Christine de Lee: Labour Announces a New Tax

Well, well, well… there’s a surprise. Labour has announced that, if it wins the next election, it will implement a Capital Gains Tax. From 2027, there will be a tax levied on the capital profits made on the sales of investment properties, commercial properties… and that seems to be about it. The family home will be exempt, as will farms, business assets, shares, collectibles, Kiwisaver accounts, and basically all other asset types. In other words, this is a Property Tax – not a Capital Gains Tax.

This is not how Capital Gains Taxes around the world work at all.

We already have a tax on capital gains on property. It is called the Bright Line Test, and the current government has reduced the period where it applies, from 10 years (under the last Labour government) to 2 years. It is now, as was originally intended, a Property Speculation tax, aimed at those who make a quick buck on the sale of an investment property. But now there will be no time limit on the ownership of an investment property. If you own one and sell it, you will be taxed. End of story.

But Labour is fooling itself – and everyone else – if it calls this latest tax a Capital Gains Tax. Most capital gains will still be untaxed. If you have a share portfolio, you’re fine. Kiwisaver will be untouched. Managed funds are okay. Even farms are exempt. This is not a true Capital Gains Tax. It is merely – yes, you guessed it – another attack on landlords.

Also, it is madness to start spending the proceeds of this new tax before it has even been implemented. The tax will not produce much revenue for some time. When Australia introduced CGT – under a much more comprehensive system than this half-hearted attempt by Labour – it took 15 years before it produced any significant revenue. So, Labour’s promise to fund 3 doctor’s visits per person each year is improperly costed… in fact, it has not been costed at all.

When CGT is introduced, it will not be applied retrospectively. If you own an investment property that has an unrealised capital profit of $100,000 on the first day of CGT, that gain is yours. The property will be valued as at the date of the introduction of the tax, and any taxable gains will accrue only from that day onwards. This explains why it took 15 years for any significant income to be generated by CGT in Australia… and it also explains why Labour will not be paying for free doctor’s visits from the proceeds of CGT anytime soon.

Hipkins, Edmonds and Verrall all fronted up to the media playing fairy godmothers. No doubt this will persuade a few people to vote Labour. But Labour is playing fast and loose with the truth once again. They assume that no one understands how these things work… and that everyone will be enraptured by the prospect of 3 free doctor’s appointments every year. The fact that the money will have to come from somewhere – and it won’t be from the proceeds of CGT – seems to be an irrelevance. Free doctor’s visits is the prize.

Typically of Labour, all this will do is to increase administration for already busy medical administrators. Free doctor’s visits have to be paid from somewhere, and the medical practices will have to apply for reimbursement from the Ministry of Health. Once again, small fortunes will be paid out on administration for Labour to spend even more money that the country doesn’t have.

Just by way of comparison, in the USA, rates of CGT are 0%, 15% & 20%, and assets held for a long term attract lower rates. Collectibles – art works, coins and antiques – attract the highest rates because they generally require no effort – they simply accumulate value. Compare that with a flat rate of 28% to be applied in NZ. Those who describe this as an ‘envy tax’ have a point.

I never fully understand the loathing that the parties on the left have for landlords. Many landlords are not the uber-wealthy evildoers that the left seems to think they are. But whatever else happens, this will drive more landlords out of the rental market, causing even further shortages of rental properties. And yes, every rental property sold provides a house for an aspiring home owner – but there are always people who need to rent, if only temporarily. Sadly, the government does not have blocks and blocks of empty social housing just waiting to sweep up the remaining renters, so it will create more chaos in the rental market that simply does not need to happen.

I am in favour of the introduction of a CGT, but not this one. To be applied fairly, it needs to be applied to all capital gains, not just those cherry picked by an envious government- to-be. It needs to be applied at a flat rate (or a range thereof) but that flat rate needs to be much lower than 28%. And it needs to take inflation into account. Most property value increases are simply inflation disguised as capital gains. Applied fairly, a CGT could work well in New Zealand, but this is not the way to do it.

I am also of the opinion that politicians should not make tax policy. Leave that to the experts – those that understand taxation and can predict the likely outcomes. Taxation should never be a matter of envy. But that, unfortunately, is all that can be taken from this latest proposal.

Christine de Lee BA (Hons) CA PP is a Chartered Accountant