First National Blog

Mar '19

Revealing the Winners and Losers of Capital Gains Tax
Scott Bentley Posted by
Scott Bentley

The report from the working group chaired by Sir Michael Cullen is now in the hands of the politicians to decide to what extent if any a CGT may become part of New Zealand's taxation law. 
Political views within the current coalition are divided, with Labour generally supporting the concept, the Greens fully supporting and NZ First appearing to be unconvinced. National for their part have said that if such a tax is legislated, they will repeal this when they return to the Government benches. Essentially a CGT is an additional tax that gathers additional tax revenue for possible redistribution in whatever manner the Government of the day sees fit. For that reason, it is sometimes referred to as a "wealth tax" in that it generally accrues as a tax on secondary assets, and may be redistributed by boosting direct and indirect funding of Governments social responsibilities, such as Health, Education, Social Services, Housing, etc. 
The only thing that is currently certain, is that there is a lot of water to go under the bridge yet before any legislation is enacted, and if so, to what extent the widely published recommendations may be adopted.
Assuming that a CGT does proceed, a political commitment has been made that this will only apply to capital gains that accrue from 1 April 2021.
So assuming this does eventuate, based on the Cullen report recommendations, it would apply to a very wide range of personal investment and business activities, including farms.
How might it affect Real Estate? Well, if your only investment is your family home, as currently recommended this will be exempt. If however, you own an investment property, a business, or a rural property of greater than 4500m2 (approximately 1 acre) then if selling after 1 April 2021, any increase in value from that date is likely to see that difference regarded as a "Capital Gain", and therefore taxed at whatever your personal highest tax rate is. For most people who are likely to be paying CGT, this will be 33%. So while it doesn't mean you won’t benefit from selling an asset for more than what it was valued at as of 1 April 2021, one third of profit will go to the Government as general taxation revenue for possible redistribution at their discretion.
Will the introduction of a CGT affect housing supply, and could it lead to increased rents?
Certainly it has the potential to do both, commodity prices are always linked to supply and demand, and some may see CGT as a reason not to invest in rental housing, leading to a diminished supply, and therefore increased rents. However, it needs to be remembered that CGT will only apply when you sell an asset so if owning a rental investment for a long term hold is your objective, the rental returns may very well be acceptable to you, with any CGT effectively deferred until sale date. It could also be argued that a CGT may see the end of speculators "flipping" properties for rapid gain, although legislation does currently exist to allow taxation on profit where speculation and gain were clearly the motive.
So, if you don’t own a house or have other investments you could both be a winner and a loser.
Who else could be winners? Well my guess is that it will up the work load of accountants who are the professional tax experts, and maybe we will need a whole lot more public servants with IRD on their name badge in Wellington?
One thing that is a given is that CGT will remain a political hot potato, and we can expect to hear a great deal more about CGT over the coming months, and especially leading up to the 2020 election.
By Owen Norrish
Director and Principal Officer
First National Marlborough Ltd

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