Don’t believe the scaremongering on capital gains tax

capital gains tax first world problem

The unholy trinity of National, right-wing blogs and the mainstream media are scaremongering about Labour et al’s proposed capital gains tax again. Because it’s new and because it’s a tax, it seems scary and there’s easy political points available in opposing it. But in fact most countries have capital gains taxes. New Zealand’s tax system is one of the most generous to the rich, and part of that is our anomalous lack of CGT.

The current scaremongery relates to inherited family homes of deceased family members. The impression John Key et al are putting across is that a grieving, struggling family will have to scramble to sell their deceased parents’ family home to avoid being stung with a hefty capital gains tax they can’t afford. IF that were the case, a one-month “grace period” certainly doesn’t sound like long enough to grieve, get organised & sell the house to avoid financial ruin.

But it’s NOT the case. Even without a grace period, only profit since inheritance – I repeat, profit since inheritance – would be taxable (and at a modest 15%). If a family inherited a house worth $400,000, and sold it a year later for $430,000, they’d incur tax of $4,500, but they’d get to keep the other $25,500. They’d still be $25,500 better off than if they’d sold the house straight away, and $425,500 better off than if they hadn’t inherited the house.

This is no different from inheriting any other profitable asset. Currently, if you inherit a company, and it makes $30,000 profit over the next year, you’ll be liable for 28% ($8,400) company tax on that profit. There’s no “grace period” there. And more importantly, there’s no “grace period” on the profits – 72% of which you’ll keep and no doubt enjoy.

So it’s extremely dishonest of Key to portray families inheriting profitable assets as somehow hard-done-by, simply because they’ll incur tax on those profits. Truly hard-done-by families are the families of (increasingly numerous) people who’ve never managed to buy a house (largely because of tax-free property investment). Those families will receive no inheritance (let alone profitable inheritance), and many struggle to pay for (increasingly exorbitant) funeral and burial costs.

Years from now, if my siblings and I inherit my parents’ house and it makes capital gains by the time we get around to selling it, we’re not hard-done-by if we incur tax on those gains. We’re lucky my parents own their home in the first place, and have something to leave us (in fact, something that continues gaining value until we sell it).

That said, I do tend to agree there should probably be a grace period of maybe six months, because the tax is supposed to target people who buy extra houses for profit, not people who gain an extra house by accident because a relative died. Besides, it may take some months to decide whether they’ll sell it, keep it as a rental, or have other family move in (in which case it remains a family home, thus exempt from CGT). But a grace period would be an act of compassion to people who don’t really need it; certainly not a demand of justice or need.

Of course, Cunliffe didn’t help his own cause by remembering the policy wrong and declaring unequivocally that the grace period will be one month. In truth, the length of the grace period is a detail that they’ll leave to an expert advisory group to work out. It was incompetent of Cunliffe not to know this.

Anyway, despite those two caveats: don’t believe the hype. Look into it, listen to David Parker’s explanation, think about it, etc. After doing so, no right-thinking person would think there’s anything to worry about.

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9 comments

  1. Jimmy Conner

    Wow this is such a shallow overview of the issue…..the fact that people will only pay 15% tax on property capital gains really just reinforces the point that a CGT will not stop speculation…..people will ultimately be ok with paying 15% on a capital gain of say…..20,30….80K! Additionally, speculation will be even more rife with Labour’s policy to use Kiwi Saver as a means of keeping interest rates low (and the economy from overheating), this will mean people wont get much out of a term deposit at the bank, and with interest rates being stable and low under such a policy, people will do the math and climb into property. The only thing a CGT will do is give us more tax revenue to spend, about half of what Labour claim it will according to the NZIER…..

    • calebmorgan

      BERL’s estimates look more reliable than NZIER’s.

      I agree that by itself a CGT won’t stop speculation. It has to be one of a range of measures.

      I also agree it should be higher, or more accurately, it should be progressive. If we had the same rates for CGT as for income tax, the people in my example above would end up paying less than 15% tax (first 14,000 at 10.5% and next 16,000 at 17.5% = 14.2333% overall… and of course if the house was co-owned by multiple people the income they’d all only be in the 10.5% bracket). But a property magnate with dozens of properties would be up into the 33% tax bracket, which genuinely would discourage speculation.

      You raise good points about interest rates. Term deposits and property aren’t the only forms of investment – the hope is it would encourage investment in the stock market. But low interest rates would in fact keep the cost of property investment low (but also housing costs low). On the whole I reckon it’s good to have interest rates and therefore mortgage costs low, but the fact that this would incentivise property speculation is all the more reason for decent capital gains taxes.

      • Jimmy Conner

        Thanks for the reply, not that i want to come across like im all ENTITLED to a reply…..you raise some good points around a progressive tax regime, but fundamentally, this kind of contradicts the title of the article because it shows that Labours CGT policy doesn’t go far enough and therefore, property speculators will still be skipping to the bank……
        Your right term deposits aren’t the only avenue for investment, but thats kind of beside the point, people can have a go trading FOREX, Futures, Stocks etc now but but property is still being traded in more problematic volumes, furthermore, Labour wants to tax these too under a CGT, which is kind of OK except if these investments will be taxed this makes property no less attractive. Also, due the the GFC Kiwis are arguably weary of Trading on the financial markets as they dont want to loose money in global markets which are still very volatile (yes, such markets have been experiencing very high degrees of liquidity and trading but this is primarily due to the quantitative easing, money printing, which has flooded such markets with huge volumes of cheap money to invest), but essentially these markets are volatile. Anyway, the reason people love property is cos’ its tangible.
        Anyway, with Labours measure to keep interest rates low through forced hikes in Kiwi Saver contributions, you can pretty much guarantee people will speculate in property all the more, personally, if i had a choice between interest rates being held low and paying a 15% tax VS scary fluctuations in rates and no tax (i.e the status quo), then id way rather have the former conditions, cos’ that means minimal risk: paying 15% upon sale is fine compared to staring down the barrell of tens of thousands due to rates hikes! Therefore, you can almost expect that speculation will be just as bad or worse under Labour, cos with all the building to be done, it will take years for supply to meet demand. RANT.

        • calebmorgan

          I agree with you that it doesn’t go far enough and has the problems you describe. This blog was responding to one particular inaccurate fear promoted by John Key. I could also write another blog saying “Don’t believe the hype that a flat 15% capital gains tax will on its own completely solve the problem of property investors/speculators making housing unaffordable” – although I don’t believe Labour or anyone are actually saying or implying it will.

          Also, the way I see it, an imperfect capital gains tax is still better than none, from both strategic and justice points of view (ie, I hope it will mitigate the problem somewhat, but even if it doesn’t at all, at least people are being taxed for passive profiting off others’ need rather than actually improving the world). And even assuming it doesn’t work very well at all from the strategic point of view, a poorly-working capitals gains tax is a better platform for a decent capitals gains tax than no capital gains tax.

          • Jimmy Conner

            OK fair calls….your right, i like how you frame it as a justice issue and if your making money you should be taxed…..from what i can tell some public perception is that a CGT will slow down speculation, because i cant see anything that labour or National is proposing will slow down property prices in the next 10 years in places like AKLND – because thats how long it will probably take for Kiwibuild etc to really get supply meeting demand…..with around 100 people moving to AKLND each week and a huge lag in land release and related infrastructure. stopping foreign ownership will create a dent at best. Both National and Labour know that in places like AK its a supply and demand issue (which they are both addressing through Kiwi Build and cash help with new builds) , and if anything its time for AK to go up a few stories and let go of the 1/4 acre dream in central AK suburbs. il stop badgering you now, great blog, thanks for the chat…

            • calebmorgan

              I agree.

              I personally think National’s cash help with new builds is a bit pathetic (see previous blog here).

              But anyway, you’re right that this will take years to solve, and an unfortunate quirk of democracy is they’re less inclined to do things that won’t get results until they’re long since gone from Parliament.

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