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CGT Now!

Written By: - Date published: 10:45 am, June 5th, 2012 - 32 comments
Categories: capital gains, economy, housing - Tags: ,

It’s been said so often that surely everyone understands it by now. New Zealanders invest too much in property. It’s “unproductive” investment in that it doesn’t create or export anything. It’s often done on borrowed money, which drives up debt. Oh and just incidentally, it prices houses out of reach of ordinary Kiwis (never mind Mum and Dad investing in privatised assets, currently they can’t afford to stay in their own homes).

Bernard Hickey addressed part of this messy picture in his Sunday piece:

All our eggs are in the wrong basket

Finance Minister Bill English made a habit of brandishing one chart in his first few years in the job. It showed how the “good” tradeable sector, which includes productive sectors that export and compete with imports, had languished through the mid to late 2000s under Labour at the benefit of the “bad” non-tradeable sector, which includes government, financial services and real estate.

It was a useful tool to help him argue for a re-balancing of the economy. It powered the “big tax switch” of 2010 that encouraged saving by increasing GST and reduced incentives for residential property investing by changing the tax rules on property depreciation.

The theory was great. New Zealanders would save more, reducing the need for foreign capital. We would also invest less in rental property and more in “productive” assets that generated export returns or competed with imports, improving our trade surplus and our ability to pay our way in the world, which we haven’t done for a while.

Nice theory. Except it hasn’t worked. The chart was noticeable by its absence in the minister’s Budget presentation last week. Dig it out though and it shows the “tradeable” portion of the economy has kept declining since the National Government was elected in 2008 and is now back to levels last seen in 2002. …

All this is happening as the Government forecast in its Budget that New Zealand’s current account deficit will widen to 6.7 per cent of GDP in 2015/16 from a forecast 4.2 per cent of GDP this year as our demand for capital to go on spending outpaces our ability to pay for it.

How to cool the property market and thus redirect investment elsewhere? How to raise some revenue to address the current account deficit? I know, how about a Capital Gains Tax! Labour did all the hard work before the last election, and the proposal was almost universally well received by the experts. Time for the Nats to swallow their pride, and do what’s best for the country. CGT Now. Because taxing paperboys isn’t going to cut it.

32 comments on “CGT Now! ”

  1. Jono 1

    While a large proportion thereof, Auckland and Christchurch are not the New Zealand property market. We have just sold our place, for $40k less than we bought our starter home for in late 2006 and the real estate market in our provincial city is still the worst it has been in 25 years. We have been waiting to spend money on building a new house for two years while we tried to sell! Improving employment prospects in the regions and incentivising people to get out of Auckland and establish themselves (cheaply!) in other centres would take some of the wind out of Auckland’s sales.

  2. tc 2

    The NACT have their heads in the sand regarding a CGT and alot of other issues they refuse to address as the Hollowman script doesn’t contain those items.

    Put the emotional rehetoric to one side and ask yourself if it’s fair that people can plan for and make an untaxable gain off property deliberately as a hedge against our pathetic superannuation regime.

    Gains are a result of a healthy market so to not clip the ticket for the infrastructure strain, obvious speculative behaviour etc is bonkers.

  3. Bill 3

    Granted, a CGT would raise tax revenue. But what else would it do? If banks would overwhelmingly rather lend money for property purchases than for business development due to risk factors – which I think is how it is – then how would a CGT dampen the housing market?

    Even with a CGT in place, someone looking to borrow/invest for business purposes would still be as likely to be turned down as today. And so would invest in property because that’s the banks’ preferred option.

    And if more and more people are ‘under water’, isn’t that more to do with needing a household income (ie <104 pay cheques but >52 pay cheques) to service a mortgage as against needing a single income (ie <52 pay cheques) and all the vulnerabilities that come with that scenario? I.e. you or your partner become unemployed for whatever reason then, unlike when only one income could service a mortgage and a certain amount of leeway was afforded, these days that results in an unservicable mortgage.

    • Zorr 3.1

      ummm… you misunderstand the term “under water” when used in relation to home loans means that the mortgage is worth more than the value of the home. It has nothing to do with earning potential – you could be John Key and still have an under water home loan…

      • Bill 3.1.1

        Yup. My bad. I obviously meant to mean the growing number of people being unable make their mortage repayments… as highlighted by the linked article.

  4. BillODrees 4

    The Kiwi Guide to paying bugger all tax: 
    1.Own a business, ideally with a good retail component.
    2.Siphon off cash and keep in safe or one of the “tax-paid” saving products from, say, UDC Finance.  
    3.Charge as many of your family’s expenses to the business.
    4.Buy a house that needs a significant do-up.
    5.Engage Builder and buy materials with the dodgy cash.
    6.Sell shiny lovely house.
    7.Pocket the profit, tax free, and all legit.
    Repeat every two years.

    Variation on the theme: use siphoned cash to deal in works of Art; combine your passion with dodging tax. 

    • vto 4.1

      Not quite “7.Pocket the profit, tax free, and all legit.”

      Far from legit.

      2. siphon off cash. If you mean without declaring it then that is illegal and effectively theft.
      3. Charge family expenses to the business. Also illegal.
      7. Pocket the profit tax-free. Also illegal if the doer-upper was bought for the purpose of selling for gain.

      All of the above have been done by EVERY single person I have ever known who has partaken in any of the above. Virtually all New Zealanders are tax cheats and thieves.

      As for the topic…

      1. Housing is not an unproductive sector. If that is so then the entire global economy is unproductive as nothing is exported from earth to, say, mars. Think about it.

      2. A CGT will have virtually no bearing on the occurence of future booms and busts in the property market.

      3. A CGT is good in that it spreads the tax-take across more of those earning money and not just the salary and wage earner.

    • just saying 4.2

      Step 3.5 Liaise with other business owners so that you all may write-up non-tax-deductible personal expenditure as business expenses for each other.

  5. tsmithfield 5

    “New Zealanders invest too much in property. It’s “unproductive” investment in that it doesn’t create or export anything.”

    Not always true. My business is supported by mortgages over the 3 houses of myself and two business partners. This means we are able to employ another 8 people. I suspect there are a lot of small to medium sized businesses in NZ in a similar situation.

    • lprent 5.1

      Yeah. I have been in or advised several businesses that were started only using mortgages on property by family members. There is a particular issue with that, especially with export businesses.

      It is fine to bootstrap a local business that way because the local market is so small that you rapidly get to the point of not having into expand further. But basically local businesses do virtually nothing for anyone apart from their owners and their few local employees (usually less than 20).

      The overseas markets are so vast by comparision to NZ, that if a company has even minor success you need to expand your capital rapidly to follow up. So where do you raise capital from?

      Banks basically won’t lend on a startup’s non-provable demand. The local public stock market essentially doesn’t provide money for IPO’s unless you already have millions of dollars in revenue. There aren’t many private investors outside of peoples families because it is safer and usually more lucrative investing on the property bubble. And your mortgages on your properties won’t spread to the setup costs of the overseas distribution chain or sales offices or further development.

      You’re left with local venture capitalists using overseas money or Goliath overseas fairy godparent partner companies. So you offload most of your equity.

      Then the second or third round of capital injection happens. All the same things apply. Now you’re mostly owned by overseas investors because all of the local ones are so busy chasing largely tax free capital gains. Any local investors have been selling out their stakes to overseas investors because they’re dismayed at how much investment is required to stay in the game (and the overseas people are offering really great returns).

      At some stage through the process you get listed directly or indirectly on overseas bourses because who in the hell would try to raise capital in our peanut exchange with it’s incestuous brokers?

      Eventually the best people are taken offshore to live where ever the company makes its new home. Nett result is that we just lost another export industry based on peoples brains.

      Stick a bloody capital gains tax in damnit!

  6. How to cool the property market and thus redirect investment elsewhere?

    Has that been successful in Australia? Do they avoid property booms? What about other countries, where has a CGT keep property markets in check.

    What about Ireland, they had a far worse property boom than here – do they have a CGT? USA?

    How to raise some revenue to address the current account deficit?

    Regardless of everything else, Labour made it clear CGT revenue would have only started to kick in half a decade after being introduced. It was never intended as an immediate revenue earner.

    • Lanthanide 6.1

      I don’t think it was ever intended as the single silver bullet that would stop property booms, either. Nor was it marketed as such.

    • bbfloyd 6.2

      her we go again….. little pete, do you have any idea what fueled australia’s housing boom??

      I suspect you do, but nevertheless you misuse the facts to suit whatever waffle you deem suits what is becoming an exercise in deckchair shuffling at united future headquarters(or in the broom closet which would be room enough for party membership nowadays)…

      I’ll tell you just to be fair…. the liberal/national government introduced a $14,000 subsidy for new house owners…. actually a gift, as it didn’t need to be repaid…. if you had the house built, then another $14,000 was given to subsidise the land purchase….

      the accounting oversight was so loose as to allow people to claim their “gifts” in the name of their children, family dog, cat, goldfish, etc….

      this was a blatant election bribe at the time, and was acknowledged as such…. this didn’t stop hundreds of thousands of people taking advantage of the scheme….. it was introduced as a temporary measure, then extended for another three years just before the last term of the liberal/national government….

      this had the effect of whole suburbs springing up overnight where i was (perth)at the time… it also had the effect of pushing up property prices to over double what they had been selling for before the subsidy kicked in….

      perth now has not only a massive oversupply of houses, but a large group of people who owned houses that were massively overpriced, with huge mortgages that without the infrastructure work being carried out there(WA)would have seen an epidemic of mortgagee sales.. as it is, a lot of people became trapped with debts larger than the worth of the house they owned…

      it has ruined what was a relatively healthy, and affordable housing market in that state…. rents there have gone from less than half what you would pay in auckland, to being on a par now… driven by owners need to cover the huge debts incurred in the boom…..

      in short…. the “bubble” was caused by pork barrelling politics rather than any lack of effectiveness of the tax system there…..just as the ‘bubbles” elsewhere were created as a result of the mindless greed dictating lending policies of the capitalist worlds financial institutions….

  7. AAMC 7

    Catch with CGT is it requires Capital Gains, which are realized on the sale of your property.

    Spain has had a 50% decrease in property value, economists predicting a further 30% to go, Greece I’m sure has similar numbers. England is starting to deleverage, USA has already corrected but not hit a bottom yet, China has tumbled.

    Melborne property prices have been reported to have cooled by 2% and Sydney by 1.5%.

    It is inevitable, in light of affordability as Bill alludes, that we will very shortly see in the cities some correction similar to what Jono mentions outside of the main centers . As we have all noted many times, our news is sponsored by banks, who control property value via how much they’re prepared to lend. But that bubble can’t inflate forever as we are layed off and we’re subject to stagflation.

    I’ve recently had a realestate agent move in next door to me, he is pumping that bubble real hard, skiting that he’s selling property in Arch Hill with original bathrooms and kitchens for 900k, a Grey Lynn property recently selling for 2.6 mill. Even if you’re on 100k, that mortgage is going to prevent you from spending a cent anywhere else in the economy, it won’t last forever.

    So I wouldn’t pin your hopes on some great windfall from CGT!

  8. A CGT is just tweaking the system. Worse it embeds lies about capitalism.
    Capital Gains Tax are three words the validate capitalism.
    Capital is theft since it originates in the surplus value of workers appropriated by their employers. Profits and Shares are derivatives of Capital that also validate private profit.
    Applied to land it is a ‘rent’ tax, as rent is part of the value deducted from wages and surplus value deducted from capital and paid to landlords for the use of land.
    ‘Gains’, legitimates the idea of gain from rent, when rent is the product of ownership of a scarce commodity, land. Thus most rent results from the unearned increment, the so-called ‘value’ of land created by the demand for land by those who do not own land. That is why ideally capitalists like to bypass landlords and own land as their own means of production. 
    Rent is a hangover from feudalism though kept alive as source of speculation in countries like NZ that heavily depend on extensive land-based commodity production. Thus ‘gains’ based on ownership and speculation in land should be rejected and replaced with a word like ‘theft’ as in Proudhon’s “property is theft”, rent rorts, or if you have an historical bent, ‘unearned increment’.
    ‘Tax’, is also an insidious term implying that the income or source of income taxed originates legitimately as private property. This results in bullshit spew such as Bob Jones, NZs No 1 property ‘thief’, moaning about the right not to pay tax in today’s NZH. 
    Hence those who propose a CGT should be rename it a ‘social fund’ understood as the re-appropriation of all socially derived value from the private ownership of property. 
    That, or at least the understanding of what it entails, would be a small step towards the burial of capitalism.

  9. her 9

    CGT is always going to be a hard sell in a farming country and this policy alone will probably get National a third term.

    What would Helen have done?

  10. As a property investor I would be really concerned if a “blanket”CGT was introduced.
    Not for myself because I just won’t sell my properties. No sale, no CGT tax revenue.
    Bit of a bummer then for first time buyers given the supply of properties will shrink and price good homes even further out of reach.

    • vto 10.1

      The supply of properties will not shrink. Why will it? Because some people don’t want to realise their gain and pay tax on it? Don’t think so. Most house sales follow human demographic trends i.e. move on average every 7 years. That won’t change.

      Sounds to me like you are exactly the type of person the CGT is aimed at – those who buy with a view to sell later at a higher price. And that means you are obliged to pay income tax on it today. Hope you have declared all past gains otherwise you will be a tax cheat.

      • I have never bought with a view to sell later at a higher price, actooally. No need to assume I’m a tax cheat. I don’t sell property I just buy it,rent it out and pay tax on the profits. Like any normal business. How else you gonna get me now, assuming that you’ve decided I’m an arsehole and want to apply the appropriate arsehole tax?

        • vto 10.1.1.1

          Calm down. I didn’t assume. It was implied in your original post as you said it won’t affect you because you wont sell your properties (anymore because of the CGT). Implied / assumed was the (anymore etc).

          How will they get you now? After you draw your final breath and the properties get transferred to the next owner the taxman will taketh. Not as much as if the properties had been transferred several times before your last breath though. Actually, that’s not right. If the property gets transferred say 4 times at 50k gain each time it will net about the same as one transfer at 200k. So not selling makes no difference in the end, to the taxmanwoman.

          One trick is to simply out-live the taxman…

          And if all tax cheats are arseholes then I aint met a single New Zealander yet who isn’t an arsehole.

          • Monique Watson 10.1.1.1.1

            That’s residential property and I guess profits/wealth for you. Can’t milk it, can’t fuck it and take it with you. 🙂
            much calmer now thanks.

  11. quartz 11

    Increase tenants rights too. Minimum standards for rental housing to ensure warm dry and energy efficient stock would increase demand by pushing a lot of shoddy do-up stock onto the market but add stronger tenant-occupier rights (such as they have in Europe) to the equation and you’ll reduce the demand too. Watch that price-point drop.

    As a tenant considering buying I’ve got to say there’s nothing worse than feeling like you’re being squeezed between having no rights in your rental and the prospect of paying hundreds of thousands of dollars in interest to an Australian bank for a mortgage.

  12. tsmithfield 12

    I would be happy to support a capital gains tax only if capital losses can be claimed as an expense.
    If I am to be taxed on a capital gain, then why shouldn’t I be able to claim on a capital loss? It only seems fair to me.

    • Lanthanide 12.1

      Which is exactly what Labour proposed.

      • tsmithfield 12.1.1

        I am not sure about that. I thought they wanted to weasel out of letting people claim for losses.

    • Uturn 12.2

      See dave browns comment at #8. You’d be claiming compensation for the stuff you couldn’t steal. Which now I think about it is not all that unusual. So what the hell, steal what you can, claim back what you can’t steal, take everything you see, hear and imagine. Oh yeah, and then complain that other people aren’t making you rich enough or refusing to emulate or validate your theft. That’s the best part.

    • felix 12.3

      “If I am to be taxed on a capital gain, then why shouldn’t I be able to claim on a capital loss? It only seems fair to me.”

      Presumably you’d also argue for all workers – whether salary or contract – to be able to claim for expenses.

    • mike e 12.4

      Tsm Thats why labour were going to tax at 15% instead of the company tax rate which would possibly leave the govt worse off.

  13. This is a nice post.It has a good tips here. Thank you for sharing.
    Housing Prices

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