Report Looks at a Capital Gains Tax (AGAIN)
THE RENTAL PROPERTY MARKET IN NEW ZEALAND IS DUE FOR A BIG SHAKE-UP
Most of us are probably aware of this. For months now the government’s focus on Healthy Homes and some of the likely changes to the laws governing rental properties, have been reported across various media.
But what seems to have slipped under the ‘big news’ radar is the interim report released on 20 September by the government’s Tax Working Group. Headed by former Labour deputy prime minister, Sir Michael Cullen, this group has been tasked with reviewing New Zealand’s tax system, including its structure, fairness and balance as it applies to wealth generally, and to capital income specific ally. This includes looking at the merits of extending the taxation of capital income to asset classes previously exempt from capital gains, including paying tax on profits when selling properties. On a brighter note, increasing the income tax rate, or the rate of GST, implementing an inheritance tax or any changes that would apply to the taxation of the family home or the land underneath it, are outside the Tax Working Group’s mandate.
The Tax Working Group have considered 6,700 submissions lodged between 1 March and 30 April 2018, and the report notes that many submitters have been concerned that tax-free gains on houses encourages New Zealanders to place a high proportion of savings in land and housing, leaving lower New Zealand savings for other forms of investment.
Is any of this relevant to rental property investors and to the rental market?
It might well be. Although the report did admit it was difficult to quantify the impact of the New Zealand tax system on house prices and rents, mainly because the housing market was subject to many different influences and there is very little definitive evidence available regarding the tax impact on house prices and rents in New Zealand. However, the Tax Working Group did agree that some features of the current tax system – such as the inconsistent treatment of capital income – have probably exacerbated the house price cycle (even if the tax system is not the primary cause of unaffordable housing). This means that any extensions to capital income taxation, such as the introduction of a new tax on capital gains from residential property investments, will likely impact the housing market, including probably putting upward pressure on the ratio of rents to prices – in other words, it’s likely to cause rents to rise.
Taking a lead from across the Tasman hasn’t been ruled out either. The interim report lists examples from Australia, which could herald the development of similar taxes in New Zealand,including ‘vacant land’ and ’empty house’ taxes. These are seen as one way of improving housing supply and affordability, but the report also notes that the introduction of a tax on vacant residential land, or on empty homes in residential areas, would likely intensify the use of existing urban areas – thereby creating another set of problems.
The interim report stops short of making a definitive recommendation on the introduction of a broad-based capital gains tax on property and sharemarket investments, but it is still early days. Sir Michael says they know that extending the taxation of capital income will have a range of advantages and disadvantages, but that the group is still weighing up all the issues.
The final report will be published in February 2019, and the government has promised several more rounds of reports and public consultation before the final decisions are made by cabinet. However, as the appetite for any proposed changes is likely to be tested at the 2020 election, it would appear that the implementation of any new tax laws is unlikely to happen before the start of the 2021 tax year.
Our best advice is to get the best advice. There are some very skilled tax accountants and tax lawyers who specialise in the residential property marketplace; make sure you are working with experts.
We started off this article by talking about the new ‘Healthy Homes’ legislation. If you are a residential rental property owner and you’re not aware of how this could affect you and your rental investment – then you need to know now!
Talk to the experts. For free, informed and practical advice on any aspect of residential property management, including Healthy Homes, given Quinovic Parnell in Auckland a call.