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'Lunacy' that property speculators get tax-free capital gain - Cunliffe

A Labour led government would impose a capital gains tax of 15% on realised gains from investment property. He says the family home would be exempt, Labour leader David Cunliffe told TVNZ’s Q+A programme this morning.

"I'm comfortable with that because speculators are driving this market, and to make matters worse, according to the BNZ and Real Estate Institute about 12% of speculative house buyers, all house buyers last year in Auckland came from non-resident foreigners.  Non-resident foreigners who have access to cheap finance are driving up the price of homes in New Zealand, so young Kiwis can't get into their own homes." Mr Cunliffe said.

When questioned on why a capital gains tax isn’t working in Australia, Mr Cunliffe said, "The problem would be worse if they didn’t have it."

"We're not talking about crashing house prices, there is no way that house prices are going to crash.  Middle New Zealand does not have to worry about that.  But what we don’t want – what I don’t want – I've got one home – I don’t want to see the value of it crash, but I don’t want my two sons locked out of the market when they come to need a home."

Mr Cunliffe says housing is one of the crucial issues in this year’s election.

"If Nick Smith and the National Party don’t think we're going to be coming after them – this is disgusting and it's going to change."

Comments and questions

Many landlords, developers and property traders already pay income tax on gains. Does Labour propose that the 15% is in addition to that?

I build and sell homes and pay both GST and tax on the sales I make and at present I compete with private speculators who pay neither so I support the tax as I already pay it

Everybody pays GST, or rather cannot claim it back on residential, and also will, or should pay income tax. Your concern should be whether you would have to pay the CGT of 15% in addition.

Wayne Brown appears to be one of the truthful ones, and he probably pays (company tax of) 28% on his profits, rather than the 15%.

15% sounds pretty fair to me, and shouldnt discourage those that at good at it. The real question is will they be able to claim expenses against their capital gain? Devil is always in the detail.

Sadly todays Journalists lack wider understanding of business, and dont seem to ask the hard questions.

An excellent question considering yes there already is an effective tax in property gains and it's at a higher rate than 15%.

Does NZ have a capital gains tax? The answer is No - BUT! NZ does not have a CGT as such, but a tax on capital gains does arise in certain situations. These include:

1 Share Traders: ... If you intend to be trade shares take advice first.
Gain on property purchased with a specific intention of resale at a profit is taxable:
2 Gains on land subdivided within 10 years of purchase are taxable, with limited exemptions: N.B. ...
3 Gains on properties sold by builders within 10 years of completing any improvements to the property are generally taxable: ...
4 Gains on properties owned by land dealers and developers are generally taxable.
5 Gains due to zoning changes (or the prospect of such a change) can be taxable.
a) In the case of points 4 and 5 above, profits on land sold by persons associated to a builder/dealer or developer can also be taxable. ...
b) Generally the profit on your own home is not subject to tax but this is not always the case if the home is owned by a company or trust or is on an area of land exceeding 4,500m2 (approximately 1 acre).

Tip: Seek professional advice before you sell any property, especially if it has been owned for less than 10 years and a subdivision is involved.

What rate of Tax Applies to Capital Gains?
Effectively it is your marginal tax rate. This means that for a company the tax rate is 30% (28% from 1 April 2011) while for a trust it is 33%. The highest rate for a gain derived by an individual is 33% from 1 April 2011.

We do indeed and at a lot more than 15%. Can we count on david to drop the tax rate for all not just property speculators or is he just going to look after his mates.

Really? David looking after his mates like John Key looking after his with a tax cut to the top income earners,effectively wiping out $1.5billion off the tax take,coincidentally,the amount Treasury is missing from its annual forecast.

David Cunliffe does not have a policy that is going to help grow our export sector, all he wants to do is identify who has some assets that others are envious of, and introduce a tax.

Where is a policy that reduces the cost of running the bureaucracy, a policy that encourages welfare dependents to move into the work force and pay tax, a policy to ensure student loans are repaid in an economically sensible time frame, a policy to stop the insidious growth of Local Government's Debt mountain.

The CGT that Labour propose will do two things for certain, increase the income of Tax Planners (who will find novel means to avoid it) and make absolutely no difference to the Governments tax take.

can somebody please explain what Mr Cunliffe means when he says "according to the BNZ and Real Estate Institute about 12% of speculative house buyers, all house buyers last year in Auckland came from non-resident foreigners" ? I don't understand him !

Don't worry. Nobody understands him.

Clarence, and others; you should worry very much that nobody understand Cunliffe; the economically illiterate electors, nearly 40% of the polled voters, believe in him or his ilk.
Interesting that his CGT does not seem to include Trusts, too many Socialist politicians and their chardonnay wives holding property in Trusts perhaps.

Also not to confuse the secret trust Cunliffe set up for donations from anonymous donors to help him become the Labour Party Leader.When challenged, he refused to name his secret benefactors.

There has been no suggestion that trusts will be exempt. The proposed tax will apply to all residential property sales other than the tax payers prime residence.

My understanding is the Labour CGT will include Trusts but will exclude a family home that is held by a Trust which would otherwise be subject to the tax as the owner does not use it as a family residence.

Think that's bad.The Green Party want the same 15% then inflation adjusted yearly.Cunliffe says the family home will be exempt,.'except once inherited,then on sold CGT will kick in.Seems that goes under the heading of a secret CGT, Labour Party agenda,an INHERITANCE TAX.

This is the real issue here - if the CGT is on a realised gain, then surely an inheritance's value is only realised one you sell it.

The man is an idiot. Someone please tell him there has been tax law in place for decades which taxes gains made from property speculation. And at a much higher rate than he is proposing. What Cunliffe is proposing will actuall y reduce the tax speculators pay now by about half. What a muppet.

Mark - you deserve a medal !
You are quite correct yet no one reminds the muppets of these salient points. Go figure.

all that is needed is greater enforcement of the current tax on capital gains from people who buy and sell property within a short period of time (-10yrs) and dont live in that house. That tax is greater than 15% already. The laws are already there, tighten their definition if needed, but a new tax is not needed. Presumably losses would be tax deductible too

Good point Mark. This is one of the massive holes in the proposed CGT. It is obvious that Labour is seriously underdone in its detail behind this tax and have taken bit and pieces rather than thinking about the tax in totality.

As somebody who would personally be hit quite hard by this. I still agree with concept of an inheritance tax. It is painless for the person paying it and the kids still get a windfall comprising the lions share of a residual tax paid estate. It would result in a few ppty trusts been part sold down to pay taxes, increase market liquidity and create opportunities. Also if handled well it might fund some tax cuts on income for the living which is when you want them.

Just put in a price ceiling while your at it Dave. I am sure it will do wonders!

Everyone knows the main attraction to invest in rental property is the attractive tax free capital gain. No investor I know puts the yield from rent as the main motive.
As nearly all property investors and speculators are National supporter, National will not touch the out of control property market with a barge pole. Good on Cunliffe, Peters and Norman for having the guts to tackle this very serious problem we are facing.
I will be voting for one of these three just because of Nationals housing policies after voting for National last time.

Hurrah! A tax cut!!

Labour's CGT will result in an increase in house prices, not a decrease .Why? Because every other asset class will be subject to a CGT (farms, shares, businesses etc) but your home is exempt. Those who don't own their home need to buy to take advantage of this tax exemption. Those who already own a home should look at putting more money into upsizing their home - a 10% tax free capital gain on a $500000 home is a third of a 10% gain on a $1.5m home. This is a major reason Australian city house prices are so high. For Cunliffe to claim Australian house prices would be higher without a CGT is hilarious.

The one thing that a CGT has shown, in all the countries where it exists, is that it has utterly failed to reduced house price inflation by so much as $1. It couldn't even stop the GFC.

That Cunliffe and the Labour party are hell bent on introducing a tax that doesn't work across the entire nation in order to reduce Auckland's house price inflation screams out their profound economic incompetence. If anything is disgusting it is that they consider themselves fit to run this country.

One could assume Cunliffe means a general capital gains tax on all property gains as opposed to the existing one which has more exceptions than application. The first version will probably try and exempt residential homes but this is probably not necessary.
From a governors point of view its not a bad move.

Just another instance of DC being disingenuous. As Mark has stated above, the tax law already taxes gains made on speculative investments including land. If DC didn't already know that then I question his intelligence and or his advice. If he does know it I question his integrity (ah yes, yet again).

The taxation of land investments is now on a footing with most other common types of investment (probably debt instruments like bonds aside). The solution to the housing problem in NZ lies in getting the supply side working, not in trying to manipulate the demand.

If he is serious about a CGT is should include the family home - CGT is a tax on capital gain - why should the home be sacrosanct? whay should I be able to make a massive gain on my plush Herne Bay home without it being taxable? He needs to grow some kahunas and stop talking about it exempting the family mansion - maybe put a tax free threshhold on it but don't exclude it. Also don't exclude the non-productive assets like artworks etc that in 2011 they proposed would be excluded.

Also, if he really grows a big pair he could start talking about using CGT as a replacement for some of the existing income tax, rather than just another tax grab on top of the proposed grabs they have already announced. When 78% of the income tax is already paid by 12% of the populus one would have thought that might be getting somewhere near 'enough'.

The current CGT is clearly not working, and too costly to police. I applaud politicians who are prepared to make hard calls.

CGT will affect me, as I have a number of houses.

This country is in the financial state it is in because we have had soft politics for the pass 3 decades. Multi nationals and overseas interests have fleeced us in between times. They dont play fair, using tax havens to avoid taxes.

If you want to blame anyone, its Roger Douglas; whos ignorance and continued arrogance has seen this country looted started by Fay & his merry men.

Ask yourself how can you collect enough tax to run essential services when half the country is owned by overseas interests who dont pay their fair share. .

Cunliffe is correct. I know of one Chinese property investor who recently bought 10 houses in Auckland and they live in Singapore.

Investment property deemed gains should be taxed as income. The important comparative point is that managed funds are taxed on 'capital gains' on the fair dividend rate deemed gain even if not sold. Investment property owners should also be taxed in a similar way. Beach houses and foreign owned properties are investments. All tax is unfair but it should at least be evenly unfair.

Non-resident buyers are an issue for house price inflation, particularly in Auckland (4% of buyers overall equals around 10% in Auckland given their concentration here). Furthermore, they are getting a free-ride on the rest of us taxpayers here (their house values are influenced by local schools, roading, policing, and NZ's laws and security, all of which are funded by resident taxpayers). This happens whether they are Chinese, Brits, Yanks, Aussies or Kiwis living overseas.

But the solution isn't a ban or a CGT. The Government should levy an annual tax on the capital value of properties owned by non-residents.

This is actually very easy to implement and almost impossible to evade if done properly:
1. Levy a 5% annual tax on the capital value of ALL property in NZ. Impose it through rates bills and give the IRD and Councils the power to sell the property to recoup unpaid taxes On average this is around $30k per house in Auckland. This is similar to the annual income tax on an individual earning $130k who lives here.
2. Then waive the tax if owners can prove to the IRD that they are NZ tax resident in the past and current tax year (proof is easy, just match ownership at Land Registry with your IRD number).
3. Don't allow sham corporate vehicles or Trusts to get around the tax (follow the UK example and impose penalty taxes if this sort of vehicle is used for house purchasing).
4. Tax evasion is already illegal, but to add extra teeth make it explicit in this case and extend liability to all lawyers, accountants, real estate agents and other residents that assist an offshore buyer to own and not pay the tax (e.g. no trusts, no agreements with someone else owning the property on your behalf etc).

To me this would both reduce demand from new offshore buyers and also provide considerable extra tax revenue to NZ with no growth drag (i.e. these people currently don't pay any tax here and contribute nothing to our growth). So it really is a free tax lunch. And we lose nothing if these owners choose to sell instead of pay the tax because they don't live here or pay tax here currently - in fact this brings more inventory to the market so reduces house price pressure.

And it has no impact on inward foreign investment into real businesses in services, manufacturing, technology etc. Currently rules continue to apply there and anyone who claims that businesspeople will stop investing in NZ if they can't buy a tax free house here as well is just being ridiculous.

If you say that 10% of the annual buyers in Auckland over the past 5 years have been offshore, and assuming around 30k houses purchased in Auckland annually, then you could be looking at significant annual tax revenue (in the low hundreds of millions of $ per annum).

Now I'm not a tax practitioner but to me this really is a blatantly obvious and simple solution, one that helps our tax system (money can be used to invest in rducation or reduce taxes etc), and one that comes with no voting penalty to the party that proposes it (offshore residents, unless Kiwis, don't get to vote; residents here see no impact other than potentially lower income taxes or better schools and hospitals, combined with lower house price inflation).

All tax is unfair?

Dude, that's about as ridiculous as "property is theft." Except that it's true, inasmuch as private ownership axiomatically deprives someone of something.

You've obviously never played poker.

Asset speculation for profit is taxed at marginal tax rates already. Every new tax increases costs. New taxes have their own bureaucratic costs too.
I say eliminate all income tax and replace it with a simple tax on all labour and capital costs at their source i.e. on the total monthly payment of wages, salaries, contract labour , interest , rent, and dividends. As far as property is concerned, all borrowers paying interest on their property debt would pay tax on that.
This would hugely simplify taxation. Eliminating income tax completely and make a costly to administer CGT unnecessary too.
Cunliffe has no imagination. He is just another Labour Marxist who wants more and more taxes when central and local govt. already spend near 40 % of GDP. But to be fair, national isn't much better.