By Alex Tarrant
A capital gains tax on 'absolutely everything' would work in a perfect world, although no politician has the guts to introduce one in New Zealand, Prime Minister John Key says.
Speaking to a KPMG tax briefing in Auckland on Friday, Key told the firms' clients why he was so opposed to Labour's and the Greens' Election 2011 capital gains tax policies, which would have exempted gains on owner-occupied housing from being taxed.
"I hate capital gains taxes – I just don’t like them. The reason I don’t like them is that, in political terms I don’t think they work," Key said.
If government was prepared to do with a capital gains tax what had been done with GST – put it on "virtually absolutely everything with no exceptions - they work well."
“Because, in theory, if you earn NZ$100,000 from going out there and having a job, and you pay tax on it, well fair enough. If you earn NZ$100,000 from buying a property, well you probably should pay tax on that – fair enough," Key said.
“But this is where the problem comes along, and that is, that no politician has the guts to do that. Because they go, ‘well that’s a vote-loser.’ They turn around and say, 'OK, we’re going to have exemptions - the exemptions are all private housing,'" he said about Labour's and the Greens' policies.
'Rich guys in Parnell smarter than the left'
The fact that three-quarters of housing was owner-occupied, and would therefore be exempt under those proposals, meant their argument that a CGT would discourage investment in housing was "nonsense."
"The theory is they’re going to sock it to rich guys who live in Parnell – so they’re going to really nail them. But actually, those rich guys in Parnell are way smarter than the left, because they’ve already worked out to buy a big house in Parnell [which] would be exempt," Key, himself a wealthy Parnell resident, said.
“So [those house prices will] go up faster, not go up slower.”
"It encourages people to go into housing; it doesn’t discourage them," he said.
Key reiterated his argument during the election campaign that New Zealand already had a capital gains tax on housing if a property was bought and sold with the primary intention of making a profit.
"And by the way, IRD are hiring people, at Bill English’s request – it’s always his fault – and they are trawling through these returns, getting lots and lots of money from people who are doing just that and not paying their taxes," he said.
Labour would then apply its capital gains to other forms of investment, including farms, businesses, orchards and shares.
“Well, that is the productive sector," Key said.
“So then you get to a point where you say, well, eventually long-term it raises some revenue for you. OK, what ends up happening is, people just don’t want to pay it. Instead of getting to a point where they have to pay capital gains, which they pay on realisation – when you sell the asset – they don’t sell," he said.
“They sit around forever not selling. And then they even do remarkable things like they’ll give it to their kids. So you’ve got to bring back in gift duty. We got rid of gift duty, I think in Budget 2010, because it was raising us literally NZ$1.8 million a year, and it was costing us NZ$70 million a year to administer."
“In a perfect world, if you’re prepared to put it on absolutely everything – no exceptions, from the boat to the house – it works. But then you’ve also got to lower personal taxes and things, because that would be the right logical sequence of what you would do," Key said.
61 Comments
A temporary scenario, although it might continue for a while yet. The other aspect this is the lower volumes today compared to the peak a the capital gain is only realised when you sell. Do you know if the transaction cost comes out of the final figure when a capital gain is calculated? What is proposed and what is the scenario overseas? Could wipe half of that 10% out, and become a net loss when considered nation wide.
So you want to load up a capital gains tax on the whole country becuase of what's happeneing in a few suburbs in Auckland? If a few vain and contrived 30-something social climbers what to bid the price of properties up in central west Auckland. Let them. But don't make that the rest of the country's problem.
Exactly right , DB .... where you hanging out at , fella ?
.. long time no bloggy-bloggy ... same old CGT now as back in 2012 ... different wastral leading the Labour Party though , Key's seen off 3 of them , one Cunny little blighter to go ...
One day they'll trip over the truth , that we need more houses built , not a CGT ... and then they'll dust themselves off and add a stamp duty to the CGT policy ...
Bernard , I disagree with you completely on the causes of Aucklands price increases . Check out Economics 101 . Inflation cannot exist in a single city ( Auckland ). When it occurs, its countrywide, and by definition its cannot be in one city only. If we had inflation we would see a genaral level of price increases everywhere .
Regarettably , Aucklands price inreases are due to a combination or permutation of 4 things unrelated to inflation
1) Artificial land Supply contraints,( encouraged by speculators )
2) Coucil's excesive rort-like charges in creating new sections , coupled to that terribly restrictive Resource consent Act
3) Net migration from overseas and Chch into Auckland
4) Ridiculously low borrowing costs , the lowest since WWii
All this creates supply side contraints , and demand pushes up the price , not inflation , not rocket science , just plain old laws of supply and demand .
The market is actually now disotrted( possibly even dysfunctional ) , because NZ economic fundamentals have neither changed not improved
As i have said before , I am disappointed that John Key's Gvernment has not had the balls to address the problem by forcing councils to change their ways
I am not opposed to a CGT in principle but the horse has already bolted. It should have been done thirty years ago, or at the same time the gold standard was killed. I more effective way would be to take care of the offshore money coming into the market, then all we have to do is ride out the Christchurch relocation, which will be a temporary affair. Targeting leverage would also have a greater impact IMO. Put it another way, if you allow crooked money then what is the point in allowing a few band aids to give it credibility.
“In a perfect world, if you’re prepared to put it on absolutely everything – no exceptions, from the boat to the house – it works. But then you’ve also got to lower personal taxes and things, because that would be the right logical sequence of what you would do," Key said.
And if we were to "lower personal taxes [PAYE] and things [GST]" we might also be able to get rid of in-work tax credits [WFF] as well. But that might be too "logical".
"that no politician has the guts to do that. Because they go, ‘well that’s a vote-loser."
He says no politician has the guts to do it...
But other parties say they will...do they have more guts than Mr Key?
My other problem is this shows that he is more interested in being in power (votes) than doing the right thing for NZ, whatever that thing may be.
What the PM above has said is correct, although the wrong thinking Left would rather choke on it first than admit that. But let's focus on one of the real issues here.
"And by the way, IRD are hiring people, at Bill English’s request – it’s always his fault – and they are trawling through these returns, getting lots and lots of money from people who are doing just that and not paying their taxes," he said.
As I understand it, IRD are already gathering upwards of $100m in capital gains taxes from property investors in NZ from our already existing CGT law. So those who repeatedly say that there is no CGT in NZ are lying - no doubt in the service of advancing the Left's political agenda in this country.
Well far from laughing at me, given the frequency and speed that you, scarfie and a few others respond to everything I post here, it would seem that you actually hang on my every word, and you can’t help yourselves. It's good to see that you recognise your betters and superiors!
If you buy in order to sell than you have to pay tax, sure but that isnt a universal CGT If you buy but just happen to make a profit when you sell say your farm say 30 years later you pay no tax on the sale, thats pretty much unique in the developed world, even the USA has a CGT?. In the meantime load up the farm with debt so you get tax relief and WFF....great scams if you can get away with it....a universal CGT stops the dodging.
In terms of "$100million", the CGT "proper" aims to collect far bigger sums that are not taxed at all, or make trying to dodge tax by this method moot....
Left agenda, sure, if you want....level playing field as far as I am concerned, no matter who you are or what you do, everyone should be paying the same level of tax for the same income, seems fair to me.
regards
Assuming capital losses will be deductible then how does a CGT reconcile with your prediction of a 50% fall in house prices ?
There is plenty of legislation already in place to deal with gains on assets - the real question should be why has the IRD been so hopeless in enforcing it ?
Bring in Window Tax,It is very easy to count windows, larger houses tend to have more windows and cost more so the tax is progressive. The glass manufacturers lobby will then have to work hard to influenece policy against it. But they might be countered by the Brick makers lobby group. So it will be a hard one to pick.
In the end to me it is important to understand that we need to tax many things at very small rates rather than a few things at high rates because very low rates mean less people are willing to work hard to avoid them.
So a low GST is Ok but 15% and higher is very silly.
PAYE is Ok as long as it is progressive and also that it is not too much
Likewise make cigarette taxes too high and we are going to see a whle new wave of crime.
To make it all work we are somehow going to have to come to terms with the idea of taxing doing stuff" ( transaction taxes like GST and PAYE) less" and staring to tax not doing things- like owning land and not doing anything at all in particular. So a land tax- at a low rate is essential.
It is easy to get, easy to assess, gets everyone, can solve the problem of old people- defer the tax till the estate is sold off. And it helps with intergeneration inequality. People will come out stroongly against it and use old people as a cover for them wanting nana's house for free
Daylight robbery - the Brits tried that once - http://en.wikipedia.org/wiki/Daylight_robbery#Daylight_robbery
This is how capital gains tax works in the UK:
- your principle private residence is exempt. Although note that there is a purchase tax on all properties, stamp duty, in the UK.
- costs of buying, selling and improving are deducted from the gain
- you have an annual personal allowance (currently GBP10,600 each) so you don't need to pay for the first part of the gain. If you are married and the asset is shared, you can use both your's and your partner's allowance
- there are exceptions if you are a business owner selling you business or re-investing in similar assets
- any capital losses can be carried forward against future gains
In summary, you have to make a significant gain on final disposal to have to pay CGT.
does key know that some of the parnell rich are now behind bars after the finance company fiasco and there should be more to follow.
maybe this is another example of key being weak and not wanting to face reality something which seems to be prevalant in his second term.
two term johnny
"The theory is they’re going to sock it to rich guys who live in Parnell – so they’re going to really nail them. But actually, those rich guys in Parnell are way smarter than the left, because they’ve already worked out to buy a big house in Parnell [which] would be exempt," Key, himself a wealthy Parnell resident, said.
The Prime Minister is a buffoon - He has single handedly labelled Parnell's rich as tax avoiding sociopaths along with their advisers.
Maybe we can resort to publicly labelling these citizens that are habitually derelict in their duty to society if the PM is so knowledgeable about their existence.
What Key is saying using his normal mangled syntax is that capital will flow to the most tax favoured places and if you bring in a capital gains tax and exempt private housing people will put more of their money into their owner occupier residence That will tend to result in even greater tax free capital gains in the leafy suburbs.
There will be less investment in rental housing ( which at least assists in providing people with somewhere to live ) and less in the productive areas of the economy. A capital gains tax with exemptions will accentuate the distortions we already have.
These statements make him a candidate for a public speaking course but they dont make him a buffoon. He will also be aware of all the other ways people with resources get around capital gains taxes but the arguments get a bit complex. The one he has used here is just the most obvious problem with the proposal.
the parnell rich also have the tendancy to break the legs of people they disagree with - sometimes using a car to make the point. They are clearly not to be messed with and tax for them should be optional.
So lets
Bring in a land tax- not optional- we will then not need to care which fake entity, onshore or off shore, company or trust etc pays the tax just so long as it is paid.
Last few years there has been this ideal that landlords and property owners should be bashed with anything possible. Including Capital Gains Tax.
The supposed result was a drop in house prices, plentiful housing supply and cheap rents.
Really ?? Like how ?? Don't think so. How would that happen as the result of a Capital gains tax.
I don't think the proposers of that move gave even a thought as to how the mechanism would work. Usual Kiwi gut respose of giving a misdirected kick/bash - in the absence of any other idea. Nasty bunch us Kiwi's
Thank you for your reply. My point is a reasonable one,
We need to not tax doing stuff quite so much. And tax not doing stuff a little bit to make up the difference.
In New Zealand we heavily 'tax doing' stuff through GST, PAYE Comapny Tax etc.
Yet "not doing stuff " is not taxed at all. By not doing stuff I mean Land that is just sitting there going up in value because of all the work that people 'doing stuff' put into it.
Often this is hard for people to understand because we are locked into the idea that Tax has something to do with the act of 'doing' or transcating or consuming. But tax can be apportioned to anything you like, eg windows.
My point is that if we keep on putting the tax burden sloely on doing - don't expect people to do much ( or to arrange their affairs so as tpo look like they do not do much)
A much fairer growth orientated tax system would lower the burden of tax on 'doing things' and actually put some of the burden on owning things- the best one to work with in this area is a land tax.
Why a Land Tax
It is easy to administer
You cannot hide from it
It takes into account a whole lot of stuff about where the land came from and how we got it.
( this bit is a bit deep but you can read about it here- this link has been referenced by others on this site.- www.nuffield.ox.ac.uk%2Fpolitics%2Fpapers%2F2004%2FMcLean%2520Land%2520…
or search
Land tax: options for reform By Iain McLean Professor of Politics, Oxford University
It does not matter what sort of entity owns the land the tax applies- the government does not care who pays the tax- only that it is collected.
We have allowed a system that forces out a great deal of the vigor of New Zealand and retained a great deal of rent seeking behaviour. This is to our cost as a nation.
It is important stuff. I was being flipant in my comment. I am not however kicking land owners rather I am saying that they are getting an uneraned benifit from the work of many others who are paying and it needs to be evened up.
Won't apply to REAL businesses! All it takes is a simple Clause in the legislation stating:
"Any business producing a physical product or services for export/ and or domestic market that implies GST will be exempt". Any perceived profit outside this criteria coming from ownership of lands or buildings outside the 1 family home is subject to Capital Gains"
I am not really in avour of a CGT - very hard to make work. A land tax is much easier to work with captures everyone and could be set very low and achieve a great deal. At the same time transaction taxes like GST, PAYE etc need to come down to a level where avoidance is not important to the great majoirty of people. ( There are some for whom paying anything towards the society they operate in is a no go area eg google, amazon etc)
Maybe put GST on all rental properties just like all commercial properties have a GST on them. So when a property is sold they have to pay the GST on the total cost of the house. Maybe that would stop speculators.
Or GST on all houses not lived in (by the owner) for at least 8 months of the year.
As for Parnell, well, if a 5 mil house becomes 10 mil then their own home is just tying up their money which they cannot use.
I think the general point he makes has merit. An investor could choose to buy 1 residential and 3 investment ppties in papakura, or buy one residential in Parnell for the same price and be better off from a tax perspective. This could certainly lead to skewed demand to more expensive housing. That said, as prices on expensive houses rise, this would mean lower yields so there would be some financial restrint on overcommitting on the principal residence via a better cashflow on smaller ppties - so not sure the degree to which this scenario would play out. Personally I favour a CGT, but it should apply across the board regardless of intent. If it is not intended to be profit making (eg house) then any gain should be viewed as a windfall and you cant complain too much about the tax.
I was interested in Key's comments re IRD chasing investors where primary intention is profit. In my opinion the presumption should be that if you are negatively geared you MUST be buying for gains, otherwise what else would you be buying for given the cash loss???? Put the onus on the investor to come up with a viable business plan to be profitable - you think anyone with a net yield of 3% could do this???
For my part here is what I think is doable politically at the moment and the most productive:
- scrap neg gearing
- provide concessions to savers. Savers get CRUCIFIED in NZ and Aus at the moment. Removing taxes on interest would provide an alternative "safe" investment that beats inflation, even if only by a 2-3%. A 30 year old putting in $100, could expect it to double in real terms come retirement. I'd be happy with that, especially in the post GFC "new normal" environment.
Put this in the mix. Back around the 1980's (can't remember if it was the Muldoon or Douglas era) for a short period of time, property investors cum landlords could deduct mortgage interest in arriving at the net taxable rent, but if and when the property was sold, all the interest paid from inception was clawed back, added back for tax purposes. It was a good system. Didn't last long. Don't know why or when it was discontinued.
Just as a footnote .. in australia .. when hooking up with Centrelink (social security department) or WINZ, for welfare, all intending beneficiaries are required to sign an agreement that permits Centrelink to have access to their ATO tax records. Full data matching between Centrelink, ATO, Customs and State Revenue Offices. Intending beneficiaries who happen to own a negatively geared investment property, and receiving rents find that Centrelink does NOT recognise mortgage interest on an investment property as a business expense, treating it instead as a capital expense and add it back in determining eligibility for welfare payments.
"those rich guys in Parnell are way smarter than the left"
Loved this. Most Accounting 101 students would be able to demolish this argument but who cares? Keys has his hands on the levers so it isn't going to happen.
Much more significant was Key's argument that rich (i.e elite) people are smarter than everyone else. Now this is bullshit - better connected, more ruthless, less taxed maybe but smarter?not necessarily.
This is a nice piece on the cult of smartness being central to the creation of elites in the West:
http://www.thenation.com/article/168265/why-elites-fail?page=full#
It seemsto me Key's speech is much less about CGT than it is about reinforcing that our elite deserves its privileged position. So all the losers can just shut up.
So all the losers can just shut up.
No, just the ones on the Left who havent thought through the unintended consequences of a CGT.
I expect the so called "smart" already have their tax affairs in order so any CGT will have less impact on them and a greater impact on those Labour pretends to represent.
Maybe Keys right about smartness ? Look at this absolute snorter at Telekomm ... sort of makes up for the boss losing his job eh
Outgoing Telecom CEO to receive $1.75m
Telecom's confirmed its outgoing CEO will receive a termination payment of $1.75 million.
It's part of an agreement which meant Paul Reynolds would stay with the company to oversee structural separation and the establishment of Telecom as a separated business.
Telecom Chair Mark Verbiest says the company needed certainty as to when Dr Reynolds would depart and the agreement allowed time to find a new CEO.
Paul Reynolds will also be entitled to Short Term Incentive and Long Term Incentive payments earned during his tenure as CEO - although details of those payments are yet to be disclosed.
'Rich guys in Parnell smarter than the left'
John Key should learn to keep it shut. He’s increasingly sounding like a colonial red-neck relation to David Cameron. The ‘Parnell rich’...talk about big fish in a small pond. ‘Rich’ meaning they own a few NZX shares and a bach in the Coromandel....the dizzy heights!
Do us a favour John and start fixing the real problems in NZ. Only then can start making gloating remarks about your relative position to the great unwashed in your banana republic. Let’s face it John, your biggest contribution to NZ so far was making a National embarrassment of yourself and NZ by grovelling on the Letterman show.
Rant over.
The Parnell Rich are the ones who go out for dinner and spend $65 on a mains (and a side salad) so they do contribute their fair share of the tax burden, all this talk about elitism is nonsense. Leave these 1%ers alone please people they are the ones creating opportunity for New Zealanders. Just last week I say guy in the Ponsenby New World Carpark getting paid $15 to polish an imported Audi A4 while the mutton dressed as lamb owner went inside to purchase the weekly necessities. Now where would that guy be without meaningful employment….?
Lots of discussion (as usual) on CGT and no resolution.
Same old, same old.
An ASSET tax has some positives though I would not expect any coherent result from a discussion here.
Some points:
1. A tax on the asset not the owner(s) so it is hard to avoid
2. Widely applied it can be very low rate.
3. Covers overseas ownership of local assets. No concession to double taxation agreements necessary.
4. The rate can be changed annually in the budget according to need or policy of the Government.
5. Options available to link a concession to the income of the owner who has insufficient income to meet cash demand.
6. Could extend on a FIF basis to NZ residents who own overseas assets.
Yes owners of speculative investments with low or nil earnings would cry foul. So what.
Tax on assets that had not been declared could be based on sale price and number of years owned being at a rate that would penalise to non-declaration.
Takes cover in personal bomb shelter.
Boom, Boom!
Basel
They're probably smarter than key is anyway.
What's his achievements so far? take a country from making record surpluses, to making record deficits, and running up debt like never before.
While planning to sell off worth billions of high earning assets, just to try to make his terrible economic performance look not as quite as pathetic.
But do we need a capital gains tax, hell no not according to Key, especially not when we have the most overpriced houses in the world.
But we do need to go round taking money from paper boys.
MikeM: Correct. But, that could be minimised by
- Limiting the exemption to the first $5m
- Title held in the name of registered companies - non-exempt
- Title held in the name of registered Trusts - non-exempt
- Title held in the names of absentee owners - non-exempt
- Title held in the name of overseas residents - non-exempt
What a gloriously simple opportunity to FIX the Trust business.
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