Capital Gains Tax proposed

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#2185483 22-Feb-2019 16:19

Are people going to have to keep records longer then 7 years now, ie to prove how much they spent doing up Bach , and it could be nine or more years before sold?

Also are all costs able to be claimed, rates, insurance, costs involved with sale and purchase, new carpet, plumbers, electricians etc, as these are costs that someone wouldn’t have if didn’t own asset.

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#2185493 22-Feb-2019 16:32

rugrat: Are people going to have to keep records longer then 7 years now, ie to prove how much they spent doing up Bach , and it could be nine or more years before sold?

Also are all costs able to be claimed, rates, insurance, costs involved with sale and purchase, new carpet, plumbers, electricians etc, as these are costs that someone wouldn’t have if didn’t own asset.

I’d say you would need to keep those records yes. One folder of stuff it won’t be much. When I buy your Bach for 400k I might pay 300k and I give you a car. I save a it you evade tax lol . Humans will find a way

Rates repairs etc you can’t claim just capex

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#2185494 22-Feb-2019 16:34

networkn:
Sure, I understand about the bias thing.I agree, impossible to eliminate entirely, but I remain convinced Cullen was in my view one of the worst they could have appointed to head it. Same in my opinion with the business working group that doesn't include members of the small business community.

I don't agree with "they could have stacked the deck and passed the law". They were elected as no new taxes in term 1 (though I feel they have been sneaky in actually doing so) but they were clear they would propose the new structure clearly prior to the next election and then if elected they have a mandate to execute it, which I agree was the right thing to do. They weren't going to be voted in this term with the original stance of "we will decide and that's that".

People in general are more politically aware and interested, a crappy tax proposal won't get passed near as easily.

National in my view are between a rock and a hard place. I'd like to see them constructively contribute, and if they actually agree, say so, but only support with the changes they propose. If they agree however, they are really giving the green tick to a Labour Greens Government in 2020.

If they do indeed disagree with it, then it should be clearly communicated as why. Using phrases like "attacking our way of life" looks like hysterical babble, even if they believe it. It would do them the world of good to come up with a different tax structure that is better if such a thing exists, and campaign on this in opposition to a CGT. That is how I'd like to see them win the next election. It's doable in my view, but they need to move quickly.

Constructively that is indeed the key. No one likes whingers, everyone likes constructive meaningful dialogue. They do need to do that

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#2185510 22-Feb-2019 17:04

tdgeek:
networkn:

If they do indeed disagree with it, then it should be clearly communicated as why. Using phrases like "attacking our way of life" looks like hysterical babble, even if they believe it. It would do them the world of good to come up with a different tax structure that is better if such a thing exists, and campaign on this in opposition to a CGT. That is how I'd like to see them win the next election. It's doable in my view, but they need to move quickly.

Constructively that is indeed the key. No one likes whingers, everyone likes constructive meaningful dialogue. They do need to do that

Can't see that *ever* happening with Bridges/Collins/Bennett still there.

networkn

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#2185533 22-Feb-2019 18:36

Fred99:

tdgeek:
networkn:

If they do indeed disagree with it, then it should be clearly communicated as why. Using phrases like "attacking our way of life" looks like hysterical babble, even if they believe it. It would do them the world of good to come up with a different tax structure that is better if such a thing exists, and campaign on this in opposition to a CGT. That is how I'd like to see them win the next election. It's doable in my view, but they need to move quickly.

Constructively that is indeed the key. No one likes whingers, everyone likes constructive meaningful dialogue. They do need to do that

Can't see that *ever* happening with Bridges/Collins/Bennett still there.

To be fair, even if they were doing it, your objectivity when it comes to these people is such IMO, you wouldn't give them a mm of credit.

Never mind that Labour opposed the same way.

Being in opposition is incredibly hard I imagine. Every man and his dog loves the phrase opposing for the sake of it, barking at cars blah blah. Doesn't matter if they have a point, it's automatically minimized, disregarded, or viewed as inferior as a result of being in opposition.

Aredwood

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#2185648 22-Feb-2019 23:17

tdgeek:
Aredwood: And how would sales for the purpose of reinvesting be treated? As profits from sales are only income, when they are not reinvested.

What if someone owns a company, and that company then owns shares, property etc? Say the company sells a house, then uses the money from the sale to buy another house. At the end of the tax year, the company still has the exact same amount of money in its bank account, that it did at the beginning of the year. Will the company or the owner of the company have to pay a CGT?

Thats cashflow not income, two very different things. You dont pay any tax on cashflow or what's in the bank, or more correctly, liquid assets. You pay it on income.

You can earn income and be taxed on it, and have a negative cashflow. You can run at a loss, and have positive cashflow. Its about income

Except that from my understanding, there is only limited rollover relief available. So if I sell a house, and use the money to buy shares. I will still have to pay the CGT. What about if there is a gap between selling the first house and buying the second one? Will the rollover relief still apply?

So actually there will be lots of situations where you will be forced to pay tax on cashflow.

It is also a fail in that the government wants people to invest in things other than property. But if someone does that, they will have to pay extra tax. Compared to if they leave their money in property.

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#2185657 23-Feb-2019 00:23

Aredwood:

Except that from my understanding, there is only limited rollover relief available. So if I sell a house, and use the money to buy shares. I will still have to pay the CGT. What about if there is a gap between selling the first house and buying the second one? Will the rollover relief still apply?

So actually there will be lots of situations where you will be forced to pay tax on cashflow.

It is also a fail in that the government wants people to invest in things other than property. But if someone does that, they will have to pay extra tax. Compared to if they leave their money in property.

The point of a capital gain tax is that it is paid when the gain is realised. When you sell the asset you realise the capital gain, pay any tax that is owing on the gain then you are free to invest or spend the money.

The intention isnt to stop investment in property, it is to make speculative investment less attractive. Today productive assets (one that generates ongoing taxable income) are less attractive compared to an investment that is likely to produce a tax free capital gain. The only reason to take have a negatively geared asset is if it is likely to produce a capital gain. Leverage makes the effect even greater.

Assets that generate taxable income (eg company dividends) also generally employ people to produce that dividend compared to more speculative assets.

With your hypothesis of leaving the money in property you are making the assumption that an investor would never sell the property then never realise the gain. At some point most investors would want to cash out, therefore they will pay tax on the capital gain then.

This isn't a quick fix, tax policy never is. It will take at least a generation for the effects to be realised.

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Aredwood

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#2185664 23-Feb-2019 00:48

tdgeek:
rugrat: Are people going to have to keep records longer then 7 years now, ie to prove how much they spent doing up Bach , and it could be nine or more years before sold?

Also are all costs able to be claimed, rates, insurance, costs involved with sale and purchase, new carpet, plumbers, electricians etc, as these are costs that someone wouldn’t have if didn’t own asset.

I’d say you would need to keep those records yes. One folder of stuff it won’t be much. When I buy your Bach for 400k I might pay 300k and I give you a car. I save a it you evade tax lol . Humans will find a way

Rates repairs etc you can’t claim just capex

Not being able to claim OPEX is a major departure from the current rules.

If I buy a house, batch, car, whatever. For the purpose on onselling for a profit. Currently, both Capex and OPEX are 100% tax deductible. Only that Capex spending on items over $500 needs to be depreciated, instead of being fully written off at once. This means that incorrectly declaring Capex as Opex or vice versa. Only changes which tax year the tax gets paid in. Not the total amount of tax paid. So at most, you get an interest free loan from the IRD. But if you instead had to get a loan from a bank, the interest and fees charged on the loan are tax deductible anyway.

As soon as you make just 1 and not the other tax deductible out of Capex and OPEX. You have just opened up massive holes in existing tax rules. Especially as it is often difficult to accurately apportion costs between Capex and OPEX. Eg, I buy a house with the intention to renovate it and sell for a profit. The wiring is a mixture of old stuff with unsafe insulation, dodgy DIY wiring. It all has to be rewired to current electrical rules. The electrician send me a bill for the job, yet the job has an unknown ratio of capex and OPEX. So you can see the can of worms that would be opened.

Aredwood

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#2185705 23-Feb-2019 03:13

Handle9:
Aredwood:

Except that from my understanding, there is only limited rollover relief available. So if I sell a house, and use the money to buy shares. I will still have to pay the CGT. What about if there is a gap between selling the first house and buying the second one? Will the rollover relief still apply?

So actually there will be lots of situations where you will be forced to pay tax on cashflow.

It is also a fail in that the government wants people to invest in things other than property. But if someone does that, they will have to pay extra tax. Compared to if they leave their money in property.

The point of a capital gain tax is that it is paid when the gain is realised. When you sell the asset you realise the capital gain, pay any tax that is owing on the gain then you are free to invest or spend the money.

The intention isnt to stop investment in property, it is to make speculative investment less attractive. Today productive assets (one that generates ongoing taxable income) are less attractive compared to an investment that is likely to produce a tax free capital gain. The only reason to take have a negatively geared asset is if it is likely to produce a capital gain. Leverage makes the effect even greater.

Assets that generate taxable income (eg company dividends) also generally employ people to produce that dividend compared to more speculative assets.

With your hypothesis of leaving the money in property you are making the assumption that an investor would never sell the property then never realise the gain. At some point most investors would want to cash out, therefore they will pay tax on the capital gain then.

This isn't a quick fix, tax policy never is. It will take at least a generation for the effects to be realised.

What if the reason for selling, is due to an insurance payout, The government or council needing your land for a new road etc? As the government normally makes direct offers to buy land needed for roads etc, and only uses the public works act if someone decides to be stubborn and refuses to sell. While my insurance policy contains clauses, that give my insurance company the right to take my land and pay me market value for my property. Instead of rebuilding it in the event of my house being completely destroyed. (normally only invoked when council planning rules mean the insurance company is not allowed to build a new house that is the same size as my old house. Or a natural disaster the land in some way, the rebuilding is illegal or impossible).

The government, council, and insurance companies will only pay out enough to put you in the same financial situation as before. Yet if I accept an offer to sell ahead of the Public works act being invoked. Or accept an insurance payout (as there is no law that forces me to make an insurance claim if I don't want to make a claim). And Transpower normally just buy land that is in the path of new power lines, build the lines, then resell the land. (as even allowing for a drop in land value due to the new power lines, they have found out that doing so is cheaper than just forcing people to allow the lines to be installed). But in all of the above examples, the sale is technically voluntary. So I would have to pay the CGT. But because I have had to pay the CGT, Im now in a worse situation than before. Because of the tax, I don't have enough money to buy an equivalent house to the one that I used to have.

Maybe I could try demanding extra money, to offset the CGT. But since needing to pay the CGT implies that I have made a profit. The government / council / insurance company / Transpower etc could argue that they don't need to pay you extra to cover your CGT liability. Then you would have an incentive to obstruct the process as much as possible. As either completely avoiding the need to sell your land, or taking things to the point of forced sale. Will either eliminate or reduce the amount of CGT that you would have to pay. (as a compensation payout is by definition not profit). But if they do need to payout, then rates, insurance premiums, electricity etc will become more expensive. Yet extra legal fees and other expenses from more people fighting the sale of their land will still cause increases to rates, insurance premiums, electricity. In some cases, the insurance company will just pay to rebuild an otherwise uneconomic to rebuild house. The council will adopt a more expensive road design to reduce the amount of land needed to be bought / avoid the need to buy certain properties. Transpower will install underground lines or adopt a longer route that is more expensive to build. So insurance premiums, rates, and electricity prices will still increase.

I might need to ask my insurance company to give me a policy. That says that they will pay any CGT that I become liable for, as the result of a claim. But I would have to pay higher premiums for such a policy. Either way, the CGT could easily become the equivalent of a new tax on insurance premiums, rates, and electricity. And such an (equivalent) tax would be very regressive.

As for the supposed hypothesis that most investors would eventually sell. There are lots of reasons to delay selling, that might reduce or eliminate the need to pay CGT. No GCT on transfers due to the owners death. If the government achieves its stated aim of lowering house prices, or at least vastly slowing down the rate of increase. Then delaying the sale reduces the amount of CGT due when compared to general inflation. And lower house prices will by definition mean less CGT to pay. Maybe a future government will reduce the CGT rate / introduce more loopholes / completely scrap CGT. Since the TWG has said that they expect the CGT will cause rents to rise. Higher rent will offset losses from a potentially lower selling price in the future.

And the biggie. If the reason for selling is due to the house being say too small, or needing alot of work. Then the CGT would encourage inefficient renovations. EG I own a rental that requires alot of money spent on it due the rental WOF laws / tenants trashing it / It is a leaky building etc. Meaning that I could either sell as is, renovate / fix then sell, Or keep it and spend the money myself upgrading it. Imagine that keeping and upgrading is the most expensive option of 100K over the next option. (if CGT didnt exist) But if I sold, I would have to pay 150K worth of CGT. So it would now make sense to not sell. But I have still had to pay a $100K "stealth tax".

Yet another scenario. I live in a small house on a big section. A property developer sees my house, and gives me an offer to buy it. As the developer could demolish my house, then build 3 houses on it and make a big profit. Im happy with my house, and have no intention of selling. My property is worth 1 million as is. An offer of 1.1-1.2 million would probably be enough to get me to agree to sell. But assuming a 33% CGT, Im not going to sell unless im offered around 1.6 Million. Otherwise I wouldn't be able to buy a house that is even slightly better than what I have. (after I have paid my CGT)

Either the developer will need to be able to sell the planned 3 housed for more money (higher house prices), Accept a lower profit margin (The CGT that I pay, gets offset due to the government receiving less CGT from the developer), Or the development is now uneconomic, and therefore never happens. Higher house prices due to less houses built. And the government never receives the tax that it would have received from the developers profits, GST (yes, developers have to pay GST on the selling price of houses that they sell). Tax on wages and company profits from all the workers and sub contractors that would have worked on building those houses. The council doesn't receive the extra rates and development contributions payments that it would have gotten otherwise.

So there are some situations where the CGT could result in the government receiving less tax overall.

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#2185706 23-Feb-2019 03:47

So you bought the original house for free? If you didn't the capital gains tax is only on the profit you made not the total value of the house.

There are edge cases and if a capital gains tax is introduced some people will get screwed. Anyone who argues otherwise is lying.

Equally the lack of a capital gains tax has screwed many people by incentivising speculative investment and costing our country significant investment in the productive economy.

To me the question is predicated upon whether the benefit to our country is significant by introducing a capital gains tax and reducing income tax on the part of our economy that has been left behind.

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#2185713 23-Feb-2019 04:51

Except that there has always been a CGT on property speculation. As the current rules (in addition to the bright line test). If you buy a property with the intention of onselling it for a profit. Then you must pay income tax on that profit. And there is no time limit or family home exemptions either. And it also applies to cars, boats, artworks etc. In short, if you bought something with the intention of onselling for profit, then you have to pay income tax.

The problem was simply proving what that intention was. As lots of landlords would say that the reason for buying rental property, was to make a profit from the rent. And if they eventually sell up and happen to make a windfall profit from the sale price, then that was an unexpected bonus.

Since speculators already have to pay CGT. The proposed CGT wont directly affect speculators. And may give them loopholes to reduce their tax bills.

And has the problem to be solved been defined? If the goal is to reduce income taxes paid by low income people. Or get people to pay tax on gains in asset prices. House prices will have to keep rising forever, for the government to get enough money to reduce income tax. But that will hurt low income people the most.

If the goal is to lower house prices. Then very little CGT would get paid if house prices do drop or stop rising. Therefore no money available to pay for income tax cuts.

And since the TWG has said that rents will rise. Will Low income people get enough of a tax cut to pay for their higher rent? Unlikely

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#2185716 23-Feb-2019 07:11

Aredwood:

The problem was simply proving what that intention was. As lots of landlords would say that the reason for buying rental property, was to make a profit from the rent. And if they eventually sell up and happen to make a windfall profit from the sale price, then that was an unexpected bonus.

Since speculators already have to pay CGT. The proposed CGT wont directly affect speculators. And may give them loopholes to reduce their tax bills.

First you say that the landlords that the current test is basically unenforceable then you say that it is. Make up your mind. In my opinion it isn't enforced or enforceable due to the deliberately grey test.

Aredwood: House prices will have to keep rising forever, for the government to get enough money to reduce income tax. But that will hurt low income people the most.

If the goal is to lower house prices. Then very little CGT would get paid if house prices do drop or stop rising. Therefore no money available to pay for income tax cuts.

Inflation won't disappear. What you will do is have a tax system that treats income consistently regardless of whether it is earned from income or capital gain. Why should capital gains be treated differently to income? Markets respond to incentives and New Zealand does not incentivise business productivity. It incentivises capital gains and negative gearing. How does that make sense? Our productivity statistics suggest it doesn't.

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#2185729 23-Feb-2019 09:33

Handle9:

It incentivises capital gains and negative gearing. How does that make sense? Our productivity statistics suggest it doesn't.

This has been the case previously, but arguably less since the Brightline and it's not even relevant after 1 April when rental ring-fencing kicks in.

This is a bug bear of mine; a lot of the sanctimony about the marginal rates of taxation on various investments are based on old, pre-Brightline figures. The Spinoff is a key offender here.

The picture will be wildly different come 1 April and I honestly think the TWG have been neglectful in acting like the current issues will still be current in 2021.

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#2185784 23-Feb-2019 11:57

Handle9: Inflation won't disappear. What you will do is have a tax system that treats income consistently regardless of whether it is earned from income or capital gain. Why should capital gains be treated differently to income? Markets respond to incentives and New Zealand does not incentivise business productivity. It incentivises capital gains and negative gearing. How does that make sense? Our productivity statistics suggest it doesn't.

Except that an increase in prices that is solely due to inflation. Is not income or an increase in underlying value.

If I receive money from employment (wages) I definitely have more spending power, and my net worth is definitely larger. Compared to if I hadn't received my wages. So money from wages is definitely income.

If I sell a house for more money than what I had originally paid for it. I only get more spending power, and net worth. If the house had increased in value by a larger amount than inflation in the time that I had owned it.

Problem is, that most of the increase in house prices have been due to artificial scarcity caused by the Resource Management Act. Before the RMA, an average house was worth around 3x the average yearly wage. House prices still increased quickly at times, but that was only because the rest of the economy also had large price increases (inflation). Meaning that there wasn't much scope to make money on property, solely by buying and later selling (without also doing other things to add value).

Now, due to house prices increasing much faster than general inflation. I get that increases in house values can be a source of income. But that depends on what you spend that money on. As selling a house and buying another at the same time. Doesn't increase your net worth or give you spending power that you didn't previously have. Yet you have definitely gained an increase in spending power and net worth. If you spend the money from selling a house on non housing things. So there are situations where a capital gains tax is a good idea.

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#2185787 23-Feb-2019 12:11

Aredwood:

Problem is, that most of the increase in house prices have been due to artificial scarcity caused by the Resource Management Act.

That's a stretch - how did the NZ RMA create simultaneous property price bubbles in Sydney, Vancouver, Hong Kong?

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