My electorate team was delighted last night to have our revenue spokesman Stuart Nash as their guest speaker. Stuart’s presentation filled in some of the knowledge gaps around the tax package announcement.
• The stark choice. The one-off $6b in revenue from flogging off state assets or a rising $2b+ annual stream from CGT.
• Most Kiwis won’t pay it. Only one in ten New Zealanders own more than one property and given Canterbury is exempt for a five years or more and family baches can be handed down without involving CGT, most will be unaffected by this part of the Labour tax package other than gaining $5000 of exempt income.
• This is not Death Duties in drag. If parents want to pass on the family home to their offspring on death or even earlier, so long as it is not sold, it is not subject to CGT, allowing the parental property to be occupied or tenanted
I was also heartened to have dinner on Saturday night with friends Pam and Rob who own a couple of investment rentals. A small part of me thought their Labour commitments might be tested. Not at all. As working people they agree all income needs to be subject to tax, whether its their wages or any profits derived from property investments. Like most Kiwis, they believe in fairness.
Fairness – the Labour Buzz word for the 2011 election. A few weeks agon on Twitter Trev made the comment that the middle classes are already paying too much tax. So what does Labour do – well they come up with even more taxes to penalise those who work hard to get ahead. Of course figures show Labour will increase borrowing at least $15b. There will be un-intended consequences, such as a shortage of ne housing developed, rents will increase, and those who are really wealthy will avoid the CGT.
If you want to talk about fairness why not talk about those who already pay the lions share of the government tax take. the 10% paying the 70%. Do something about that and you may be onto a winner.
If a 50 year old inherits their parents house, but does not want the burden of an investment property and already owns their own home, then sadly it will be a death duty in drag.
@indiana
Any wage and salary earner pays tax on 100% of their earnings. It shouldn’t matter where your income comes from. If you choose to sell your parents house and gain income from it you should pay some tax.
That is only fair.
I’d rather see a annual rising $2b+ saving from a restructured superannuation policy. Paying super to wealthy, working or working-age people that dont need it isn’t fair to anyone.
@Mel
Why then are art work and collectables, winnings from the casino, TAB and Lotto exempt, but not dividends earned from shares?
A person selling an inherited house in the example I gave had no intention of earning an income from the sale.
@ Indiana
I do not believe that ‘exceptions’ should dictate the rule.
The proposed CGT is a fair way of flattening the tax system so that all New Zealanders pay their fair share no matter where their income comes from.
@Mel – in taxation, exceptions do dictate the rules.
@ Oliver
I was talking about the CGT – not watering it down and allowing exceptions such as the one above.
otherwise as you state…
the ‘allowed exceptions’ would be dictate the rules.:)
A person selling an inherited house in the example I gave had no intention of earning an income from the sale.
If the imaginary person in your example is not looking to realise the full value of the house, then they are safe from CGT. There is no increase in value on the property, between sales, there is no capital gain, there is no Capital Gain Tax.
Should the imaginary person realise an increase of value on the property, the capital gain alone, not the full value is taxed at a low 15% tax is put on the difference.
This isn’t a death tax, but it is interesting how many strawmen are being hauled up (not just by you Indiana) to discredit a tax change modelled on a standard tax considered normal everywhere else in the English speaking World. New Zealand’s tax rate would be inline with Australia, but lighter than the U.S.A.
A lot of baby boomers are approaching retirement and had hoped to sell one or more houses to get the debt and expenses below the rent, to live off the rent.
If there is a CGT then they are encouraged to raise more debt to live off (including borrowing to make repayments) and let the estate settle the debt, rather than sell and loose the value.
Is this right – Brendon? David? Stuart?
How do reverse annuity mortgages work under a CGT? any accountants out there?
@Sean, As I understand it, though Labour are careful not to talk about details, the value is set at V-day, not at the change of ownership point, so there is already a gain on the property if they realised it’s value immediately.
A couple in Auckland receive a house as inheritance from the mother in law from Otaki, V-day valued it at $300,000.
The house bought back bad memories so they immediately realised the value of the house for $400,000.
This incurs a capital gain of $100,000 @ 15% = $15,000 tax on the realisation of their inheritance.
This is why people are calling it death duty by stealth.
However it really does hinge on when the historic cost or valuation is set for the inherited property.
Perhaps Brendon can clear that up for us?
So if you inherit a house… and sell it ..you are taxed? I’m confused (and DO care about the details) so have kept my question simple.
@Pedrovsky – I think – based on what has been thrown around – you are taxed on it if you decided to sell it and it has increased in value from V-day. You are not taxed on the unrealised gains, which was Brendon’s third point, but that really is just a red herring.
A lot of baby boomers are approaching retirement and had hoped to sell one or more houses to get the debt and expenses below the rent, to live off the rent.
Precisely. The whole reason we’re discussing selling assets or introducing CGT is to pay for an unsustainable universal super unchanged since the Muldoon government, and unchanged in age of eligibility since the 30s. Adjust super, even slightly, and you don’t need to sell any assets or introduce any new taxation.
I agree about adjusting Super, we should have gone up to 67 when Australia did.
@Mel – you are taxed on the disposal of inherited houses under the Capital Gains Tax regime we already have.
I really do dislike the policy of any increase in house price from v-day being taxed at 15% if a house is gifted to, for example, multiple children from a deceased parent in a will.
In such a case the common thing would be for the house to be sold and the proceeds split according to the testator’s wishes.
I do not see how it is far to do this as it will unfairly affect a great many people who I would not consider hugely wealthy New Zealanders.
In this sense death duty’s have in effect been re-introduced with this policy.
Super age put up to 67 would be a great policy for New Zealand, with a large grandfathering period of course.
The fact that the super age has never increased even though Kiwi’s now live so so much longer really is poor economics.
Wonderful Monty, have the rich pay no tax at all, rather like how currently 50 percent of our top earners don’t pay the top prevailing rate. Not a lot of middle class people own multiple properties and many who do recognise the inequity between paying tax on their incomes but not on any capital gains.
Jeremy, the CGT is at 15% on realised value so it shouldn’t drive people into gearing up to borrow more. Good question about reverse mortgages, have asked Stuart to respond there but my belief would be that GCT will no more apply than with an ordinary mortage.
Oliver, correct valuation is set at V-Day not on what was paid in the past. Do note we will be asking an Expert Panel to provide recommendations on the details well ahead of CGT’s introduction.
Andrew, a family can retain the home and get the rental income they don’t want to pay CGT. Let’s remember the choice is not superannuation changes or CGT, its CGT or a one-off of asset sales which will make us peasants in our own land.
It really is the details that matter here Brendan, and it is certainly misleading to say this isn’t gift duty in drag when clearly it is on the realisation of the asset…
Also, in your response to Andrew you say people can retain the home, surely that defeats your whole premise of getting people out of the property market, when you are explaining the consequences of a CGT are to lock people into it for longer?
Super age put up to 67 would be a great policy for New Zealand, with a large grandfathering period of course.
It doesn’t need a grandfathering period, as long as you take care of those who can’t find work for the two years between 65-67. All it takes is a government with guts. To be frank, the oldies will be voting conservatively, for a PM that ‘won’t touch super as long as I’m PM’. With the polls where they are, what has Labour got to lose? At least it would be a policy that wasn’t lifted from the Greens and would set Labour apart.
“Let’s remember the choice is not superannuation changes or CGT, its CGT or a one-off of asset sales which will make us peasants in our own land”
Both raise revenue for the country. One option allows us to make an investment in shares if are capable of doing so and continue to grow your own net wealth. The other is simply a penalty for saving and creating your own net wealth.
Let’s remember the choice is not superannuation changes or CGT, its CGT or a one-off of asset sales which will make us peasants in our own land.
I dislike both of your options. One pawns our future, the other punishes a future that hard-working people are trying to create for themeselves, and disincentivises getting ahead.
Sadly we don’t really have a choice at this election at all. Either option puts our future in hock to pay for holiday funds for rich retirees in the present.
Thanks for responding Brendon. I believe CGT is a good policy, I just believe the scenario I described needs to be one of the valid exceptions, many people would feel uncomfortable renting out what was their family home, which I believe is understandable.
Also it means the asset cannot be realised in a reasonable time-frame post testator’s death, without paying 15% CGT on a gift which may have been unexpected, or at least at a time in ones life which is unexpected due to a possible untimely death.
To conclude, an exception to be recommended to be analysed by the Expert Panel.
I see your point Monty, is that they believe people with assets exist purely to be taxed. Furthermore, they seem to believe that the so-called rich (in other words, anyone who has been putting money away regularly for his or her retirement) will not only not mind this happening, but will be in some way grateful to have their guilt at being “rich” assuaged by being kicked in this way.
However, the arguments against the CGT only lie around accusations of envy, punishing success etc… but the arguments for outweigh this. The NZ tax system is hardly ‘progressive’ and pushing this Green Party policy goes someway to balance the system and bring it closer to the rest of the developed world. CGT is not a new idea, it is not ‘progressive’, it’s just that the main two parties have been too frightened to introduce it in the past.
It is a money raising tool, the government will love it and no party will remove it once it has been introduced. Has it, however, stopped boom and bust? Has it stopped property speculation? Has it stopped people buying shares? No, not really.
One question I have is that if you buy an investment property (or inherit, get, win one) does the capital gain that you will be taxed on start from the date title transfer, or from what the value was at v-day?
It must be when the title holder changes otherwise tax could be paid on the same capital gain multiple times. Therefore if you inherit a property, and the property owner has changed, then sell it straight away there should be minimal capital gain.
Is this right?
@ softstarter
Nothing can stop a boom or bust; no tax is designed to.
Boom and bust are driven by greed. You can’t legislate against greed, only attempt to smooth out the spikes and troughs with intervention and statute.
CGT is ‘progressive’ in terms of taxation language, meaning that it broadens the tax base to target capital accuumlation (wealth) as opposed to just taxation on income. It’s about shifting the tax incidence (or ability to pay) away from those who can’t bear it as easily (i.e. low wage earners) to those who can (owners of capital).
‘Progressive’ in a tax context doesn’t mean anything more than that.
Thank you Brendan – How about two more scenarios for property investors (agreed it does happen overseas). If an investor (in a company with lots of property, possibly not if 1-2) finds one property is no longer performing or wants to sell 2-3 houses to buy another (larger or commercial) property then they are that much further away when only swapping like for like. Same goes for kiwisaver, shares, business and the family farm?
Likewise a couple that gets divorced with a portfolio would pay as they split ownership or bought out their former partner or sold & have to start again with 15% less cash.
And I also wondered if there could be CGT on a property and also on the shares of the company?
I think this better illustrates why I do not like taxing the asset base but the income that is derived.
As super has been mentioned – better idea – dump the asset test, place an income (not asset) threshold rather than increase the age.
Does it strike anyone as odd that (Brash 70s Gibbs 80s) the voices behind raising the age do not mentioning the income and have already hit that age and still earn high incomes.