES

    Brill.

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  39. saryn (3 comments) says:

    David, How can you be anything but appalled at this ‘suggestion’. Not all of the capital gains are gains in real terms, rather nominal due to the inflation of the currency – double whammy from the govt – counterfeiting on the one hand, and then taxing the nominal + actual gains !!! Actually this could make it a capital tax, rather than a capital gains tax !! As an aside I believe (not sure where I read it) that capital gains in the US are taxed on an ‘after inflation’ basis and at quite a low rate (10%???)

    And then there is the principle of it – if I’m going to be taxed on gains, do I get a tax refund if I sell at a loss, am I taxed only when the loss/gain is realised or on an ongoing basis (consistent with other investments subject to capital gains taxes).

    As for the reason set forth by Mr Whitehead “Without changes to the tax system, there was a real risk that the Government’s revenue base would be unsustainable in the medium term, given growing international competition for capital and skilled labour, and an ageing population” – how about we see the size and expenditure of Govt reduce so they keep their hands out of my pockets for god’s sake. This in conjunction with an improvement of property rights will attract capital both financial and human.

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