The Tax Working Group has released their report and as expected it is a comprehensive (except for the family home) Capital Gains Tax. The group recommended taxing capital growth as income at the taxpayer’s marginal tax rate, likely to be the top tax rate. There was also no allowance for the inflation component of any capital gains.
The report was greeted with howls of opposition from most industries, including farmers, business groups, financial markets and of course us, the rental property industry.
There was always a sense that the report was going to be extreme so that Government could water it down to some degree and be seen to compromise. Government did indeed signal pretty quickly that this would be the case.
Three of the Tax Working Group members disagreed about the need for a CGT. They were Business NZ CEO, Kirk Hope, Former Bell Gully partner Joanne Hodge and former deputy IRD Commissioner, Robin Oliver.
Unfortunately they also said that there might be a case for taxing more gains from investment properties, saying there was evidence rental home owners were relying on tax-free rises in house prices to make their investments stack up. Many farms also rely on capital gains from the land more than actual productivity. Trade Me wasn’t so profitable before Sam and Gareth Morgan sold it for an untaxed capital profit. Vodka producer 42 below didn’t make any money at all before it was sold for over $700m of untaxed capital gain. Xero still hasn’t made any income for its shareholders and other companies are in the same boat.
The three dissenters said rather than a comprehensive CGT, holding rental property providers to task could best be achieved by tightening existing rules such as the Bright-Line test. If the problem is people relying on capital growth to make an investment work, how will making them hold onto the investment longer fix this so-called problem?
Many journalists seemed to agree with the three dissenters, repeating the incorrect view that rental property doesn’t pay tax or contribute to the productive economy. This really shows a lack of investigation and understanding.
Journalists often focus on the point that losses are often made in the first few years of rental property ownership. However, the overall rental property industry paid tax on $1.5b of net rental income in 2016. This figure is likely to have increased since then.
Likewise, people who say rental property isn’t productive take a very narrow view of productivity. Many service industries don’t actually produce anything, so are they unproductive? Of course not. They are part of the economic system that supports other manufacturing companies. Providing homes for workers is also an essential part of the productive economy.
Share investments are actually less productive than rental property provision. After an initial company float, buying and selling shares just changes a company’s ownership structure. It does nothing to actually affect the running or productivity of the company.
Let us hope that the lack of rental property knowledge doesn’t see our industry unfairly singled out in this CGT debate.
The decision may come down to NZ First, as Labour and the Greens still need their support to push any CGT through. NZ First have argued against a CGT for many years, so it is hard to imagine they would support it as part of their next election campaign.
I imagine a proportionately higher percentage of NZ First voters are rental property providers compared to other political parties. It is interesting that both Labour and NZ First are researching their member database to get a steer on what their members think about a CGT.
It will also be interesting to see if we get an indication this month of what the coalition Government is thinking on CGT or just the Labour Party.