Capital Gains Tax for property now law

The Herald reports:

The requirement for to be paid on investment properties bought and sold within two years has passed into law.

The so-called ‘Bright-Line’ test for residential land was announced by the Government as part of May’s Budget to try to dampen property speculation and better enforce already existing taxes on capital gains. It will require tax to be paid on any gains from residential property bought after October 1 and sold within two years. The exceptions to the rule are the owner’s main home, an inherited property or the transfer of property after a relationship break up.

Revenue Minister Todd McClay said it was an important tool to ensure property speculators paid their fair share of tax. Where properties are sold on after that two year period, the pre-existing law will continue to apply. That means if a property was bought for the intention of making a profit, income tax must be paid on the gain when it is sold.

It will be interesting to see if this has much impact on the property market. Combined with the Reserve Bank new rules, and the requirement for overseas purchasers to have a NZ IRD number, and there could be a reasonable impact.

I actually do support a Capital Gains Tax, but only under these circumstances:

  • Personal income tax rates and company tax rates must be dropped so that overall tax revenue remains the same (or reduces)
  • It must be comprehensive with almost no exceptions, so our tax system remains relatively simple and it doesn’t then provide incentives or disincentives for particular forms of investment.

A comprehensive capital gains tax is estimated to bring in $9.1 billion a year. This would allow us to do the following:

  • Drop bottom tax rate from 10.5% to 5% for income up to $14,000
  • Drop second rate from 17.5% to 10% for income from $14,000 to $48,000
  • Drop the two top tax rates from 33% and 28% to 25% for income over $48,000
  • Drop company tax rate from 28% to 25%

That would cost $8.8 billion.

So we’d have a tax system where you pay 5% and 10% for those earning below the average wage and then 25% for earnings over that – still pretty progressive.

So a broad base low rate tax system is good. But bringing in new taxes, without lowering other taxes should be resisted strongly.

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