By Andrew Coleman*
Over the last five decades New Zealand has accumulated a diverse series of taxes that increase the demand for housing and artificially inflate housing prices. This is unfortunate for young people and anyone else struggling to buy a house. New Zealand is not alone in having taxes that create incentives to build bigger and bigger houses and to push up house prices. However, we have managed to specialize in it by the ways that we do or don’t tax retirement savings, interest income, capital gains, and the implicit income stemming from owner-occupied houses.
Last week I argued that some of the problems in housing markets would be solved if we changed the way retirement savings were taxed and adopted the approach followed in most OECD countries. I still believe this would be a very good idea. But it is only one of a set of reforms that is necessary to tax housing sensibly, and even then there are some alternative ways of approaching the problem. Because this is such an important issue, this article is going to take a bit of a break from retirement policy and discuss housing taxation more generally. Unfortunately, it is not possible to do this in one or two thousand words, so this article is longer than normal. Tax, whether done by accountants, lawyers or economists is complicated and the details matter. Next week I shall get back to retirement income and look at surveys detailing what New Zealanders want from their policies. Until then, let’s start at the beginning, which means starting with taxes.
Indirect effects of housing on taxation
Taxes have direct and indirect effects on house prices. For example, GST raises the price of new properties, by directly increasing the cost of building and the price paid for land. The price of second-hand houses also increases even though GST is only applied to new houses, as people bid up prices to match the price of new houses. Since housing is the biggest asset class in New Zealand, it is really important to understand both the direct and indirect ways that taxes affect housing markets.
The indirect effects of taxes on housing markets are particularly complicated because two separate sets of taxes matter, since people can buy property or rent property. About two thirds of houses are owner-occupied. For these houses, the key issue is the way owner-occupied property is taxed relative to other investments. The remaining third are owned by landlords, and in this case what really matters is the way rental property investments are taxed relative to other investments. To understand how taxes affect property markets, you need to see how the tax system encourages owner-occupiers and landlords to pay extra for a property, and then see who wins the auctions. The relative tax advantage each person gets is only one factor, because even if a potential owner-occupier has the bigger tax advantage a landlord may win the auction if they can borrow more or if they have a bigger deposit.
Owner-occupiers and tax
Tax matters for people who live in their own homes because it affects how much they are willing to pay to purchase a house. Most people treat a house as a place to live and as an investment and when taxes on housing are lower than taxes on other investments, they are happy to buy a bigger or better house rather than invest in other things. Because the supply of property in desirable locations can only be increased by a limited amount when prices increase, lower taxes on property relative to other investments generate artificially high prices.
There are two ways to tax housing at similar rates to other investments. One way, discussed last week, is to reduce the tax on other investments so that it is similar to the tax on owner-occupied housing. This is the globally preferred solution, as it tends to reduce the economic distortions arising from taxation and is politically sustainable. But we should consider the alternative way as well, which is to increase the tax on housing so it matches taxes on other investments. If taxes on the income from housing were increased, it is very likely that house prices would decline from their artificially inflated levels. This approach is not common in the rest of the world, but it should at least be considered.
To tax the income produced by a house you must first measure the income from an owner-occupied house. Since owning your own home saves paying rent, economists estimate the value of the income a person gets from their own home as the rent they would pay if they rented from someone else. This is called ‘imputed rent’. The government currently estimates the value of imputed rent and includes it in its measure of economic activity, GDP. However, imputed rent is not taxed, unlike the rent earned by the landlord. This is the main reason why investments in a person’s own home have tax advantages over other investments.
It is possible to tax imputed rent. Basically, this means home-owning households would pay an additional tax each year based on the amount of equity they have in the house. If a person owned a house worth $750,000 without a mortgage, for instance, they might have to pay tax on an extra $15,000 per year (or $300 per week), the estimated value of the imputed rent after expenses such as insurance and rates. A tax like this would raise a lot of revenue enabling other taxes to be reduced, and it would reduce property prices. People would think twice about paying a fortune to buy a really nice house if it raised how much they pay in taxes every year. (See more here and here). For young people an imputed rent tax would be a good deal, because even though they would have to pay tax on their imputed rent, they would pay less in other taxes and they would also pay less for their property when they purchased it.
Unfortunately, an imputed rent tax is not as easy as it sounds. To calculate a person’s imputed rent, a tax inspector has to come around and make a rent assessment, and this is likely to be disputed. Expenses like insurance or city property rates will have to be deducted. There will have to be an allowance for depreciation and repairs and mortgage interest payments. Basically, everyone would have to file a tax form similar to the tax forms that landlords currently file. This would make tax collection more complicated and tax accountants would have a field day. In practice, these issues are sufficiently difficult that the government would simply tax an amount based on the value of the equity that a person has in their property. For example, the government might say that the imputed rent was 2% of the equity a person had in their house, so if they had $400,000 housing equity their housing income would be calculated as $8,000 and they would have to pay income tax on this amount. This is very similar to a wealth tax, just applied to housing wealth, and with a tax rate equal to a person’s income tax rate.
In practice, a tax on imputed rent or on housing wealth may not be a workable solution to the housing problem. Many homeowners would campaign to have the tax removed (so their house prices would increase again) and many politicians would support them. Not many countries tax imputed rent because it is difficult to determine the right amount and because it is politically unsustainable. Switzerland is one of the few counterexamples – possibly because their home ownership rate is less than 40%. New Zealand considered taxing imputed rent back in 1989 but political realities meant nothing came of it. Many people find this a bit disappointing, because taxes on owner-occupied houses have the potential to be efficient, fair, and simple. Nonetheless, at this stage an imputed rent tax or a housing wealth tax does not seem a realistic option. Most governments understand that even if they could introduce an imputed rent tax there would be enormous political pressure to abolish it in favour of some other taxes.
While most economic theory suggests that property prices would be lower if housing were taxed more like other investments, this doesn’t mean taxes on houses need to be higher. Rather, taxes could be reduced on other forms of savings and investments. As was discussed last week, one of the easiest ways to do this is to reduce the tax on retirement savings so they are taxed the way they are taxed in most overseas countries – by reverting back to an EET (Exempt-Exempt-Taxed) form of taxation rather than the TTE (Taxed, Taxed, Exempt) form adopted in 1989. This solution is not only appealing on the logical grounds that it reduces the extent that tax distorts economic activity and artificially raises house prices, but it is practical as well – it is the solution adopted by most OECD countries.
Even if it is not considered practical to raise taxes on housing income, or change the taxes on retirement savings, there are still other ways to improve the tax situation. One of the simplest ways is to reduce the extent that interest earnings are over-taxed because the tax system does not adjust interest earnings for the effects of inflation. It is widely recognized that New Zealand’s current system penalises people who save by depositing money in banks or by buying private or public interest-earning bonds. If this were corrected there would be less incentive to purchase the most expensive house that you can afford, and more incentive to save by lending money.
It should be noted that an income tax applied to housing is different to a property tax. Property taxes are paid on the value of an asset at a rate that is the same for everyone and is thus independent of the owner’s income or the equity they have in a property. These taxes have a long history and are widely considered be very efficient, particularly if they are applied to land rather than structures. In New Zealand local body taxes are generally collected at rates that are much lower than income tax rate. If they are applied by local governments they are usually politically sustainable as local governments have few other sources of revenue and most people are willing to pay taxes to have their streets maintained and cleaned and their waste water collected.
Rented housing and capital gains taxes
The retirement savings tax regime also affects landlords. Most middle- and higher- income people want to save extra for their retirement, thinking that the government pension will not be enough to support a decent lifestyle. Many investors seek out investments that are lightly taxed. Since New Zealand’s tax system does not tax all income types in the same way, some people invest in businesses for tax reasons rather than because they are the best or most profitable companies. For 30 years New Zealand investors have favoured investment property and one of the reasons is the lack of a capital gains tax.
New Zealand is quite unusual. Most countries have a capital gains tax to reduce tax distortions and to increase fairness. If a country taxes income without a capital gains tax, there are incentives to invest in some types of assets such as share investments or rental property rather than others like bank deposits. Indeed, unless there is a capital gains tax, there are incentives to make too many investments in low-yielding, long-term assets and too few investments in higher-yielding, short-term assets, since the latter are effectively taxed at higher rates than the former. (The original paper arguing this was written 60 years ago by the Nobel prize winning economist Paul Samuelson). A tax on capital gains evens up the tax treatment of different types of income and this should lead to a higher productivity, higher wage economy. This is particularly important in countries like New Zealand, which have relatively high income taxes on capital incomes, because then the tax exemptions on some classes of investment generate big incentives to invest in one type of asset rather than another.
The lack of a capital gains tax causes particularly acute problems when it comes to investments in residential property. If people think they can buy a property and make untaxed capital gains, they will be prepared to buy the property even if it only provides a low rental return, because they can be pretty sure they will be able to sell it again sometime in the distant future. Untaxed capital gains raise the demand for property as an investment asset, and this increases prices.
The second argument for a capital gains tax is fairness. Over the last two decades, most capital gains in New Zealand have been from residential property particularly if you take ordinary inflation into account. If there had been a capital gains tax, some of this income would have been taxed. Many New Zealanders think this is only fair: people should be taxed on their income, regardless of whether that income comes from working a nine-to-five job or from flipping investment properties. This argument is not really compelling, because even if people think something is fair it does not mean it is also good tax policy. As I discussed in Article 8 on the Nordic tax system, the governments of most countries and many tax experts seem to think that it is more effective to tax labour income at higher rates than capital income if you want a high wage economy. Nonetheless, fairness is an important component of a tax system.
Is it unfair not to tax capital gains? Probably, but the arguments are often overstated. This is because it can be really difficult to determine the incidence of a tax and sometimes people who are not directly paying taxes to the government are paying them indirectly. For example, consider who pays rates to the Wellington City Council. Renters do not pay rates directly – their landlords do – but renters often pay them indirectly, because their rent is raised to cover the rates bill that the landlord pays. It would be a brave person that claimed renters were freeloaders that didn’t pay anything towards city services. A similar issue arises with capital gains taxes – even if a person obtaining a capital gain does not pay tax on the gain directly to the government, there are good reasons to think they still might be paying indirectly. It is crucially important to calculate the incidence of taxes before making pronouncements on what is and is not fair, although this is not always done in the heat of political debates.
Capital gains taxes can be complicated to introduce, as they mean people need to record when they buy and sell assets, but we shouldn’t overstate these difficulties. After all, most countries have them. In Australia, they raise about 1% of GDP per year in tax revenue, or the equivalent to roughly $3 billion to $4 billion per year in New Zealand. This would be about 3% of all the tax revenue that is collected in New Zealand each year. This is not a huge amount, and some of this revenue is offset by a reduction in income taxes paid at a later date, but if it makes the economy fairer and more efficient, why not? Most countries tax capital gains to make sure the returns to different classes of assets are taxed as equally as possible, so that are not artificial incentives to favour one class of assets over another. If a capital gains tax had been introduced in 2000, the government would have made a lot of revenue, property prices are likely to be lower, and the economy might be more productive as some of the effort that landlords placed in finding the right property would have been redirected towards potentially more productive activities.
Capital gains taxes work best if they are applied to all capital gains but in most countries owner-occupiers are exempt. In New Zealand capital gains taxes are only likely to be applied to rental housing and shares and some businesses. This means the tax system will still have a distortion that favours owner-occupiers. A capital gains tax applied to landlords could be a good idea but it won’t fix the whole problem. To get rid of the distortions it is also necessary to change the tax system facing owner-occupiers as well as landlords. You may be tired of hearing me say this, but the common and efficient way this is done around the world is by changing the way retirement savings are taxed.
Capital gains taxes are only one of the issues facing landlords. Even though successive governments have shied away from a capital gains tax, they have been acutely aware that lots of property investors have paid rather little tax on their property returns. Rather than fix the problem at the source, over the years they have introduced a series of “fixes” which meant that by 2023 residential property investments were taxed in a manner inconsistent with the taxation of any other type of business either in New Zealand or overseas. Landlords could not claim depreciation allowances as their buildings wore out; if they had borrowed money they could not deduct the real (inflation-adjusted) cost of the interest payments they made from any rental income they earned, even though the lenders pay tax on these interest payments; and there were various ad hoc bright-line tests requiring landlords to pay taxes on capital gains if they had not owned the property for a sufficiently long time. In 2022 and 2023 it was not clear whether residential rental property was tax advantaged or tax disadvantaged relative to other investments, and it was not clear what this would do to the future availability and price of rental accommodation. In 2024 many of these rules were changed or are under review. What is clear, however, is that the taxation regime for rental property has been flawed for decades and by 2023 it no longer made any sense. Introducing a bit of logic into the system could be quite helpful.
Is change possible?
New Zealand is not the only country to adopt taxes that favour housing, although we do have a rather unusual collection of distortions. There is a vast economics literature arguing that when housing is taxed less than other assets property prices increase and housing affordability becomes worse. (See more here, here and here). The high prices transfer resources between generations. The losers are young people. This is because land prices are bid to artificially high levels, which means current and future generations of young people have to pay more to buy or rent housing. The beneficiaries are the owners of the land when the taxes were first introduced, or their descendants if they choose to leave an inheritance. But the ripples don’t stop there. Since people end up putting more of their savings into housing, they have less to invest in other things and this can reduce the amount of business investment in the economy. As wages are lower when there is less business investment, it can end up as one large vicious circle, at least if you are young.
There is also a significant body of New Zealand and international literature that suggests the tax system delays the time it takes young people to purchase their first house. This will become increasingly problematic if the size of the pension system increases as life expectancy increases, for then the tax distortions will get larger. Some models of this issue suggest that young people would be better off increasing the pension age as longevity increases, rather than raising taxes and keeping the pension age constant, because the interaction of the tax system and the retirement income system will further delay the time they can first move into a house. (See more on this here).
The path forward
The simplest ways to correct these problems is to (i) introduce a capital gains tax on any capital gains on rental property (and other investment assets) that exceed the inflation rate, and (ii) change the way retirement savings are taxed by adopting an EET approach. These measures should reduce house prices and improve the return to other forms of saving. This is the approach adopted in many OECD countries. (See more here and here). Even if this is not possible, changing the way that interest income is taxed by adjusting it properly for inflation before it is taxed will make an appreciable difference.
Should young people change the way their retirement savings are taxed? As you know by now, it is my view that it should be for them to decide. There are good reasons to support a change and adopt the tax system for retirement savings that is used in most other countries. Of course, young people could well decide it is too complex to make changes and that it is better to put up with a system that distorts investment patterns and generates artificially high house prices. That might be their choice. But surely the decision should rest with them, as they are the people most adversely affected by the current system, and they are the people who will have to live with any decisions that are made.
*This series and an accompanying paper are based on work I started in 2020 with Jeanne-Marie Bonnet while we were both at the University of Otago. I am very grateful for her assistance and insights. All errors remain my own.
(This article is part 10 in the series. You can find all other articles in the series to date here).
**Andrew Coleman is a visiting professor at the Asia School of Business. This article is his personal view of retirement policy in New Zealand, based on academic study.
Coleman is on extended leave from the Reserve Bank of New Zealand, while working overseas. The views expressed in this article do not represent the RBNZ and are unrelated to work conducted at the Bank, which has no responsibility for retirement policy in New Zealand.
95 Comments
What an impediment to good taxation policy parliamentary democracy can be! Or perhaps not so much parliamentary democracy as New Zealand's mix of MMP with its history of a Westminster parliament of Government and Opposition.
Consider the introduction in 1985 of the surcharge tax on other income of those signed up for Muldoon's unaffordably generous universal pension. It survived because National and Labour agreed on its necessity. Enter MMP in 1996, and Hey Presto: the opportunist Winston Peters could bring it to an end in 1998 as a condition for forming a governing coalition with National.
What's needed now is a Grand Coalition of the two main parties to agree on the taxation New Zealand needs, rather than the taxation people want (which is always to tax Someone Else).
A raft of thoughts.
Firstly, to address this issue we could reduce the extent to which houses have provided massive capital gains, by increasing supply. House price inflation between 1960 and 2000 was less than cpi or interest rates. It was loose financial policy after the 2008 GFC and restrictive zoning that created this problem.
Secondly, the wealth tax of rates would act in this manner. But we are seeing those who advocate for capital gains tax also arguing to move rates burden to income tax.
Thirdly, capital gains overseas are so hit and miss. I thought the previous government had it right with disallowing interest rate deductibility on rental property.
Isn't picking those dates cherry picking....what about over the last 25 years? When you hear property investors speak about capital gains, they say it has been doubling every 7 years or so. Cheap money and low interest rates have a lot to do with this and led to the previous bubble. I think a CGT is needed and a higher top tax rates, plus stamp duty which Oz has. Their bubbles haven't been as bad as NZ, and they also didn't have a house price crash like NZ, partly because their interest rates didn't go up as much to stop inflation.
CGT will immediately put prices up as sellers recoup the extra tax.
It's like wage increases increase prices.... But not in a linear fashion.
We have seen since Ardern's lifting of the minimum wage fiasco prices go ballistic.
A 5% wage increase= a 6- 7+ % price increase. Why?..
Well, take a wholesaler ....the newbie gets 5% so the oldie wants 5% then the manager 5, then the CEO 7.... Then. ...The wholesaler' s customer/ retailer does the same then 💥....
That 5 buck coffee is 6.50.
So the net effect is .. your 5 % increase is only making the economy unaffordable.... And here we are!
Capital gains taxes offsetting income tax rates require assets to increase in price ahead of the inflation curve - at least at the same pace as governmental department cost inflation (which is terrifying, given we've boosted the tax revenue take 70% over the last half a decade but have fewer services) or else they will result in a cut.
So pick your poision; endlessly increasing asset prices or flat asset prices, a CGT and the same (if not more at times of deflation/stagnation) levels of personal income taxation we have now.
Interesting academic argument but hard to draw straight lines to the outcomes of tax policy. I'm from BC, Canada which should be a cautionary example of accepting any new taxes for prescribed outcomes. BC taxes income > 50%, 15% GST even on second hand vehicle sales, property transfers are taxed, capital gains are taxed every which way you can think of, and the provincial govt almost solely controls and owns returns on insurance, alcohol, weed, and electricity. They also just put a blanket ban on short term holiday property rentals and created a new provincial ministry to regulate and enforce the legally approved exceptions. Add to this a combative, arrogant, and simply putrid culture in the Federal tax authority and you have an administrative burden far in excess of what we deal with in NZ. I was just there and house prices, rents, food inflation, and homelessness are much worse than here. I urge caution in believing that giving government more general revenue and power based on academic theory is in your interest.
Haha . Spoken like a true green/ red- " I know what's best for you" supporter .
...Come back to us when your a boomer and the things you want now have contributed to your fiscal Demise then ... And you rely on the state and the next generation to support you
Gen "Y can't I have it now"
"Come back to us when your [sic] a boomer..."
LOL. I am a boomer. I've also quite a bit of economics training and practice under my belt. (Actually, it's a lot.)
Save your FB and X comments to FB and X. Your nonsense is water off a duck's back. But thanks for posting so we know how fools think. It is valuable information, for which we are extremely grateful.
cheapest electricity in the world in BC @ 11c per kwh. no peak pricing. All hydro power. The main reason its so cheap is BC sells its surplus supply to Washington state and California at a premium. Win/win.
Population of BC is the same as NZ.
BC has a worse housing crisis than NZ. Fuelled by zero capital gains tax on housing and, until relatively recently, mortgage interest rates of 1.5% to 2.5%
My BiL in BC/Vancouver is not the most astute when it comes to taxation, costs and other political stuff. You made a comment that the excess hydro gen is sold to the US. Are you sure there excess hydro gen? My BiL seems to think that the energy sold to the US is that dirt cheap to the extent that its close to cost per kWh. His sarcastic comment was that the Yanks screwed BC over with with the energy supply contracts.
There is truth to this. In a macro sense BC benefits by being able to take west coast US coal generation overnight, sometimes being paid to take it. We then also have the ability to buy transmission capacity and monopolise power channels down the west coast because we can simply ramp up hydro to fill any gaps we cant purchase from US generators. PowerEx is the trading organisation and they've created scenarios that have made BC a lot of money in the past. Court cases, non payment, disputes/appeals, and political implications are certainly present. Overall though it is claimed that BC is still a net importer of electricity, and even with the new gigantic Site-C dam project coming online, will stay this way. Prices certainly cheaper than here - I'd suggest that the 26 private lines monopolies and the ridiculously fake competition between several retailers is the primary reason although not having a larger market connection with a naturally advantageous position is certainly a factor.
"In practice, these issues are sufficiently difficult that the government would simply tax an amount based on the value of the equity that a person has in their property. For example, the government might say that the imputed rent was 2% of the equity a person had in their house, so if they had $400,000 housing equity their housing income would be calculated as $8,000 and they would have to pay income tax on this amount."
I don't understand how you jump to here? Why would they not just tax based on an assumed rental yield?
The problem is how you make the assumptions about the gross rental value of a property. You could use a market assessment using a tax inspector of consultant of some type, or you could assume a fixed rate multiplied by the value of the house. Either way you then need to adjust it for expenses, especially interest rate expenses if the owner has a mortgage. This could be done by looking at the net equity in the house (value-mortgage outstanding) multiplied by a constant rate, or it could be done by calculating the gross rental first and then subtracting the mortgage expenses. Some people advocate to calculate the gross rent minus mortgage expenses; others a fixed rate on net equity. I think Susan St John at Auckland University and Terry Baucher have advocated for a net equity position tax.
The wider point is that there has to be some way of estimating gross rental and adjusting for expenses, and that if this process is adopted (which I am not advocating) it needs to be seen to be fair to ensure it has wide public support and compliance.
AC
Hello Passhass,
You are right, that is not very clear at all.
What I meant to say is much longer. I should give an example
If you estimate the annual value of imputed rent of a house worth $1miiliion, it might be $30,000. The local body taxes might be $5000. The local body tax rate on the annual rent value of the house is then about 5000/30000 =16%. this is about half the marginal tax rate on income.
I have not calculated these numbers recently to update for the faster increase in rates than inflation and rents, but last time I calculated them using total national rates collections and estimates of the total value of imputed rent, the implied tax rate on the annual value of housing services was about half the income tax rate on normal income. So if the central government wanted to tax imputed rent, there is some justification for saying imputed rent is currently lightly taxed even when taking local body rates into account.
As you probably surmise from my article last week and this week, I am far from convinced that a central government tax on imputed rent is likely. The current system we have for taxing imputed rent (ie not taxing it at a central government level) is politically sustainable, and is similar to the system used in most countries overseas. If it is combined with appropriate taxes on other capital income (eg dividends and interest) , it is not too distortionary - by which I mean, if it is combined with an EET regime for retirement savings, it is not too distortionary because then both owner-occupied housing and retirement savings (which in most countries are the two biggest asset classes that most people have) are taxed on a similar expenditure basis.
I am sorry not to have been clear, but it is a relatively minor point and the article was already very long.
AC
Assuming a $600,000 mortgage on a million dollar house and a 4% interest rate, the interest on the mortgage would be $24,000 add $3,000 for insurance and $1,000 per year for plumbers, sparkles, handymen, averaged wear and tear on carpets, etc. gives a nett taxable income of $2,000, local body rates of $5,000 represent 250% of income, this would be amongst the highest tax rates in NZ.
Just a point of clarification. Even in your example, the tax ratio of rates/rent is still approximately 5000/30,000 = 1/6, as the value of the rental services is still $30,000. In this case there are two claimants on the house: the owner; and the lender. They are splitting the value of the annual rent in a manner which means the owner is getting only a small amount of the net benefit but is paying the entire rates bill. (The owner gets the 30000 value of rent minus all the expenses you mention; the lender gets the interest payments.) The rates bill is large relative to the fraction of the benefit that the owner gets, but it is not large relative to the value of the rent.
In some sense it is similar if you went out to dinner for two, spent $100 plus GST, and paid the entire bill. If you compared the total GST ($15) to the value of the food you ate ($50) you would be overstating the GST rate, although correctly identifying the "pain" of the taxes you paid.
ac
Do young people need to purchase a home to secure their economic future? Homeownership is not the only path to building wealth, and alternative strategies should be explored. The belief that every young person must buy a house as soon as possible can create an overreliance on the property market as the primary solution. In countries with high GDP per capita, long-term renting is a viable option even for high-income earners. Embracing long-term renting as a cultural shift, rather than focusing on tax, could provide a more sustainable solution. There is evidence from OECD countries that this model can work effectively
Consider that a young couple might be looking at more than just economic factors. Maybe they want the stability of having a home of their own where they can start a family and the amenities needed for that. It gets pretty tiring pretty quickly when a landlord can kick you out to realize their capital gain or ignore repeated requests for basic maintenance.
But that seems to be the narrative in NZ, and their are financial benefits in doing this due to the way things are setup in NZ. Including borrowing money to buy a rental, and then getting capital gains on that borrowed money, which you can't really do with shares and ETFs, as it is less common to borrow to buy shares.
surely the decision should rest with them, as they are the people most adversely affected by the current system, and they are the people who will have to live with any decisions that are made.
The sad part is, that they won't be able to choose until they:
1./ Decide that engaging in this debate, and local and central government is of value to them, and come to vote accordingly, which typically the young don't do given the lack of long term foresight and
2./ Have the majority vote over those who currently own and benefit from the current status quo around property who, by and large, are older generations
The easy option is to use rates. We pay double the OECD average here for rates, and the services we get are rubbish.
So, we halve rates and right size councils and make them perform their actual jobs rather than spend money on rubbish. Rates would be the same, but half of it would be an effective land tax, which councils would not get.
Then you have your increase in revenue.
No one will vote for a system whereby you pay tax imputed rent on a house that you already own.
In the very unlikely event that this policy saw the light of day, many would simply mortgage themselves 100%, and take the money overseas and invest in something else, like shares, or property overseas and avoid it completely. I am sure there will be a variety of other loopholes available as well.
I see the idiot Hipkins on the news this morning talking about new takes (including wealth taxes), that he might/would implement should he ever be in power (he won't be, he is getting rolled soon), but, in the next decade Labour will be back in power (maybe in 10-12 years). So, soon I will start arranging my affairs so that I have no assets (they will be overseas or hidden) so that if these sorts of polices come to pass, I will have planned well in advance not to pay them. One day I will retire so I will have to ensure that I still receive super and avoid any risk of means testing, and if in the unlilkely even I end up in a home I will need to be sure that the government pay for this rather than draining my assets.
So, soon I will start arranging my affairs so that I have no assets (they will be overseas or hidden) so that if these sorts of polices come to pass, I will have planned well in advance not to pay them. One day I will retire so I will have to ensure that I still receive super and avoid any risk of means testing, and if in the unlilkely even I end up in a home I will need to be sure that the government pay for this rather than draining my assets.
See the bold for emphasis from your quote. You have just outlined the precise issues that some of Andrew's proposed solutions seek to fix in his series of articles. You want to own and keep a volume of assets, have the state care for you if needed and claim super, yet keep all of your assets through avoidance, be subject to means testing, all while draining money from those currently paying tax when you receive it. You consciously plan to actively avoid being held accountable for the system you so dearly wish to take advantage of, extracting maximum gain with the most minimal of input. This attitude is the problem from which we find ourselves in the current predicament of an unsustainable superannuation scheme and unhelpful emphasis on property investment/speculation.
Exactly. We already pay enough tax. I pay my 39% or whatever it is, plus GST as well. My assets are well, mine, and my wife's, and I will hand them down to my kids. Tax free. Thanks. I don't know where you get that I don't put anything in, as I am in the top 1% of contributors, and I am not a property speculator and I do not avoid tax using losses on property on anything else. But, if you think I will contribute more than anyone else (relatively speaking), and then let my assets be taxed and whatever else, forget it. There are legal ways to avoid it, and so I will. The reason we find ourselves in this predicament is that a majority of us are lazy, live for the moment numbskulls that realize far too late that they should have planned for their future rather than pissing everything up against the wall.
It's quite simple. Super isn't a handout, because it gets handed out to everyone regardless of need or contribution, when they have clocked up enough birthdays.
Other benefits that are for a particular need, require you to take particular actions to receive them, and are asset and/or income tested - those are the handouts.
It's not really interesting who administers it. But compare to Jobseekers, for example. Jobseekers has a number of criteria - you can't claim if your partner earns over a threshold, you can't claim if your assets are over a threshold, you have obligations to continue to receive support.
Super - just hit 65 and it's yours. Handed out to you regardless of what you do or what you need.
You're fighting a weird semantic battle here, perhaps you have hang-ups around the word handout, but it is what it is.
I too am planning to not receive a pension when I'm old. Mainly because its likely I will be living in Australia by then, and I wont receive one under their rules due to having assets. I have personal investments, and at some point will probably dump a bunch of them into an Australian super fund so I can receive the income and capital gains tax free once I turn 60.
Inheritance tax is in the UK, and I suspect it will eventually come to NZ as government create new sources of revenue. IMO it provides more benefit to children to provide money to them earlier in life, such as helping with a house etc, as they are less likely to need it, or it having the same value, as when they are older and have more wealth. You just need a few more cycles of Labour and National in government to achieve this over time.
Death taxes have already been tried...and failed.... in NZ. They cost more to administrate than they collected.
Easily avoided. Old people moved to Australia where there weren't any.
Why should anyone pay taxes on their death anyway? They earned it, it's their money, dead or alive.
"Inheritance tax is in the UK, and I suspect it will eventually come to NZ as government create new sources of revenue."
Did you mean "come back"?
NZ abolished it in 1992. (The government was the National Party, led by Jim Bolger. Making rich people richer. It's what they do.)
The simplest ways to correct these problems is to (i) introduce a capital gains tax on any capital gains on rental property (and other investment assets) that exceed the inflation rate,
The really important words there are; 'that exceed the inflation rate'. If CGT were to be introduced, then only gains in excess of inflation should be taxed, but I am willing to bet that this would not happen.
I still think that a direct property tax-a stamp duty on every sale- would be much easier to implement and administer.
I would support CGT if taxation was limited to 25% of GDP and only changeable by referendum approval of 75 % of the vote. Andrew like many opionists forget NZ is a democarcy run by people elected by the people for the benefit of the people and when the elected decide they know better and impose unacceptable measures its only a question time before the majority win and its usually pretty ugly for the losers.
Capital gains Taxes also means capital loss refunds....right?
What would happen in the event of a colossal crash in housing prices?
Probably the same after the IRD started taxing capital gains on share prices in 1986/1987. After the crash in October 1987, the IRD had to cough up billions in losses.
CGT isn't a one-way street.
You mean the crash that's happenning right now? Let alone a bigger one.
Look at the taxes the government would NOT have collected from the housing market gain against inflation the last few years. That's quite a significant negative number. This isn't an easy fix at all.
Yes, in most countries losses are deductible. The aim is to correct the inherent inefficiencies of an income tax, and this means losses should be deductible. Most countries do not adjust for inflation, however. As a practical step, capital gains are often taxed at half the rate of other income to reflect the effect of inflation, but it is not the case that this properly adjusts for inflation when there are losses (or even gains).
There are really good reasons why many economists prefer expenditure taxes (including EET retirement income taxes ) to income taxes. They deal with capital income and inflation so much better than income taxes. In practice, income taxes on capital income tend to generate a lot of distortions and channel investments into inefficient avenues. This is why many economists have designed progressive expenditure taxes, of which EET has been the most successful. I guess the bright side of income taxes is that they generate a lot of work for tax accountants and layers, and , yes, a capital gains tax with throw more business their way.
Agree that adjusting for inflation isn't a good idea. (Which is why most countries don't.)
I mean - which measure of inflation should be used? The RBNZ's CPI that omits critical items? Stat's HLPI which measures all kinds of costs? Or REINZ's HPI that just measure houses? And in which region should 'inflation' be measured? Nope. All measures have an issue.
Just keep the tax rate lower and use nominal realised amounts.
Wing correctly points out the Accountants wet dream of a CGT. To much scope for avoidance. Really highlights why a land tax would be simpler, unavoidable, and highly effective. Think of the tax on land bankers waiting for their super tax free lunch....even in Riverhead.
"What is clear, however, is that the taxation regime for rental property has been flawed for decades and by 2023 it no longer made any sense. "
It depends on the objective and priority of the objectve. Tax policy or housing policy?
From a tax policy of fairness of taxation between different investments it may not have made any sense.
From a housing policy perspective, of equalising the tax treatment of owner occupier buyers (no interest deductibility) in the existing house market vs interest deductibility for property investor buyers in the existing house market. Removal of interest deductibility for property investors in the existing housing market put them on the same footing as owner occupier buyers in the existing house market and created incentives for property investors to buy and supply new housing (interest deductibility). From a housing policy perspective, it seemed to be have the intended effect as anecdotally, property investors were buying new builds in order to take advantage of the tax differences. Many property investors were mainly buying in existing house market to supply to community housing providers due to continued interest deductibility or to subdivide the back yard and build.
There are property buying syndicates of property investors (say 3 -5 friends / family / co investors) combining their income and borrowing power to outbid owner occupier buyers in the existing house market. For owner occupier buyers, many need the bank of mum and dad or to combine 3 - 5 family members (in some cases 2 working parents and 2 adult children - mulitgenerational buying) to be able to borrow a sufficient amount to compete and not be outbid by these property buying syndicates in the existing house market. A single person, or a couple on a median household income without access to the bank of mum and dad is likely to be less able to compete with the property buying syndicates operating in the existing house market.
With the re-introduction of interest deductibility in the existing house market, many property buying syndicates will likely be outbidding owner occupier buyers. There is less incentive to buy new builds (due to the reduced ability to "add value" when compared to opportunities to "add value" in the existing house market) and add to total housing supply.
Buying a house now is one of life's great opportunities, no one rings a bell when the market hits the bottom.
Interest rates are on the way down, new home completions have plunged, there's ample stock to peruse, spring's just around the corner.
Just remember to drive a very hard bargain.
Most commentators seem to have missed AC's point about making alternative investment decisions. Any investment should be as neutral as possible wrt tax. Currently there is close to zero capital gains tax on investment property. 2 year brightline on new properties only? On many shares there is a CG tax or fair dividend tax. The govt reaps in millions on this via some KiwiSaver funds and the Cullen Super fund. I wouldn't be surprised if its not one or 2 billion. A CGT on rental property houses is a bare minimum. I also dislike inheritance tax. If I recall correctly a cousin in the UK had to do something 7? years in advance of his likely death in order to avoid a tax. Not sure exactly what tax. He assisted his children in getting a house to live in.
I do not see a CGT tax on rental houses as a revenue gathering exercise. It is an attempt to level the investment playing field.
I see Zwifter said our tax system is broken. I disagree, its distorted rather than broken.
It makes sense I think to tax scarce resources. Land, or at least land suitable for housing, is a scarce resource, so why not tax land. I think most capital gain is on land, so when land values increase we have automatic taxation of land's capital gain component; and, unlike with capital gains taxes, with a land tax we do not have to wait until a property is sold before we can collect the tax; the tax would be payable annually, or half yearly, or whatever we decide. A shift in the tax base from income on land would allow for reductions in income tax and/or GST. Landlords would probably pass on land tax as part of rent so nobody would be exempt from it.
To the point mikesh, I think if a 0.33% tax was implemented on all residential & commercial zoned land, it would be enough to cover all housing supplement and social housing costs at the regional level. If GST was then put up to 17.5% there would be scope to have a tax free threshold to $25,000, and the reduction of all other income and company taxes, balancing the tax system, and breaking the cannabilising cycle we are in. This would encourage effort and initiative, rather than speculation.
Would you pay more for a piece of land that is free to hold, or an equivalent piece of land that costs you 50k a year to hold?
How about choosing between two apartments, which are identical except one has an excessive body corporate payment?
An ongoing tax on the value of some asset will work to drive down the value of the asset.
If you want to live in a an apartment with no body corporate, good luck with that.
They are available, but there's no means of persuading errant landlords or owners to keep their properties up to scratch. Does GST on food drive the price down?
The Labour govt. decided in their wisdom to tax landlords, did it drive rents down? Nope, they went up.
There's 40,000 empty houses in Auckland owned by those that can't be bothered with tenants. In some respects, I don't blame them - very good, reliable, tenants that will look after your property and pay on time aren't easy to find.
Hard to believe there's so many socialists here wanting to tax everything.
This is unfortunate for young people and anyone else struggling to buy a house.
No, it's not unfortunate, it's the logical result of the current policies.
Overall, a very disappointing article. It skirts around the main problem of high housing costs and then, perhaps unsurprisingly, suggests a weak capital gains tax that would do next to nothing towards improving the lot of 'unfortunate' young people. Shelter is a need, houses are more than investment tokens, investments are a nice to have.
It would also be nice if we could not conflate local rates as remotely equivalent to central government taxation.
To get investment flows in to productive enterprise, we do need to do something about the way the tax-fee capital gains on housing have distorted the New Zealand economy.
The Australian model, where anything apart from the family home is taxable, would simplify things and is a just way to do things, as all that gets managed with "real" numbers as opposed to estimates (that we all know can be wildly inaccurate) being applied to a family home.
The bureaucracy required to tax things like imputed estimated rents on the family home - and manage all the disputes, appeals against estimates, measurements, permissions to do maintenance, offsets against superannuation and all the rest - would be mind boggling and taxes on something as uncertain as estimates of unrealised income could become very unjust in the wrong political hands. Can you see politicians leaving a tax structure unmolested if it would serve their social engineering or other ends?
How?
The issue is houses being used to generate capital gain that goes untaxed while creating a number of downstream ills like empty houses, insane pricing, poor housing quality and all the rest.
Absolutist solutions of "tax everything" have gained no usable traction so far, where exempting a family home might be achievable becasue of the perceived equity, justice of the transition and privileged status of "home" in the human psyche.
To be focussed on the purity of a solution misses the opportunity to solve much of the problem, and is rooted in a misunderstanding of people and what's politically possible in a democracy. TOP have that problem: perfection is the enemy of the good.
As far as I'm aware there's no taxes on stock market trading.
In about 1986 the IRD in its wisdom decided to tax stock market profits. In October 1987 there was a tremendous crash, the worst on the planet occurred right here in NZ, and the IRD had to cough up billions in losses.
There's always calls by socialists here to tax real estate, but none to tax stock market profits....why not? Stock markets are making new highs, so why no grizzling about traders?
There most definitely are and it resolves down to intent. Are you an investor or a trader? IRD leave that up to you to decide. Certain overseas shares, even if listed on the NZX, are subject to FIF and fair dividend rule. Tax on unrealised capital gains or the fair dividend rule. A smart move by the then Nats and DDD (?DunneDividend). Most Kiwis don't invest directly in shares so they don't see this hitting them directly in their back pocket. Not MSM stuff either so rarely mentioned, even on this website.
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