Kerr on Capital Gains Tax

October 8th, 2009 at 10:15 am by David Farrar

Roger Kerr writes:

A gains tax on housing would not reduce . is an ongoing increase in the general level of prices, not a one-off change in some prices.

The introduction of the Goods and Services tax resulted in a one-off increase in the consumer price index – it did not lead to ongoing inflation.

Similarly, a might reduce property prices initially but it would not affect longer-term inflation.

True, and any increase in GST would be a one off bump.

Moreover, if such a tax on housing were applied only to realised gains as is likely, house prices could even rise. This is because of the lock-in effect, with owners holding on to homes to defer the tax on gains. Anything that reduces supply is likely to lead to an increase, not a decrease, in price.

One could do it on unrealised gains, but that would be pretty draconian.

Evidence confirms what theory suggests: the inflation performance of countries with a capital gains tax doesn’t differ systematically from countries that don’t.

Australia, the US and Britain, which tax capital gains, have all had large and volatile house price movements this decade.

I always like a look at empirical evidence.

A second mistaken assumption is that investment in rental housing enjoys tax privileges.

As the deputy commissioner of Inland Revenue, Robin Oliver, told a select committee in 2007: “Rules about expenses for deducting costs such as interest, upkeep and maintenance, as well as paying tax on income, are the same for investments in shares or anything else. In fact under the housing case … there are tighter rules regarding what is a capital gain.”

People are misled into thinking that rental housing is tax-preferred since highly geared rental property may record tax losses. This is because the full economic income (including the change in the market value of the assets) earned on rental property is not taxed.

However, this is a quite general feature of the taxation of real assets, including plant and equipment and farms.

A real issue though is whether it is sensible to allow property owners to claim 3% depreciation on their property annually, when the empirical evidence is that almost no residential property depreciates in value – in fact it appreciates.

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48 Responses to “Kerr on Capital Gains Tax”

  1. dime (8,752 comments) says:

    “whether it is sensible to allow property owners to claim 3% depreciation on their property annually”

    isnt it more along the lines of forcing us to claim 3% depreciation? that we have to pay back when we sell the place…

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  2. David Farrar (1,809 comments) says:

    Yes but the use of the money in the years or decades between can amount to a lot.

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  3. gazzmaniac (2,269 comments) says:

    Houses do depreciate – a 20 year old house is worth less than a 6 month old house on an identical block, and a 50 year old house is worth less than the 20 year old one and so on. It is the land content that appreciates in value, and in many cases more than compensates for the depreciation in the building.
    As for “clawback” tax, it is my understanding that it is up to the vendor to prove that the capital gain was on the land not the building to determine if it is payable or not.

    [DPF: Generally most houses are on land :-)]

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  4. gravedodger (1,426 comments) says:

    Sad isn’t how any tax reform or creation of a new tax is targeted at people who have limited opportunity to defend their money.
    Land tax, on people who have saved enough to own land easily enforced just attach payment obligation to title, likewise property tax for local body rorts.
    CGT lets grab from “rich pricks” again easily enforced.
    Death tax ( still there, zero rated).
    dog tax
    airport tax.
    payroll tax.
    tobacco and alcohol but not the other ” recreational” drugs, lets omit them by making them illegal and give the gangs free range outside enforcement.
    vehicle tax and don’t give me shit about user pays my, rego and wof is the same for 1000 ks a month as a traveller doing 20 000 ks and he can claim it as an expense.
    income tax but if you have 10 kids nothing to pay and heres a top up.

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  5. gazzmaniac (2,269 comments) says:

    Quite right gravedodger.
    Income and company taxes should be slashed, and GST should be king. Not to mention that if National started getting rid of certain government departments and commissions, they could substantially decrease spending and not even need as much tax.

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  6. nickb (3,629 comments) says:

    In the case of income tax, and especially if a land tax is introduced, I would want to see about the first $20,000.00 of income made tax free. Gives everyone a tax cut, stops the wasteful churn on taxing benefits, pensions etc. Then WFF could be reduced at a similar rate.

    This would also help out pensioners who would be hit the hardest by a land tax.

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  7. gazzmaniac (2,269 comments) says:

    Or we could just not introduce land tax at all, and have the tax cuts anyway.

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  8. John Dalley (394 comments) says:

    Does anyone know what the current estimate of uncollected tax’s in NZ?
    By that i mean uncollected and estimated tax avoidance under the existing tax laws?

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  9. gazzmaniac (2,269 comments) says:

    [DPF: Generally most houses are on land :-) ]

    Landlords can only depreciate the building, not the land. The building does depreciate.

    [DPF: I know, but should one treat them separately]

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  10. Brian Smaller (3,915 comments) says:

    gazzmaniac – especially with tenants in them. Anyone who has owned rentals, especially those let in the lower half of the market know just how much buildings depreciate. At the end of the day any depreciation claimed is counted as income in the year of sale. IRD get their blood, don’t you worry.

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  11. kaya (1,360 comments) says:

    Something needs to be done to stop speculation/gambling on property which provides nothing of value. A big difference from long term landlords who provide a service to the country. There would need to be no CGT on the primary/family home and a reducing level of tax depending on how long the property had been owned. Also factoring in how many properties are being turned over each year.
    There is a big difference between speculation and investing. Something needs to be done to punish the former and reward the latter. The turmoil in world financial markets can be firmly linked to the greed of speculators. As for the bigger picture, if this story has any substance:

    http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html

    Watch the shit hit the fan as the US dollar gets obliterated, I’m not an economist’s arsehole (thankfully) but I don’t think the current bullshit rally in world stock markets will last too long. The 1930′s depression will look like a picnic in comparison. This looks linked to the spike in gold prices in the last couple of days. Interesting time. I’m glad I’m off to Gt Barrier in the morning with 10 boxes of beer and a truck load of food….. :)

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  12. gazzmaniac (2,269 comments) says:

    Something needs to be done to stop speculation/gambling on property which provides nothing of value. A big difference from long term landlords who provide a service to the country. There would need to be no CGT on the primary/family home and a reducing level of tax depending on how long the property had been owned. Also factoring in how many properties are being turned over each year.

    Why? Should “gambling” on the sharemarket be banned too?
    The CGT in Australia has done nothing to prevent a property bubble here; if anything the bubble is worse. It’s pretty hard to find a house anywhere close to a capital city for less than $500k. If one is introduced in New Zealand, it would only be as another way of the government taxing everyone and will not reduce property prices. That will only happen when the supply to demand ratio changes (and if anything it will contract the supply side).

    The only way to encourage people to invest outside the property market is to reduce the tax on those investments. Why would I invest in a term deposit when the return is highly taxed (38% + 10% Student Loan) and the remainder won’t even make up for inflation? I’d be far better off investing in a property that will give me a rental return and a capital gain. Also, why would I bother with a managed fund, whose return is piss poor anyway, is risky because I am at risk of losing some of my capital, and would be better off and safer in the bank? I remember having the conversation with a previous employer, where I stated that their super scheme was piss poor and the only reason I joined was because the company subsidised it (that was pre-Kiwisaver). Then it’s taxed at 38% plus student loan.

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  13. gravedodger (1,426 comments) says:

    Kaya you just may have found an employment niche as an E A and i don’t mean executive assistant.
    The big push for our citizens to invest in property is security. It is always there apart from the odd earthquake, subsidence or the bank(not the one above collapsing). It is easily traded and in my experience defies the schemeing pricks who masquerade as managers of financial institutions, money managers, financial consultants and other wizzards who appear rvery 15 to 20 years as the perpetraters of ” get above market returns” schemes that are doomed to fail and never never pay anything like the appropriate margin for risk, as investments, with all the fancy names that imply security.
    Security now there an over hyped name for one , remember “safe as I reckon” and it was all lent on 2nd hand cars and OVERHEADS.
    With this country’s predilection for permitting investments in set up to fail opportunities and a share market that is an international joke, housing is always going to be attractive.

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  14. Banana Llama (1,105 comments) says:

    Why? Should “gambling” on the sharemarket be banned too?

    Yes, when people leverage money out of thin air to inflate the price of goods and services absolutely.

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  15. Chris Doms (73 comments) says:

    DPF you have got it wrong AGAIN. Buildings DO indeed depreciate. They wear out, require maintenance and eventually substantial refurbishment or replacement. Hence landlords, like any person who owns property in a taxable activity, can depreciate the BUILDING. They cannot depreciate the LAND. So the land portion remains undepreciated and the building portion is depreciated.

    Seriously, stop getting this wrong, because it’s quite important. If a business owns a piece of plant, it get depreciated. If a business owns the building around that plant, it also gets depreciated. This is commercial reality.

    Dime – you’re wrong, no one is forced to depreciate their rental property. You can elect not to depreciate the property. Many of my clients do this.

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  16. gazzmaniac (2,269 comments) says:

    Banana Llama –
    If people are willing to borrow money to invest in something, why should they be stopped? You have offered no good reason to ban it. IMHO borrowing money to buy shares is no different to borrowing money to invest in a smaller business (and in many cases far less risky). In the end it should be the decision of the investor and shouldn’t be banned or discouraged by the powers that be.

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  17. s.russell (1,486 comments) says:

    Moreover, if such a tax on housing were applied only to realised gains as is likely, house prices could even rise. This is because of the lock-in effect, with owners holding on to homes to defer the tax on gains. Anything that reduces supply is likely to lead to an increase, not a decrease, in price.

    I do not see that a CGT should reduce activity in the housing market. If you buy and sell several times as opposed to holding on to a house for a longer period the total CGT you pay will (on average) be the same anyway – you will just pay it in smaller chunks. Psychological effects may apply, but they could work both ways.

    Sad isn’t how any tax reform or creation of a new tax is targeted at people who have limited opportunity to defend their money.

    So would it be better to tax things that are easily dodged? A fundamental reason for having this tax review is to shift taxes on to exactly those things: the immovables, and away from what can be avoided. That is surely fairer.

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  18. bchapman (649 comments) says:

    Don’t we already have a land tax. Its called Local Authority Rates. We even pay GST (ie double taxation) on it. The easiest place to tax property is at the transaction stage- in Australia its called stamp duty, doesn’t stop speculation but certainly makes it less appealing.

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  19. Jeff83 (765 comments) says:

    The difference between most taxable activies, for example shares, and housing is where the majority of the value comes from. In New Zealand high level of dividends are paid out, which are taxable. As long as a tax payer isnt in the business of trading in shares when they sell them the gain (or loss) will be capital in nature. However in respect to investment properties generally the rent doesnt even cover the mortgage payments, which results in a deductible loss. The gain is in relation to when it is sold, which is currently seen as capital in nature. It is here where the advantage lies, in the gain being more of a capital one, when compared to other investments, and also being a type of asset which people can much more heavily leverage (At a lower cost).

    Australia’s housing prices in NSW have sky rocketed due to a housing shortage, high immigration rates and a very strong economy. Using that as emperical evidence that a capital gains tax would not address the current investment imbalance in NZ (by making revenue orientated investments more appealing) is false.

    A CGT which was used to fund a decrease in the top rates would mean those who are currently screwing the tax system pay for the overtaxation of many who are being overtaxed. However if you do it by GST and Land tax you are just getting the middle to pay for the rich, but that is what Treasury are good at.

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  20. FletcherB (60 comments) says:

    A capital gains tax on additional properties from the “family home” is not supposed to magically “reduce inflation”…

    Its supposed to even the playing field, so that gains from any income source are taxed more evenly… and thus will stop encouraging investment from being so heavily skewed towards the one investment vehicle that avoids proper taxing….

    ie. Once capital gain on property is taxed on an equal (or, at least, closer to equal) rate as investments in shares, or direct investment in a business… the theory is that more people may be inclined to invest in those areas…. and this should be good for NZ’s future growth.

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  21. wreck1080 (3,522 comments) says:

    To those clowns who say that capital gains did not prevent house price increases in other countries, so it would not do so here.

    That is a piece of rubbish argument. An individual economy is too complex to make such a statement.

    Australia was riding on the crest of a resources boom – they had money coming out their ears. Some of that went inot housing so who cares?

    Maybe our house value increases would have been less under a CG tax regime.

    Maybe those other countries would have had larger price increases if they had not had CG tax.

    I personally think it is disgusting how house owners can reap small fortunes and pay no tax on that. My children are taxed on the meagre amounts of interest they earn. So why should homeowners not be taxed on the billions of dollars they earned over the boom times?

    Pathetic.

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  22. gazzmaniac (2,269 comments) says:

    Why should people be taxed because the value of their property increases? And why are we having this discussion? The public voted for a right winged government to reduce taxes, not to make new ones.

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  23. Chris Doms (73 comments) says:

    Gazzmaniac – it’s reasonably unanimous that the family home would not be caught in any CGT. People who buy a second property with the intention of reaping a capital gain ought to be taxed on that property.

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  24. KiwiGreg (3,129 comments) says:

    “Why should people be taxed because the value of their property increases? And why are we having this discussion? The public voted for a right winged government to reduce taxes, not to make new ones.”

    Shame about what they got then

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  25. FletcherB (60 comments) says:

    “Why should people be taxed because the value of their property increases?”

    Why should people have income that isnt taxed?

    We live in a society that, regardless of whether you agree with it or not, and regardless of whether “left” or “right” won the election, taxes income to pay for services that the government provides…. policing, health, education, etc.

    You may quibble with what it pays for, how much it pays, who it is fair or not fair to tax, and how heavily…. but most people agree that everyone should be taxed fairly. Taxing one type of income while allowing another to remain tax free is seen as unfair by some.

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  26. gazzmaniac (2,269 comments) says:

    Chris Doms –
    People who buy a house with the intention of making a capital gain are already covered by income tax. We don’t need a law change for that.
    FletcherB –
    A capital gain is not income. All you are taxing is the increase in capital, and this is simply inflation if you take a long term view.

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  27. gazzmaniac (2,269 comments) says:

    Do you inflict a capital gain tax on the shares of a small business? What if someone starts a business, makes it profitable, makes it worth something then sells it when he retires? Will you tax that capital gain? What about shares of a big business? Where do you stop?

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  28. Chris Doms (73 comments) says:

    Gazzmaniac, I’m afraid you are wrong. People who purchase properties with the intention of a REVENUE gain (eg speculators, developers etc) are taxed under the Income Tax Act. People who buy property with the intention of a CAPITAL gain (investors) are not taxed on their gain, and they should be. The distinction is subtle but important.

    While their position is currently legally justifiable, property investors know they’re buying loss-generating properties for the purpose of making large, untaxed capital gains in the future. This behaviour takes advantage of our tax system. It’s legal, but erodes the integrity of our tax structure and needs to change.

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  29. wreck1080 (3,522 comments) says:

    gazzmaniac: why should people not be taxed on capital gains?

    Lets take a coal miner, who goes daily into the coal mines and risks his life and probably shortens it just to earn 40grand a year. He rents the house he lives in. He may pay 10 grand a year tax , leaving him with 30grand.

    Now, take the guy next door to him, who does not work but owns his house. This guy is on the benefit, and his house appreciates by 200 grand in 1 year.

    Why should the coal miner pay 10 grand tax on earnings of $40k , while the bludging house owner pays 0 tax on income of 200k?

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  30. Chris Doms (73 comments) says:

    Gazzmaniac – with regard to your second point, refer to my point above. People do not buy shares or businesses with the intention of creating long term tax losses for the sake of a capital gain later. You’re comparing a profit generating business with a loss generating property. While it’s not the IRD’s place to tell me how to prudently run my business, when people are deliberately buying properties to make a loss so they can reap a capital gain, this is an exploitation of a weak and uneven tax system.

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  31. FletcherB (60 comments) says:

    Gazzmaniac,

    The problem is the IRD tries to deduce your intention when you buy shares or property….. they want to tax your profit if you buy and sell with the intention of making a profit…. and they want to let you not pay tax on increases in capital value over the long term if you purchased with the intention of generating an income (which they will tax).

    The problem is in determining what was the intention at time of purchase…

    The current rule (I believe?) is…. if you buy shares for income (ie. INVEST)…. the income is taxable but the capital gain is not… but if you TRADE in shares… you pay tax on any gain at all.

    So, buy share X for $10…. keep it a few years, collect annual dividends, and then sell it for $15…. your $5 increase is tax free, but you’ve payed tax on the dividend earnings in the mean time…… wheras, if you by share X today for $10 and sell in a week for $12, you’ll pay tax on your $2 trading profit.

    If you buy a rundown house, tart it up and sell it later the same year, the tax department may deem that you TRADE in houses (especially if you make a habit of it) and tax you on your profit.

    If you INVEST in rental property, you are supposed to be purchasing an income making asset… but frequently you’ll only break even or even make a loss…. what with rents and interest on loans (a deductable expense) being nearly equal… So while people CLAIM to be investing for rental income…. thats really a bit of a sham in many cases…. people who are negatively geared (the rental investment costs more to purchase than the income it creates) are relying on the increase in value over time to realize a profit….

    Many “property investors” set up their business affairs to satisfy the tax department that they’ve made a poor investment in a non-performing or loss making income asset, that “just happens” to realize a capital gain over the mid-term…. its a sham. the capital gain was what they were looking for in the first place and they are really trading in properties, not investing in rental income. Books are published on how to do it. Accountants and valuers specialize in maximizing losses so that little or no income is earned before the sale…. which is tax free.

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  32. gazzmaniac (2,269 comments) says:

    First, Chris Doms –
    If you buy a house with an intention of making a capital gain, and this comes to the attention of the IRD, they will call you a trader and any capital gain becomes income.
    People also have loss making businesses, and if you make a loss in business you can offset it against future earnings. If you use a complicated loss acruing qualifying company, you can offset it against your other income.

    Wreck1080 – let’s take a coalminer, who goes daily into the coal mines. He doesn’t risk his life because mining has some of the toughest regulation around health and safety. In fact, the mine bosses can end up in jail if they are negligent and cause serious harm to a person. He “just” earns about $70k per year (over $100k in Australia) to drive a dump truck, and will likely earn more if he works underground. He rents a house, but his accomodation is a fairly small percentage of his take home pay, as he lives in a small west coast town, and property is cheaper than in Wellington. He also has a pretty good roster, spending only half of his time working, and having half free as he works a 4 day on 4 day off roster. Life is pretty good, he has a surplus of income, so he decides to start investing so he is not reliant on a single source of income. He had a short stint unemployed when he was younger, and really found it demeaning to have to beg for money from the department of work and income, who seemed to put barriers in his path, every step of the way, and didn’t want to go through all that again. After all, who knows what will happen if they find more snails? He isn’t so sure about investing in the sharemarket, as he isn’t really all that interested in running his investments from day to day. He meets an investment advisor who shows him a range of managed funds, but doesn’t really fancy them either because they have pretty average returns (some are worse than leaving it in the bank), and realises that because he is on the highest tax rate, he will have to give nice uncle Bill 38c in every dollar that he recieves. So he decides he will save up for a section, and when he has bought it he will build some units on it during his four days off. He builds the units, rents them out to other miners who are only there for work and don’t want to settle in the town, and makes a bit of money off the cashflow from the rent, as his mortgage is quite low because he built them himself. He knows that in a few years he will have paid off the loan, and there is a pretty good chance that he will have been able to increase the rents, further increasing the profit from renting them. Then nasty uncle Bill decided to demand a share in his capital gain when he decides to sell them.

    The guy next door to him does not work and is on a benefit, because he is 75. He and his wife have paid for their modest family home over years of prudent living, and although they are making ends meet with the pension, are by no means living the high life. The only asset they have is their home and car, as they were assured that the state would look after them when they were younger, so didn’t worry about setting up a nest egg. After all, at one stage he was paying 66c in the dollar to nice uncle Rob. He is finding it more difficult to make ends meet, thanks partly to the local council increasing the cost of rates by up to 10% per year, but they struggle on, and make a bit of money on the side selling preserves at the local market. One day they decide that the old house is to big, and his arthritis is making it too hard to keep up the maintenance on the place, so they decide to sell and build a small 3 bedroom brick house on a small section. Wicked uncle Bill demands the capital gain, and they miss out on the visit to Crete to see the war grave of a long lost uncle.

    Why shouldn’t we have a capital gain tax? Because it is a tax on inflation.

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  33. FletcherB (60 comments) says:

    Gazzmaniac.

    I agree… a capital gains tax on a family home will frequently have unfair consequences. Who has proposed one?

    Some CGT’s overseas have a time element to them, where the years between purchase and sale abate the amount of tax owed. Large gain in a short timer– lots of tax. Same gaine over 20 or more years… much less, or zero tax. This also seems fair an equitable to me.

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  34. gazzmaniac (2,269 comments) says:

    FletcherB –
    I do know how the capital gain tax system works. If you trade in something (be it shares or houses) you will be taxed as a trader. Currently the IRD do not enforce this law and people get away with trading houses. That is not a reason to change tax law. And the idea of a blanket capital gain tax is stupid, because you will affect people who are buying for rental investment, and people who build up small businesses.
    It is also entirely possible to buy or build a property that makes money on rental in the medium turn. People are mugs if they buy a house for investment where the dollars don’t stack up – they will lose it if they lose their job. So what if it makes a capital gain? And how is that situation any different from someone who buys a shop or farm that they think they can make profitable, but actually can’t? Should they pay a capital gain tax (if they make money from the sale) too?
    Finally, will the government give us money back if we make a capital loss? I didn’t think so.

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  35. gazzmaniac (2,269 comments) says:

    FletcherB –
    In Wreck1080′s post he suggested that a beneficiary who earns no income but owns his own house should pay tax on a capital gain.

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  36. Chris Doms (73 comments) says:

    OK gazzmanic, I need to reveal myself because you’re pissing me off. I’m an accountant. I deal with this stuff every day. Your assertion above that IRD ignore property dealers and developers is totally false. They are frequently targeted by IRD, and people with multiple property transactions are often audited. Almost all of them are reasonably honest with their affairs, because there is a very high risk of being audited by IRD.

    You do not understand revenue versus capital gains, which is painfully obvious by your boneheaded comments above. Someone who deal in or develops property DOES NOT MAKE A CAPITAL GAIN. They make a REVENUE gain, which is taxable, and is enforced. Someone who does not declare this income is being dishonest and is exposing themselves to substantial risk.

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  37. kaya (1,360 comments) says:

    gazzmaniac – I’ve just got in from work and read some of your responses. I don’t think we are that far apart in our thinking.

    I don’t believe a blanket CGT is appropriate. Read my original post again. I say factor in length of time owned and number of trades etc. My old man used to say to me “you get nothing for nothing” and I firmly believe in that. If you are adding value or providing some service then that is a different thing altogether.

    If anyone wants to speculate (including the stock market) then take your money and head to Sky City. Speculating does nothing positive for anyone.

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  38. Viking2 (10,715 comments) says:

    Imagine for a moment if you will that we are back in time about one year. CGT is in force and house values have dropped.
    Question; will the IRD refund the loss in cgt? At what applicable rate?
    If the CGT is a yearly guestimation as some have suggested and therefore at tally up time all the house values are well down and some way way down will, will there be annual refunds and if there is will Treasury have to borrow to fund those refunds. When the refund is paid will houses be sold at the lower value?
    If a house is owned by a company and I sell the shares in the company will capital gains apply?
    This is how Fonterra shares have been traded in the last couple of years and look at the financial implications of that activity. Serious enough to cause concern. Of course there were a few who took advantage of that situation and sold on lower production making a capital gain on their previous purchase.
    Not simple is it. That’s why we shouldn’t even go there. Simplicity is best.

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  39. nickb (3,629 comments) says:

    Agree with you Chris that IRD already has the power to tax property speculators- there is a special unit in IRD for this very purpose Gazz.

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  40. kaya (1,360 comments) says:

    Viking2 – What is proposed is a capital gain tax, not a capital loss tax. Why would you get a refund if you sold at a loss? It would be there for the purpose of stopping people speculating on property. Your family home wouldn’t be subject to it and if the tax threshold reduced to zero over a period of time (maybe 5 years) then what is the problem?

    There is no doubt in my mind that the current system with LAQC’s is a rort in the majority of cases.

    nickb – there may be a special IRD unit to deal with this but it can’t be working or they wouldn’t be advocating this? I know of numerous people who were buying and selling with impunity over the last 8 years. The greedy ones are being caught out now though.

    Don’t misunderstand me, I dislike paying tax like everyone else but the speculation that arose from the obvious rewards to be gained in the property market went a long way to creating the financial problems we are facing presently.

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  41. nickb (3,629 comments) says:

    Sure I know what you mean kaya.
    Will disagree with you that LAQC’s are a rort however- this is a common misconception.

    They are mostly (not always) used in cases of small closely held companies. The purpose of them is so business losses can be offset against a person’s (usually the company’s director or main shareholders) other income, for example salary and wages. In this way losses are not trapped inside a limited liablity company, and this can be invaluable in getting small businesses of the ground.

    Rorts arise where a sham company is set up and given LAQC status. The company either does not trade, or carries on some small peripheral function. The company then purchases the director or shareholder’s family home, for the sole (or main) purpose of claimng mortgage interest, depreciation, rates etc as an expense.

    This is the way LAQC’s are used to rort, and IRD has taken a very firm line on this- it has identified all instances where a LAQC owns property and advised them that this constitutes tax avoidance.

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  42. gazzmaniac (2,269 comments) says:

    Chris Doms, I worked out that you are an accountant in your post that you mentioned “some of my clients.” I accept that you might know a bit more about tax law than me, as I am a geologist (which I think is far more productive for society). I didn’t say that the IRD don’t chase property dealers. I am stating that if there are so many people out there who are trading in houses in the medium term, and are using negative gearing to do it, then the IRD should be pursuing them, and considering the capital gain as income as the current law allows – their intent is to make money from the capital gain, not the rent. I am also aware of the unit that the IRD has set up to police this – they are known for demanding records from realestate agents.
    Kaya – I wouldn’t be as concerned if the proposed tax expired after the property (or shares, or whatever) was owned for 5 years as you suggest. It probably would stop a lot of the short term speculation you are worried about. The main danger is that successive governments will change the rules and make it 7 years, 10 years, 15 years, then you are going through several maintenance cycles for the building rather than just one (houses tend to be sellable as “reasonably new” up to about 8 or 9 years old, when they require their first serious maintenance).
    The government should not be looking at a capital gain tax to “correct” the tax system, which will only tax the shit out of more people. I know why accountants like a complicated tax system – it creates work for them. And yes, Australia is far worse than New Zealand (I wouldn’t wish the Aussie system on anyone, their individual income tax form is 15 pages long and is accompanied by an 80 page booklet).
    I don’t believe any additional tax is justified. I voted for one of the minor parties that currently make up the government, on the basis that they would be promoting the simplification of the tax system, the reduction of the tax burden (including at a local government level) and the slimming down of the state. So far they have failed to do so, and have failed to even steer debate in that direction. All that seems to be coming from the government is new ways to penalise people – which makes them no better than the ones we just got rid of.

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  43. Anthony (736 comments) says:

    As I’ve said before, look at the tax treatment of forestry. You get to claim losses in the early years while you are building up the asset but when you go to sell it to finance your retirement, all the proceeds are taxable. That negatively geared rental property held for the medium term is pretty similar. You can sell it before it starts earning taxable income and reap the capital gain. I would like Robin Oliver to say just how that is like other businesses!

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  44. Anthony (736 comments) says:

    DPF is quite correct on the issue of depreciation though. I have some quite compelling evidence that houses certainly don’t generally depreciate in nominal terms if anyone is interested? It is historical data on the value of state houses over time – which tend to get the bare minimum in terms of renovations so act as a good sample of houses which are just maintained rather than improved.

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  45. Alan Wilkinson (1,798 comments) says:

    I suspect thousands of leaky homes have depreciated somewhat more than 3% annually.

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  46. Anthony (736 comments) says:

    Yes Alan, but all the expenditure to get them back into shape would be deductible if they are a rental property.

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  47. Luc Hansen (4,573 comments) says:

    I have studied accounting and I have always found the concept of depreciation a strange one. Why should we give a tax break for the sometimes imaginary depletion of an asset when we don’t do the same for humans? I’m 58. Shouldn’t I get a tax break for wear and tear? Businesses should just cost in any depletion then it would all be up front. It’s called price signals.

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  48. markone (1 comment) says:

    What will the Govt gain by a CGT – a net tax gain – maybe not. Will the less priviledged be better off – maybe not.
    As said by others CGT in other countries has not prevented house prices rising. NZ has a relatively high home ownership.
    Will a CGT increase house prices and rents in the long term – yes. Will the less priviledged need more Govt support – yes.
    Will more people need to rent – yes. Countries with CGT have lower home ownership than NZ.
    Reduce the incentive to provide someone else with a place to live and the supply of housing reduces. Prices and rents increase. We dont save because tax on the interest removes the incentive – where does funding come from – borrowing…
    Will the Govt have to build more houses – yes – and how will it pay for them?
    CGT is not about being fairer – it is about gathering more tax. Want to be fair? Lets talk local body rates – how many people in your house and what is it worth? or my taxes being spent on healthcare of those who dont look after themselves…
    What about the people I employ with the incentives and wealth created to create more and employ more…. Not everyone wants to run a business and pay the price – especially in the early years.
    As said by others the IRD already has the ability to treat entities that operate/trade residental rentals as a “business”, just as it has for entities that trade shares. So just like shares leave residental rentals as they are. Clarification of “guidelines” and some thresholds/timelines are required – for shares also – when are you a share trader??
    The more money that flows through the Govt the less productive it is.

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