SPOTLIGHT – Capital Gains Tax – How would it affect you? Tax Working Group’s Final Report.
It’s been a big day today with the Tax Working Group (TWG) releasing their proposal on a comprehensive capital gains tax.
Before we all get carried away, a TWG back in 2009 also recommended a capital gains tax reform on which the previous National government chose not to implement. The proposals need to be implemented and passed into law by Parliament to be in place.
Summary of their recommendations can be found in the link below:
Video from TWG has been created to explain a few simple examples on how it could apply:
They’ve suggested a broad capital gains tax that covers all productive assets (rental properties, business assets, Kiwisaver, shares, intangible property (e.g. Patents & goodwill). Exemptions have been applied for unproductive assets such as a family home (less than 4500m2 in land), personal items & vehicles. The proposal was designed to be tax neutral over a 5 year period yet will bring in $8.3b over these next 5 years which will need to be re-distributed. TWG have acknowledged that the majority of the tax take will be after 5 years so despite the crown’s promises it being tax neutral the net proceeds to the crown will likely well exceed the $8.3b.
Some of the members of TWG did not agree with the proposal and instead suggest a targeted extension of existing rules such as the Brightline test for property investors.
Ideology aside, good tax reform should encourage a productive allocation of capital to increase wealth for the entire nation.
Here is my summary of those who may lose out from the capital gains tax proposal.
There are well over 2 million Kiwisavers who will be impacted by the proposal. The proposal suggests that the fund manager
The Brightline test has been a simple and effective tool to capture those who are intending to actually trade these properties. The broad stroke effect from the TWG proposal is that investors may be holding onto properties that are unproductive and after accounting for inflation would incur a loss which isn’t rebated. For example, if a property is bought for $500,000 and inflation runs at 2% p.a. in nominal terms after 10 years the $500,000 property would now be $609,500.
In our opinion any capital gains tax on property investors must have an allowance for inflation. Given the incentive to buy unproductive assets we’d expect less houses ‘adequate’ to a family’s needs, and more bespoke, larger homes as there is an incentive to park the majority of capital into a tax efficient asset such as a family home.
We would expect overall house turnover to decrease and there is an incentive to hold onto non-performing properties. It’s hard to say how this will impact house prices, but with a lower quantity of houses on the market the market would become more volatile as there would be less records to evidence an average price.
It would also incur cashflow issues to investors in a
Let’s consider an example; I’d like to introduce you to Bill & Jane, a couple in their early 30’s on a modest salary.
They bought a house in the town they grew up in 10 years ago
for $200,000 and took out a loan with ABC Bank for $160,000. 10 years later,
their mortgage was $50,000 and there were job opportunities in a nearby town
and they bought a house for $450,000 via a cross guarantee at ABC bank as their
new family home. This was 100% financed with the equity from their rental
Life was good, not long later they had the confidence to start their own business and they just found out they were expecting their first child. Their rental was now worth $400,000 so they decided to sell, with the idea to repay the original ($50,000), pay down enough of their new loan to get to 80% ($90,000), pay for the capital gains tax ($60,000* based on 30% tax rate) and the rest will be reinvested into their business ($200,000).
On settlement day what will the bank do? There isn’t any income (based on the fact the business is brand new) to pay for the remaining $360,000 loan so the bank will take 100% of the proceeds. Bill & Jane end up with a mortgage of $100,000 and their current family home of $450,000. There is no money aside to pay for the capital gains tax bill and no money to invest into their business.
They do have options and provided an appropriate loan structure when they bought their next property could have avoided this situation. However, many kiwis would end up precisely in this predicament.
Minimal direct impact. Property developers already undertake a taxable activity.
In our opinion we’d expect businesses to carry on as normal. The businesses most impacted by the proposal are those who invest in research & development and those selling their businesses. Smaller businesses would not bother going through the expensive sales process and will simply liquidate.
It would only encourage divestment from this already lacking investment class in New Zealand.
Hon. Grant Robinson, Labour’s Finance minister has clarified they do not intend to implement all of the proposals. The report had made some allowances for income earners with less than $48,000 p.a. such as removing the ESCT that employers pay on their
I challenge us all to put ideology aside and open this conversation for debate with each other.