Mark Lister: Fairer capital gains taxation the best approach

The 3.4 per cent gross yield that Auckland rental property is presently offering - before costs - is unlikely to stack up if you can't count on making substantial capital gains. Photo / Greg Bowker

If capital gains tax is introduced in New Zealand, it makes sense to cut wage earners a break at the same time.

Following the recent housing initiatives from the Government and the Reserve Bank, a capital gains tax is again being discussed. While the recent changes share some of the characteristics of a capital gains tax (CGT), we are still a far cry from that in New Zealand.

Whether the moves have any impact on house prices in Auckland is difficult to judge. They might take some of the heat out of the market, but beyond that I find it hard to see them making a huge difference, in the short-term at least. After all, the biggest drivers of house prices in Auckland have been strong migration and the physical undersupply of houses.

I also find it somewhat futile debating the merits of a capital gains tax, because I'm highly cynical of whether any political party in New Zealand would ever implement one.

That aside, I have some sympathy for a CGT, in principle at least. Of all the opposition policies from last year's election campaign, I thought it was one of those most worthy of debate. The others being increasing the retirement age and making KiwiSaver compulsory, which are two very sensible policies.

However, I would have made CGT comprehensive rather than excluding anything, even the family home. The more you exclude, the more complicated it becomes to administer and the more loopholes that emerge. Before long you've defeated the purpose of it and only the accounting fraternity have financially benefited from its introduction.

People simply change their behaviour to benefit from the exclusions, which in this example would mean funneling every last dollar back into making the family home bigger and flasher, in order to avoid paying any CGT. Ironically, the price of housing gets even more expensive when this happens.

I would have reduced income taxes at the same time as introducing the CGT. The point of launching a CGT should be to make our tax system fairer by rebalancing the tax take from wage, salary and income earners toward those benefiting substantially from rising asset values.

Reducing income tax rates while establishing a CGT would put more emphasis on the cashflows that investments generate. Genuine investors tend to focus on cashflows, while speculators are more interested in chasing capital gains.

Workers who earn a salary or wage would catch a break, as would savers and investors who make their investment decisions based on sensible things like earnings, dividends, rents and interest payments. The 3.4 per cent gross yield that Auckland rental property is presently offering -- before costs -- is unlikely to stack up if you can't count on making substantial capital gains.

We might never see a CGT in this country, which could well be a good thing given the compromises that would likely be part of its introduction. However, hopefully the recent initiatives will at least put a decent dent in sentiment, even if they don't derail the Auckland house price juggernaut completely.

Buying an investment you know is too expensive in the hope that next year it might be even more expensive can work very well while the market is going in your favour, especially if you're leveraged. But like all property, sharemarket and commodity bubbles, at some point the rubber band gets stretched too far.

Mark Lister is head of private wealth research at Craigs Investment Partners. His disclosure statement is available free of charge under his profile on www.craigsip.com.
This column is general in nature and should not be regarded as specific investment advice.

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