Serious decisions about New Zealand’s capital gains tax need to be made soon, writes Ross Linklater.
At least one political party has recently said the major issue facing New Zealand is wealth inequality. By most accounts this has worsened since the ''Rogernomics'' of the mid-1980s. Home ownership rates, which used to be high by Western world standards, continue to fall.
An obvious cause of this is insufficient income, which is primarily related to someone's job. Another major cause is low or nil net assets, and the limited income these assets can then provide.
There needs to be much more debate on the need for wealth redistribution, and what can be done to address our housing market failure (Lack of land? Lack of builders? Easy speculation?). There are political consequences, so it's good that the new Government has just extended the ''bright-line test'' from two to five years.
There is increasing discussion on whether or not a capital gains tax should be introduced on the sale of all real estate, not just to address wealth inequality, but as a basis of a fairer tax regime.
It is widely accepted that property investment ''crowds out'' other forms of investment, not only in terms of rates of return, and the continuing low interest rates, and also the favourable income tax treatment. Until recently, the gain on the sale of these was non-taxable, unless one was in the business of buying and selling property, or a property developer.
The Government does very well out of the latter, raising millions from GST and income tax on their sale.
As a result, we are witnessing another feeding frenzy on property investment (in Otago at least). The new ''bright line'' test has done nothing locally to address the above, as the two-year hold time was not long enough, and because of the numerous exemptions, was not widespread enough.
Another undesirable consequence of untaxed, galloping property values is the possibility of owners not even letting out their property. The rise in capital value may more than cover the lack of rental income, with avoidance of all the usual problems with unsatisfactory tenants.
We already have examples in Dunedin of ''land banking'', and vacant sections remaining undeveloped for lengthy periods. However, it would not be easy to start up CGT. Exactly which assets (not just real estate) should be taxed, and at what tax rate, start date (backdate?), period threshold etc.
In addition, there will be significant compliance costs and accountants, real estate agents and conveyancers will have to be involved. Perhaps most difficult of all, how should your labour for doing property improvement be included, and having to account for the costs of these improvements?
What value should be placed on all the repairs and maintenance carried out?
We can of course look to Australia for guidance. However, it is rather complex. Their CGT allows for a 50% tax reduction for individuals, and 33% for superannuation funds after one year of ownership, with a minimum tax rate applied of 15%.
There is also an exemption if the owner has lived in the property for at least two out of the previous five years.
Serious decisions need to be made soon. While house prices may yet fall, it is more likely they will merely level out, before yet another surge takes place. This will just continue the ''inter-generational theft'' which has marked this country's social landscape since the 1970s. A time is coming very soon, if not already here, when our grandchildren will not be able to afford to buy a house unless their parents lend or gift them a portion of its cost.
-Ross Linklater is a Dunedin accountant.
