Effect of capital gains tax on house prices disputed

The discussion about capital gains tax and its effect on house prices and rents is heating up. Photo: Gregor Richardson
The discussion about capital gains tax and its effect on house prices and rents is heating up. Photo: Gregor Richardson
The introduction of a capital gains tax in New Zealand remains a charged topic of debate.

Westpac chief economist Dominick Stephens has published a bulletin estimating how tax changes may affect house prices.  The Property Investors Federation has responded with its own take. Business editor Dene Mackenzie reports.

Introducing a 10% capital gains tax would reduce house prices by 10.9%, according to Westpac chief economist Dominick Stephens.

House prices would not immediately drop by 10.9%. It could mean a long period of stagnation while the fundamentals caught up.

The Government's Tax Working Group is investigating changes to the tax system and whether changes will affect house prices.

''The answer is a definite yes. Property prices in New Zealand are profoundly affected by the tax system. It follows changing the tax system would change property prices,'' Mr Stephens said.

In New Zealand, property was more lightly taxed than any other forms of investment.

The Treasury and Inland Revenue estimated property investors paid 29.4% of their after-inflation returns in tax. Bank depositors and owners of dividend-paying shares paid 55.7%.

Income from investments was taxed while capital gains were tax-free, he said.

Bank deposits yielded only income and were taxed heavily. By contrast, property investments returned little in the way of taxable net income and more in the way of capital gain - which was tax-free.

''The kicker is the fact expenses, including mortgage interest, are tax deductible. This feature of the tax system is especially useful for property investors who find it easier to borrow against their investments than other businesses.''

Landlords' debt loading could be so high their expenses outweighed their rental income, meaning they could declare zero or negative taxable income.

Meanwhile, they could collect tax-free capital gains, Mr Stephens said.

However, NZ Property Investors Federation executive officer Andrew King took issue with Mr Stephens and his calculations.

According to Mr King, financial consultants Morgan Wallace found large errors in the Tax Working Group's study and concluded that rental property was ''actually taxed more than other assets''. Officials agreed with the Wallace Morgan report, he said.

''They said if the study had treated other assets with a capital growth component the same way they treated rental property, then rental property would have a higher marginal effective tax rate because of local government rates.''

Claiming expenses against taxable income was a tax law existing for all, Mr King said.

Rental property paid tax on gross income less expenses, just like every other business or investment.

Home buyers did not have an income stream from which to deduct their expenses. Instead, when buying a home, they received the benefit of accommodation.

The two situations were completely different, he said.

''Just because a rental provider can claim expenses from their rental income does not make buying a property easier for them compared to a home buyer.''

Mr King also took issue with Mr Stephens' claim of tax advantages for rental property having caused home ownership levels to fall from the early 1990s.

What changed in the early 1990s was government assistance for first-home buyers was removed - the likely reason for home ownership rates falling since the 1990s.

With government subsidies returning, it was likely home ownership rates would stabilise and increase as a result.

Other countries with a capital gains tax also had high levels of house price growth and New Zealand was unlikely to be different, especially when owner-occupied housing was exempt, he said.

Inland Revenue data showed the rental property industry paid tax on about $1.5 billion of net rental income each year.

''Mr Stephens is right - a capital gains tax will increase rental prices. But it will not lower house prices.''

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