By Hannah McQueen*
I love property. I love it because of the immense power of leverage.
You put in, say, 20%, the bank lends you 80%, but you get to keep 100% of the gains.
When it comes to generating investment returns, that's powerful. In addition to that, what it costs you to make the 100% - the weekly top-up you have to pay to cover the shortfall in rent vs outgoings, is tax deductible. So, if I have to put in $100 per week, I then get $30 back. As a tax expert and adviser to many clients, that is a beautiful thing.
Given that passion, it might surprise you to learn that I think a Capital Gains Tax is actually a good idea, whoever is in Government after Winston makes his choice.
I'm well aware that implementing a Capital Gains Tax has long been considered to be political poison because Kiwis' love affair with property has been paying them serious, untaxed dividends.
Reserve Bank figures show exactly how serious. Between September 2008 and the end of March 2017, (the last three terms of the National Government) there was a $320 billion rise in the value of housing and land, untaxed.
That $320 billion is more than the entire country generates in a year, just in property gains, and represents a serious increase in wealth for property owners. The return on investment property is up to 300% higher than other investment options where you can't use leverage.
But it's time these phenomenal gains were taxed. Not each year, but when you sell.
Yes, there should be an exemption for the family home, and I think the longer you own the property, the less tax you should pay. I do get that the landlord takes on the risk, so they should get the return, that it's easier than you realise to buy a lemon, and that tenants can be painful. But a tax on money you would never have earned without the strength of our economy, needs to feed back into the economy somehow. Even if it is just a little. A smidge. Something.
International evidence suggests it won't have any long-lasting effect on property prices - these returns are enabled by bank lending policies, not the government tax policies - so why are property owners so petrified?
We should also prioritise New Zealanders. People who are not New Zealanders who buy in our country should be taxed a whole heap more. I am sick of travelling to other countries and seeing New Zealand advertised on their TV screens as an amazing place to invest, where it's easy and tax-free. The irony of this is that they will be taxed in their own country when they sell the property, even if they don't pay tax in New Zealand. So, their country benefits from our growth, but our own economy doesn't. That's ridiculous.
A good tax system needs to be fair, and ours isn't. The Tax Working Group assembled by the National Government reported as much in 2010, saying there's a "major hole in our tax base concerning the taxation of capital", which results in the tax burden being shouldered by wage and salary earners.
The implication of this distortion being, why work and pay tax when you can borrow money and own property? Why indeed. The strength of any economy is based on the middle class doing well and when they are struggling the gap between rich and poor widens, and that puts downward pressure on any economy. Pretending it won't, doesn't mean it doesn't. Whereas, when the middle class is thriving the economy does too.
Sir Paul Callaghan says what New Zealand needs is 100 great companies.
But creating 100 great companies will take innovation and innovation will take capital. You need a whole lot of cash.
How can our businesses have a shot at growing when it makes little sense to invest in them over property? There's more debt against the housing market than the entire capitalisation of the share market – a place where companies go to raise capital.
It's easier to get a property loan than a business loan, because banks want security, and their preferred security is always property. If we don't incentivise people to invest capital in good local ideas, then it ends up being sold to someone in another country who has the capital to grow that idea. I don't blame the innovator – but imagine if our great ideas had more capital behind them to become rock-star companies based in NZ, self-propagating more growth? Genuine growth. Not growth brought on by inflation or immigration. That's not growth. That's a Ponzi scheme.
As a business owner who also advises many other business owners, I know better than most that it's laborious work and if you've managed to build a high-growth business, cash flow funding is relentlessly hard. As a Masters of Taxation Studies, I also know a bit about tax. As a mum, I also want my kids to have a chance at success because we live in a fair system.
So, if the politicians' aversion to upsetting property-owning Kiwis remains, it's time Kiwis led the charge. Ask yourself, would it really be such a bad thing if there was more capital for businesses to grow and be better and a little less tied up in housing?
*Hannah McQueen runs financial coaching firm EnableMe.
31 Comments
"That $320 billion is more than the entire country generates in a year, just in property gains." - Sounds about right.
"Yes, there should be an exemption for the family home" - Err....most of the above $320 billion is tied up in the Family Home, and you want to exempt it? Why? If Home prices don't change, no one pays a cent in CGT. If they go up 10% then 1%, of only the gain, gets taken as tax to the benefit of the New Zealand economy. Isn't that just what you are arguing for, Hannah?
Of course!! You own a Family Home don't you, Hannah, and whilst taxation of other New Zealanders is good, it shouldn't apply to you, should it......
That is $320 billion that the middle-age and older generations along with foreign investors have reaped at the expense of younger generations. The younger generations are going to have to pay for that "good fortune" through higher property prices. This election was one of the last chances to redress the injustice by making lower priced houses available to FHBs. I fear that greed won and that opportunity is lost.
The totally ironic thing is - it was Aucklanders that delivered the election majority to National (the place with the worst of the worst problems). There is just too much debt up there for voting folks to vote for any kind of change. Problem with farming seems to suffer from the same issue. 'Steady on the tiller' because if the wind changes, we're in for a whole lot of heartache.
The perversity of Auckland voters. They have serious problems in Transport, Housing, Health and Education. When offered the options of (a) draining the swamp and making inroads into making life bearable, or, staying with the creators of the worst of the worst problems - They voted in increased numbers to stay with the problems which they know can only get worse
Dont come grovelling in 3 years time for a drained swamp - too late - WP will be gone
um, have you thought about maybe it means the majority of the people actually living in Auckland is happy and it's just Labour putting a number of dead cats on the table and making lots of emotional sound bites out of them to win votes? Haha I mean come on, radical change of government to a group of completely inexperienced one just because some rivers are dirty while in other countries there are food shortages, hyper inflation, record unemployment, record murder levels etc. And it's not like National or the farmers are being arrogant, ignoring the pollution issue and hasn't been doing anything about it. You are pulling my leg. I wouldn't trust that old sly to look after my dog.
Stev-O. - Ex-Expat - you may well be right but as one or two esteemed posters on here have stated, maybe the voter is stupid and doesn’t know what’s good for him/herself....that they should ignore their own circumstances and comfort with their own lives and do as they’re told...but they didn’t and I think that analysis explains the surprise for some
indeed and well put Stev-O. - Ex-Expat and Grant A ... maybe the results of this election should finally show people in the regions what exactly JAFAs think of some of the deplorable emotional blackmail freely dished around during this campaign .... as much as they despise all sorts of crocodile tears poured out in their favour ,
But thank you Kate for bringing that up !
I don't have a big issue with CGT in general, it is being floated that it should be revenue neutral and be somehow compensated with reductions in GST and PAYE ...My problem is TRUST !... how do we know that that money will not be spent on some ridiculous projects, enhance and feed the addiction on benefits, throw in endless money in black holes of studies and silly self service benefits to the Gov of the day - after all we have seen that in the past especially when money goes into pools and gets out of the control of payers .... and inflation surely has to be accounted for .......
While CGT might be, or Not, a good thing, it will surely freeze the property market in a time when it is already Stuffed !.... ( talking to some player in the building and commercial industries today , the situation is worrying to say the least !!) ... the most people losing by these measures ( be it lending restrictions, CGT, LVR etc) are, and will be, the FHBs and small property developers like Sian in the Stuff.co.nz article yesterday And prices will go UP.... no matter how many more dead cats are put on the table !!
I get the sense at times that my voice no longer counts in some circles because I’m male, pale and stale. Thank goodness my vote still counts. My ‘comfortable’ Postcde 1071 reality is:
My youngest child is well educated at a local state school with no teacher shortages.
My parents and In laws have received good public medical treatment for cancer and strokes without delay. My elderly father is on a waiting list for a hernia operation but accepts it’s not urgent at his age. I failed to get personal cancer screening paid for by the tax payer because I don’t have enough risk factors. I accept that I can pay $4,000 myself for the test or wait until I’m older. That’s life.
My daily car commute has increased by 2 minutes, to 23 minutes in the last 14 years. I chose not to take public transport, because I prefer my car. I pay for the privilege without moaning.
My travel times around Auckland are perfectly acceptable. I get to the airport on time, I travel on the motorways at non peak times and the weekend, without incident. I accept that coming back into Auckland at 3pm on a Sunday will be slow at Drury and going out of Auckland on a Friday night will be a nightmare. I rarely choose to put myself in those situations.
My local infrastructure is in great condition. My local roads, footpaths and amenities have no deferred maintenance whatsoever.
My personal financial position is comfortable, because I earn well, budget and save.
My house is a store of wealth, not a piggy bank. I don’t feel guilty that it’s increase in value has not been taxed. I certainly pay my share of taxes in PAYE with no deductions. It would approximate 40% of my income if I spent everything I earned.
I don’t support tax reform that will tax me on my assets as I don’t have earning years to see the concurrent PAYE benefits. Bite me if I want my children to have all my assets when I die without envy taxes.
I want my future generations to have housing, but I have no idea where and how they will live. My best way to assist them is to give them an inheritance. I won’t blow it on reverse mortgages for European holidays.
I look at my personal housing situation and see some timing luck, but a lot of graft as well. Savings paid the mortgage off and weekends are still spent on DIY maintenance as I don’t like paying others to do what I can do myself.
I see no obvious way that ‘affordable’ housing can be built based on what I spend for materials and have been quoted for minor jobs. If I was young again I would do exactly what I did when faced with an expensive housing market in 1988 i.e. move away.
I’m staggered by the migration numbers but enjoy the diversity that comes with it. I’d like more time for NZ to assimilate but won’t vote on a single issue.
My wife works at a Decile 1 school and sees none of the food issues cited in the papers. She does see families in stress, but is amazed by the resources put into at risk children.
My local environment is fine, although I wish wood fires were phased out. My inlaws farm beef and have been environmentally aware for the 25years i’ve known them.
In short, I have no reason to vote for change unless I see someone with a better plan for NZ than the current mob. Your opinion will very likely vary if you post on this forum.
I asked an Aucklander who I had met recently through business, what their take on Auckland was given what was written/said about it's woes prior to the election. They were from a younger generaiton - not a baby boomer, but basically said the same as what you have said ex-pat. They were a born and raised Aucklander and wouldn't live anywhere else.
Three observations. First, you have incorrectly described your house as a store of wealth, when it is in fact a source of (untaxed in regard to capital gain) wealth. This error suggests a lack of understanding of your own reality. Secondly, you make the mistake of using the wrong metric to measure who has "a better plan for NZ". A plan for NZ should be avaluated on its impact on NZ. To evaluate such a plan on the basis of its impact on a self-described 'comfortable' individual in Postcode 1071 suggests the possibility of an unhealthy degree of ego-centricity - or maybe just a lack of knowledge of statistics. Third, I'm guessing that you are not a fan of either Samuel Johnson or Tim Minchin. This would explain a lot.
No, no, no! You miss the whole point of the exercise. That is - Spend MORE than your earn, leverage up your risk investments and that overspending is accommodated by the tax efficient capital gains. That....is job done.
(NB: Sarcasm doesn't come into that comment. It's how The System is designed to work, and it has, until now. But eventually, all the tax efficiency and leverage in the World runs out of capacity to expand beyond income levels ( the ability to spend) and then ....it's game over. The only question is: How much longer will it be before it dawns on even the most uneconomically minded of us that the Magic Money Tree died some time ago ie: 2008?)
Yes, it's all a little odd. EnableMe comes across as you describe and looks no more than another spammy and parasitical extension of the money tree economy. But you look at Hannah's solid education and her time at KPMG and you wouldn't expect her to be another white shoe warrior (not that a masters degree in taxation and doing audit work at an accounting firm makes you beyond reproach).
Would this kind of consulting turn to dust if the money tree economy suddenly or slowly died? Does she account for any risk whatsoever and how does that fit into her formula? Have our top graduates and Big 4 alumni drunk the kool aid or has NZ (and Australia) perfected bubble economics based around suburban housing?
There we go again---"as a business owner I know better than most" and it goes on.
Every now and again these so called "know it all experts" come out of the wood works and says "i know it best-capital CGT is a must". What baffles me is- dont we already have one? Anyone who trades for a profit must pay tax on any gains from such trading. What if the current traders stop selling and just hold on to them to avoid CGT? Will it not exacerbate the current housing shortage as there will be less property for purchase and which will lead to even higher house price inflation. There is no CGT for a good reason otherwise both main parties- National and Labour would have brought it in long ago.
If we do get silly and become masters of taxation and bring in a CGT, excluding the family home would be a waste of time and effort for reasons already stated by someone in this blog.
There we go again---"as a business owner I know better than most" and it goes on.
On matters of taxation, she likely does do better than most, but it is fair to say that she doesn't really know the impact on behavior and outcomes modified by changes in behavior from the implementation of a CGT. The argument that countries with CGTs still experience speculative activity is somewhat moot.
of course tax experts want more taxes, they make more money. I also think if you are in the business of renting properties you should pay tax and you do. But once you apply a tax on profits which is a good idea you have to apply it across all business not just owning a house. If you want to earn a good income sitting on your bottom become a tax return consultant!!!
On TV this morning, it seemed clear that Hannah wanted a comprehensive CGT on all properties including owner-occupied. Regardless, let's look at 2 cases to see if we all understand.
Example 1: I buy a property for $500,000 and in 5 years time I sell it for $600,000. There will be CGT on the $100,000 gain.
Example 2: I buy a property for $500,000 and spend $100,000 fixing it up and modernising it. In 5 years time I sell it for $600,000. Will there be CGT on $100,000?
In both cases, do we take off the Real Estate commissions before working out how much is taxable?
If owner-occupiers are included, will they be informed exactly how to keep their property records i.e. in as much detail as a property investor would for their accountants?
"... But a tax on money you would never have earned without the strength of our economy, needs to feed back into the economy somehow..."
I don't believe property owners have made money from any supposed strength in our economy. The virtues of NZ property have become apparent as incredible levels of immigration have driven demand and the NZDs declining value when measured against almost anything other than fiat currency. Property owners have no control of either of these factors. I believe the NZD gains in housing are not real gains. They are partly due to increased demand from immigration - impacted by uncontrolled world population growth and overseas strife and to the declining value of the NZD.
What strange logic. So you think that if any capital asset increases in value you should tax it. Hang on no not houses that you call family home. So if I have two families (like lots of people do) then I can get away with two houses? What about my shares or the good will in my company? What happens with holiday homes or for that matter what happens with my time share. Of course you will be ignoring the fact that one of my syndicate properties was purchased at $19 Million and is now worth only $14 million. Will IRD give me some money back in cash. What happens with my rotten old rentals that I have to demolish and build new. The IRD calls that a capital loss because we can not depreciate it now. Of course if there was some utopia in the world that had capital gains tax and no rampant property price increases I would agree, Of course if there was such a weird country in todays world, no capital gain tax would be payable because their economy was so bad the property market was stagnant.
The biggest problem we have in this country is not the high immigration it is the immigration of people who come here from other countries where things are bad enough to leave but then those immigrants want us to copy the broken system they have escaped from.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.