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CGT: the focus groups made Key do it

Written By: - Date published: 8:42 am, May 18th, 2015 - 39 comments
Categories: capital gains, john key, national, national/act government, tax - Tags: ,

So …

Remember all the attacks that Labour sustained because it proposed a Capital Gains Tax so that something could be done about addressing spiralling house price speculation and the lack of investment in Aotearoa’s productive sector?  Remember back in 2012 when John Key said that he hated CGTs and they were vote losers and did not work unless they were comprehensive?  Remember last election when Key attacked Labour’s proposed CGT and claimed that a house owned by a family trust would be subject to the tax even though the legislation had not been drafted?  Remember recently when Key said “I don’t think a capital gains tax works” and that they are highly inefficient?

Well suddenly the Government is proposing one.  It is an insipid easily avoidable one, but nevertheless the Government is going to introduce a CGT that will apply to profits made on the sale of houses in certain circumstances.

Key is trying to say that it is not a CGT.  He is also trying to say that there is no housing bubble and that he has not recently changing his mind, despite a month ago stating that the Government was not going to introduce measures to address land speculation.  Perhaps he is referring to the situation on Planet Key and not Planet Earth.

Even Key’s extraordinary ability to persuade some people that black is white will be stretched to pull this off.  The tax is a tax that is paid if the capital item you purchase goes up in value and you sell it within two years of of buying it.  From initial reports intention will be irrelevant and only transmissions on death, sale of the family home and relationship property settlements will be exempt.  If it looks like a CGT and sounds like a CGT …

From Radio New Zealand:

Mr Key said there was already a tax for people buying properties with the intention of selling it for a profit but enforcement of that tax relied on proving intent.

He insisted the new policy was not a capital gains tax.

“I’m opposed to capital gains taxes … A capital gains tax means that when you buy a property, it doesn’t matter when you sell it, you pay the capital gains tax.

“The reason I’m opposed to them is you can drive a bus through them because people structure themselves in a way…

“This is just simply saying the current law is you have to pay on intent; we’re taking away the presumption that you can argue [that] within a two-year period, buying or selling a property, other than your family home, that actually what you’re really doing was looking to make a gain – it’s quite a different sort of thing.”

There is more than a whiff of panic about the measure.  Apparently backbenchers were hastily told on Saturday night about the announcement of the policy (whaleoil donotlink link).

The measures to tighten up on identification and require the provision of an IRD number are advisable and follow continuous criticism by Labour and by Winston Peters at the Government’s failure to collect data concerning purchases of land by foreign entities.  This article is from April 2014.  That it has taken this long to respond shows the Government’s commitment to doing something.

Despite speculation to the contrary Labour has not shelved the idea of a CGT.  Andrew Little has advocated for a review of the policy and consideration of all options.  It may be that the party will agree on a general review of the tax system to work out what is the best way to address the housing crisis.

Question time in Parliament this week should be interesting.  Perhaps the first question to Key should be what happens if a couple transfers the family home to a trust and within two years the trust sells the home …

 

39 comments on “CGT: the focus groups made Key do it ”

  1. Detrie 1

    Spot on. Sounds like the emperors clothes story all over again. As you say, getting around the family trust issues will be the trick. Tampering like this seldom works.

  2. Lanthanide 2

    Key’s explanation for what happened here on Morning Report did sound plausible.

    They asked IRD about bright-line tests for speculators and they said there wasn’t anything appropriate that could be done, and instead asked for more money to crack down on the ‘intentions’ of investors when selling property. So in Budget 2010 and 2014 they had increased the money going to IRD to police this activity, based on IRD advice. However when asked again, just recently the IRD came back and said “achtully, a 2-year bright line test would work” and so that’s why they’re doing it this time.

    It’s probably just a cover-story, but it is plausible.

    • Sacha 2.1

      But what has changed since the first time IRD were asked about such a test, other than the political climate?

    • Brendon Harre 2.2

      No it is not plausible Lanthanide.

      Governments do not outsource tax setting decisions to the IRD, that is for the public to decide through that thing that all politicians are very sensitive about -elections. You may have remembered CGT were discussed last election. This administration said CGT were a stupid idea before the last election and now only a few months later they are implementing a weak form of CGT……

      Spin it how you will, but in my eyes it is a major backtrack, a sign of desperation and a lie to those that voted based on Nationals pre election statements about CGT and the housing bubble.

      When will the public see John Key for what he really is. The emperor is wearing no clothes…..

      • Colonial Rawshark 2.2.1

        Governments do not outsource tax setting decisions to the IRD, that is for the public to decide through that thing that all politicians are very sensitive about -elections.

        Government asks IRD for the tax priorities, problems and options to consider, as well as IRD’s recommendations for courses of action.

      • Lanthanide 2.2.2

        All government departments clearly have advisory and consultation responsibilities, for Treasury it is their main role.

        Also I’m not spinning it at all; in fact I haven’t even commented on what I think about it anywhere on The Standard. John Key is spinning it.

      • John 2.2.3

        How can it be a backtrack when –
        1/ we’ve had the tax for a very long time, and
        2/ every year since the 2010 budget, the current government has got the IRD to clamp down more and more on those trying to avoid paying tax on housing speculation.

        From Interest.co.nz 2014
        “IRD focused on property developers speculating in the residential market, particularly in Auckland and Queenstown, but property speculation was just one area where the pursuit of undeclared or under-declared income could pay off, McClay said.

        In the 2012/13 year, IRD spent $172 million on enforcement and compliance and received a return of $1.2 billion, which was $7.47 in tax revenue for every dollar spent.

        In 2013/14 it spent $165 million and received $1.24 billion, which was $8 for every dollar spent.”
        See http://www.interest.co.nz/property/73121/ird-chases-residential-property-speculators-auckland-and-queenstown

        The tax is on people who trade in houses, the same way someone who buys and sells cars for profit is taxed on their “captial gains” (or cycles, appliances, funiture etc) .

        So continuing to tighten the same tax on trading houses that has been tightened more and more over the last five years, is just the opposite of “backtracking”

        • The changes or “bright-line test” make this fundamentally not the same type of tax. This is no longer a subjective tax on property-for-resale, it’s now an objective CGT that applies to very short-term investment properties in order to cool down speculation on houses and estate agents buying houses for resale.

          It’s not a comprehensive CGT, but given National’s talking points, that makes it even worse according to their own arguments around avoidance, fairness, and complication. LOL.

          • John 2.2.3.1.1

            The vast majority of people buying an investment property and selling it within two years are doing it to make a profit.

            All it’s doing is closing the all the loopholes, that until the tightening started happening 2010, meant the tax was largely ignored.

            It’s effectively a trading tax, in the same way that if I trade cars, art works, general auction goods, appliances, or any other products, I’m taxed on the profit I make.

            In all those examples, the profit is effectively from a capital gain. But it’s not a capital gain tax.

  3. Michael Nolan 3

    The sky is blue, the grass is green, and a tax on capital gains is a capital gains tax. The only thing more incredible than the humiliating back down on a CGT that Key ridiculed Labour about in last years Election is the contempt he treats NZers with when he tries to put lipstick on his half-arse CGT effort and expects us to believe it is something else

    • John 3.1

      “….a tax on capital gains is a capital gains tax. ”

      Except when it not.

      Like for every business in New Zealand that make it’s money from buying products and selling them at a higher price – whether the product is houses, cars or jelly beans. It’s merely a tax on profits.

      And just two days ago, even the Labour leader was arguing that it’s NOT a CGT.

  4. Puckish Rogue 4

    Pragmatism at its finest, spike something Labour were going to bang on about but do it in a fair and equitable way

  5. Colonial Rawshark 5

    The NATs appear to be in internal division over this; Key should just front foot it with strength instead of being all coy and evasive. “The Reserve Bank move last week confirmed that there is a problem with some speculative investors over-heating the difficult Auckland housing market; we are simply approaching the same problem from a different angle.”

  6. SHG 6

    Summary: National, good at politics

    • Bearded Git 6.1

      @SHG …….and useless at running the economy. It has taken years to dawn on them that a CGT was needed to stop Akl house speculation, lies and denial throughout.

      Is that really good politics, or is that what you and the MSM are spinning us?

      • Colonial Rawshark 6.1.1

        @SHG …….and useless at running the economy. It has taken years to dawn on them that a CGT was needed to stop Akl house speculation, lies and denial throughout.

        Uh, no. The NATs have been running the economy for their property developer and property investor mates just fine. And National’s CGT will do minimal to slow down Auckland house price increases. Just like Labour’s CGT.

        Neither big party is at all serious about stopping Auckland house price increases.

        • AmaKiwi 6.1.1.1

          The majority of National AND Labour MP’s own several properties.

          “It is very difficult to get an MP to understand something when his retirement nest egg depends on not understanding it.”

          (I modified the quote from Upton Sinclair).

    • Sabine 6.2

      National, no new ideas since ages ago.
      That’s why they recycle Labour ideas.

      But what about the Family Trust!!!!!!! Lol LOl Lol

      • SHG 6.2.1

        This is why National has been able to claim the centre and keeps winning elections. If an idea is useful and could result in positive outcomes, National will adopt it and pretty soon everyone thinks of it as National’s idea. But Labour will never adopt a policy originating within National. A good idea that happens to have originated with the National Party will never become Labour policy, because dogma.

    • Clemgeopin 6.3

      You left the prefix, ‘dirty’ in front of politics.

  7. Paul Campbell 7

    In some sense I agree with Key especially with his US background. In the US all capital gains are taxed as normal income with two major exemptions: the family home, and registered investments held for more than 2 years which attract a lower tax rate in the US it’s then lower rate that is called the “capital gains tax”. So in one sense at least this is “not a capital gains tax” but only if you believe, as I do, that by default all capital gains should be taxed as ordinary earned income.

    • dukeofurl 7.1

      Dont know the family home in US is an exemption ?

      “To calculate the capital gains or losses, take the sales price then deduct selling expenses, from the amount realized. Then deduct the original cost of property, plus expenses deemed to have increased its value, less claims which have notionally decreased its value (this is known as the “adjusted basis”). Expenses deemed to have increased its value are capital improvements (roof replacement, paving the driveway, central air conditioning installation, rewiring, etc.)”

      It wouldnt make sense to have an exemption for family home as the homeowners can deduct interest costs from their taxes

      • Paul Campbell 7.1.1

        it is but not in a simple way – essentially every time you sell your home and buy a new one worth more no CGT is assessed, but the untaxed capital gain is rolled ovetr, and then (depending, because Bush changed the law) either:

        1) you get a one time in your life chance to sell your home and buy a cheaper one (up to some limit) without being assessed CGT, or

        2) every 5 years you get to sell your home and buy a cheaper one and write of $500k of the CGT)

        ( 1) was true until about 2002 when Bush changed it to 2), the threshold may have changed since, I moved back home to NZ in ’04 )

        I like 1) it follows most people’s life arcs – when the kids are gone, and you’re retiring you get to access the value in your home, once.

        Remember we are talking about taxing the increased value of your home, something you got without working for, not the portion you saved for and paid off. To be fairer I could imagine a CGT that only taxes the portion past the annual inflation rate – but really all income, whether it’s from real estate or stocks and bonds, the lottery, or your daily job should be taxed the same way.

        Oh, and the US bizarrely makes money paid for your mortgage’s interest (but not principal) income tax deductable (along with rates and other stuff)

  8. mac1 8

    A quote from Key from April 21.

    “I mean one of the reasons why there probably hasn’t been a significant correction is because over the last 45 years there’s a general view that housing prices are not over-valued relative to a whole lot of different factors.”

    How can anyone argue with that statement except to say it is meaningless?

    It is full of qualifications=
    “One of the reasons”. Does he go on to talk about the other reasons?

    “probably” There’s an out if ever I read one.

    “‘general view” is also very, well, general.

    “are not overvalued” The use of a negative is much less definite than saying “are undervalued” or “are correctly valued.”

    “relative” gives a great deal of wriggle room.

    “whole lot of different factors” in which we are not told how many nor are we advised what they are.

    This is classic John Key. Saying nothing, sounding reasonable, using layman’s language, and having so much room to be able to change direction and still stay within the parameters of this meaningless statement.

    The opposition, and the media, need to pin Key down to statements on important issues having much more precision than this.

  9. philj 9

    Key on RNZ Morning Report to Guyon, on housing CGT etc.
    “Collecting data of itself doesn’t do anything…. unless you do something about it….. ” So that’s a clear explanation of why the government doesn’t want ” perfect data”

  10. ianmac 10

    In due course a future Government could tweak the 2year limit out to 3 or 5 or 10 years.

    • dukeofurl 10.1

      or more likely set up a number of houses bought and sold that define you as a trader, and thus liable for tax no matter the time involved.

  11. dukeofurl 11

    What would be interesting is if a house owned by a ‘family trust’ can be said to be a family home ?

    The trustees may or may not live in the house. The beneficiaries of the trust may or may not live in the house.

    One of my neighbours has a house which his daughter lives in. It may be a trust or personal ownership but as he doesnt live there, not counted.

    • SHG 11.1

      Let’s ask mickeysavage. If there’s one thing that guy knows, it’s the ins and outs of setting up trusts.

      AMIRITE

    • Anno1701 11.2

      We rent , and our rent gets paid into an account labelled ” XXXX family trust”

  12. Penny Bright 12

    Is housing predominantly a ‘human right’ or a ‘property right’?

    How many of the apparently 22,000 Auckland ‘ghost city’ private sector houses, (as described in the 2013 census), are empty because their owners make more money that way?

    While some people are living in caravans, cars, or sleeping rough on Queen Street Auckland, the ‘$upercity’ aspiring to be ‘the most liveable city in the world’?

    Penny Bright

    http://www.pennybright4mayor.org.nz

  13. felix 13

    “He is also trying to say that there is no housing bubble and that he has not recently changing his mind, despite a month ago stating that the Government was not going to introduce measures to address land speculation.”

    Bill English was saying the same thing 5 days ago. Nothing planned, nothing in the pipeline etc etc. Duncan Garner was playing the clip over and over on radiolive this afternoon.

  14. Clemgeopin 14

    ” Nothing planned, nothing in the pipeline etc etc”

    I read that Key said today that this tax plan has been under preparation for the last few years! Key: “‘Bright line’ property tax years in the making” !

    Yet, Revenue Minister Todd McClay says despite only being a month in the works, it was carefully thought-through.
    “Over a four- or five-week period we looked very closely at not only what the Reserve Bank is doing, but what other measures may be there from a tax point of view.”

    Read more: http://www.3news.co.nz/business/key-bright-line-property-tax-years-in-the-making-2015051809#ixzz3aUoybvuB

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