Capital gains tax could raise $4b

Photo / Martin Sykes

Labour leader Phil Goff says his party will give most New Zealanders a tax cut if elected in November.

The party's tax policy will be released next week and NZPA has confirmed that a capital gains tax on investment properties is its centrepiece, raising billions of dollars to pay for its spending promises.

The tax won't affect family homes and will target people with one or more investment properties at a rate of 15 per cent on the profit made when they are sold.

The 2006 census data suggested about 200,000 people owned an investment property.

One economist told nzherald.co.nz the Government's favourable tax treatment of land ownership was one of the biggest problems facing the New Zealand economy.

"It's absolutely the main reason New Zealanders tend to hold their wealth in the form of land or assets that include land such as farms or residential property.

"New Zealanders are incentivised to borrow money to buy land rather than invest in productive assets," Westpac chief economist Dominick Stephens said.

The introduction of a capital gains tax on investment property would likely reduce those distortions and encourage more Kiwis to invest in other markets, he said.

"If we introduced a capital gains tax that incentive would be diminished and there would be a greater incentive for people to save via bank deposits or productive business ownership," he said.

Stephens said he expected house prices would fall, particularly at the lower end of the market, because by current rental yields it wouldn't be viable to be a landlord.

Rents would probably rise, although the main adjustment would come through prices, Stephens said.

Realestate.co.nz chief executive Alistair Helm said the move could prompt investors to 'offload' properties, particularly if they were given warning of such a plan.

"This situation could cause a destabilising of the market, especially if property owners were prepared to sell below market prices where this lower price returned more cash than the implications of a capital gains tax."

A recent Tax Working Group report indicated a capital gains tax of the sort Labour is proposing would raise more than $4 billion a year.

Labour is also expected to raise the top tax rate, having attacked the Government for months over its tax cuts which gave windfalls to wealthy people.

It has also promised to close tax loopholes which high income earners use to hide their money.

This morning on TV3's Firstline programme Mr Goff did not confirm the policy but spoke generally about tax.

"For most New Zealanders what we are looking at is a policy that has actually cut their tax," he said.

Labour intends to make the first $5000 of income tax free and would remove GST from fresh fruit and vegetables.

"Clearly those things have to be paid for."

Mr Goff said with debt increasing $380 million a week and a deficit of $16.7 billion tax policies had to take that into account.

"At the same time we need to invest in growing our economy, things like research and development and upskilling, if we don't do that we will never get out of the hole that we are in.

"The tax policy has got to provide revenue to do those sorts of things but it's also got to send the right signals about fairness, it's got to send the right signal about encouraging our productive economy, that's really important. The part of the economy that creates jobs."

Mr Goff said home ownership had been plummeting with about 40 per cent of New Zealanders unlikely to realise the dream of owning their own place.

The last property boom had pushed up prices and interest rates and played havoc with the exchange rate.

"We can't repeat that sort of mistake again."

While he did not say it a capital gains tax is seen as a measure which could help deflate a new housing bubble.

Green Party Co-leader Dr Russel Norman said the lack of a comprehensive tax on capital gains was keeping the dream of home ownership out of reach for many New Zealanders.

"A capital gains tax which excluded the family home would benefit the vast majority of New Zealanders through more affordable housing and jobs as investors take money out of housing and invest in the manufacturing and export sectors."

Prime Minister John Key has always opposed a capital gains tax and yesterday said it was "hideously complicated and people spend their lives with their tax accountants".

Mr Key said people only paid the tax when they sold their assets, so they tended to hang on to them.

Labour is understood to have considered a land tax and a financial transaction tax, and ruled out both.

While details are yet to be confirmed the Real Estate Institute has already reacted telling Radio New Zealand ordinary people who rely on investment properties to pay for their retirement will be penalised.

The Property Investors Federation told the broadcaster the policy would disadvantage investment property owners, by treating sale proceeds differently to shares, businesses and other assets.

NZPA / Susie Nordqvist