English says election result last year ended debate on Capital Gains Tax; IRD may get more funds to crack down on property traders

English says election result last year ended debate on Capital Gains Tax; IRD may get more funds to crack down on property traders

By Bernard Hickey

Finance Minister Bill English has directly rejected the Reserve Bank's call for a fresh debate about removing tax incentives for landlords, saying two official Tax Reviews and the public in two elections had decided against any such widening of taxation of landlords.

"There's been a lot of discussion over that issue over two tax inquiries in New Zealand under the previous government and under this government and in both cases they came to the conclusion that, on balance, it wouldn't make much difference," English told reporters in Parliament when asked about Reserve Bank Governor Grant Spencer's call for a debate about a widening of taxation of capital gains.

English was referring to the 2010 Tax Working Group review of taxation and the 2001 McLeod Review of tax.

"In the end you have to find something that's going to be generally supported and the fact is that in New Zealand that further taxation of property was certainly not supported in the last election campaign by the public, or the election campaign before that, so I think you can say various proposals have been tested analytically and politically and there hasn't yet been a decisive tax measure or tax change that has broad support," English said.

"I think the lesson, particularly out of the last election campaign, is that the public do need to support changes in taxation of housing because it is, for by far the majority of New Zealanders, their main asset, and for many of them, a significant investment asset. We are always testing the balance of public opinion, policy purity and effectiveness of policy so we have had a few debates about capital gains tax, and it is pretty clear it doesn't have the support of the public and politicians."

English said there was already a tax on landlords who trade properties for income and the Government was in discussion with the IRD about whether it needed extra resources to toughen its enforcement of these property trading rules.

"There's already effectively an income tax in place for those who trade and there's ongoing discussion about what further enforcement IRD can apply to the existing law," English said.

"I think everyone - real estate agents, buyers - are pointing to higher levels of trading activity in Auckland and so there is a question of whether that should give rise to further enforcement activity," he said. "The focus is on what what resource they might need for further enforcement of existing law and that will be a matter discussed in the context of the budget," he said.

The 2015/16 Budget is due on May 21.

"In the past we have put further resource in for more investigation into transactions and we're, in the context of the budget, having more discussions about that now."

'We're helping on supply'

English rejected the suggestion the Government was doing nothing to help the Reserve Bank address the latest housing boom in Auckland.

"It's not a matter of the Reserve Bank not getting any help from the government. We've focused strongly on the supply side. In fact, I'd say of all developed countries' property markets we've got the most coherent discussion about the fundamental driver of the housing markets at the moment, which is inflexible supply, and we've taken a lot of measures," English said.

"We haven't actually taken the job of consenting off the Auckland City Council but with respect to supply we have pushed pretty hard. We are building momentum there. More supply is coming to the market. The higher prices are an incentive for developers to get on with more supply," he said.

WOF for private rentals?

English was also asked about a Maori Party push for a Warrant of Fitness system for private rentals.

He said Housing NZ Corp was trialling such a system, but the Government was concerned it could reduce supply of rentals and increase its cost.

"This is all a matter of balance between getting the basic quality of housing up if we can without imposing so much cost that people can't afford the houses to live in," English said.

"If you could simply raise the quality of housing at no cost then of course you would do it, but in the real world, if you make the standards too high it will put housing out of the reach of a lot of people who, right now, have adequate enough housing and can afford it - just," he said.

'Not breaching PTA'

English was also asked if Reserve Bank Governor Graeme Wheeler was breaching his Policy Targets Agreement with English, given annual CPI inflation of 0.1% in the March, which was below the Bank's 1-3% target band.

"No, I don't think he is breaching the agreement. Whether he is within the band depends on where you think inflation is going to be 18 months, two years out," English said.

"They have been forecasting it to be back within the band two years ahead for a couple of years, and every six weeks, as they update their view, we get the opportunity to see whether that is still the case."

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He, English, is right. CG tax would not make much difference unless it was comprehensive and as Muldoon predicted 35 years ago, the public won't stand for it - that it would be political suicide for any Party/ Govt that tried it. The IRD lost a key case in the 1980's (I cannot recall the detail) involving the technical application of CGT under existing provisions - that could be easily tightened up by today's govt (which they won't, of course) but a tax of a few $K won't kill a Ponzi. Increasing supply won't work either, it will just make the game bigger. The answers are: higher interest rates, VERY tight immigration (which will also improve NZers wages) and a prohibition on non NZ citizens buying (limiting them at least to new builds) properties. None of which will appeal to a govt in the pocket of most of the players in the current Ponzi.

EXactly. A capital tax would be a nation wide penalty to an Auckland problem - and wouldn't change the auckland situation one bit.

IRD do need to start looking more closely at property sellers, if there are signs of abuse. But that is just straight forward tidying up of their own existing procedures, in face of possible increase in abuse, nothing new there.

As for the WOF for property... There are _already_ existing rules for Sanitary conditions in law. If people are finding they are having issues then they need to be seeking redress with Free services at their local law centers, in the media, with existing council services, through courts, and with the department of housing - once again it needs to be dealing with _actual_ issues that are _already_ covered by law...not adding costs to everyone who is already doing the job alright. The real problem there , I think you will find is that the tenants are often at fault (poor choice, not paying rent on time, deliberately choosing poor places hoping to save money, damaging the property) and that's why they want the government to force change on everyone rather than have the court find they are at fault in some matters. that and many people just don't have the guts to front up when something is wrong, and would rather stab everyone in the back than be seen to stand up.

Yr right CB re the silly WOF thing. Refer s.45 (1c) Residential Tenancies Act 1986. It takes about 2 minutes to look it up, yd think the Lefty House Police could manage that!

Taxtion of profits on property could be fixed by making the default option - it's taxable - subject to the taxpayer making a fully documented submission to the IRD, at the time of sale, that the purpose of the original aquisition was for purposes other than making a profit

Currently the default option is the other way round - it's not taxable unless IRD can prove otherwise

It shouldn't even be that complicated. A rental property is a business asset. When disposed of, if it realises more than its (depreciated) value, the gain on sale is taxable (a loss on sale would be deductible). Intent shouldn't even come into it. That shibboleth is merely the propertied classes tweaking the law to avoid paying their fair share.

Wrong IRD dont have to prove anything only suspect, if they come knocking you have to prove that you didnt buy and sell for any capital gain. the problem is they dont go knocking enough.
im sure if there was story after story of people getting caught and taxed with penalty intreset the practice would reduce

Bill English has got his head so deep in the sand, he doesn't even know that Auckland City Council was disestablished by his own government in 2010!

Nobody has bought Auckland rental property in the last few years for the purposes of just receiving rent. That would be quite nuts. All of them did so for the capital gain, and thus anybody in this market had an anticipation in mind, making them liable for the tax under current law.

also few people would buy a rental, and then deliberately choose to dispose of it at a loss.
That's what we're saying the law is already there, it's just being misused.... why and to whose advantage you should have been asking.

There are few ways to indicate that a property is -not- intended for resale. You have the family there, job(s) in the area, have had it in the family a long time, documented it as part of long term assets in the body of a Trust document. At time of sale there are a -few- things which indicate the sale wasn't part of the goal - its their only property and their job is moving, or the family size has changed and the sale monies are being repurposed directly to the new house, the time of sale is linked to a personal catastrophy (marriage breakup, loss of income putting mortgage payments out of reach, discovery of large debts, environmental disaster).
Such things are easy to check and document if the general assumption is "for profit".

Much harder to prove profit (through resale) was an intent if the default assumption is "no resale profit"

Higher house prices are not always an incentive for developers to get on with more supply !!! In fact when prices are rising quickly there is more incentive to sit and do nothing.....and the longer you do nothing when there is a shortage the more money that you can make !!!!! And when all the blithering idiots in Parliament and the bureaucracies do everything they can to increase the costs then it's like the goose that laid the golden egg....so people sit back and enjoy the ride!!!

As I have said before wage and salaried workers have very little contact with the IRD these days as their employer is undertaking the PAYE etc......Falling under the IRD's radar is sure fire way of having your cake and eating it too!!!

It is easy for Bill E to say the RBNZ has not breached its PTA by pointing the marker to the future.....go back 18 months and then see if the PTA has been breached!!!

In regards to the WOF on rentals there are other pieces of legislation that cover contracts and agreements....goods and services must be fit for purpose......there are many standard tenancy agreement clauses and then property managers provide additional clauses outside of the original agreement so those clauses are actually invalid .....there is no signatures on these additional clauses......so what happens if a property manager fails to point out a defect?....like the house is highly susceptible to mould......what is the tenant to do after they have moved in? I don't see a need for a WOF...as there is far more available to a tenant.... they just don't seem to know what to do!!

"It is easy for Bill E to say the RBNZ has not breached its PTA by pointing the marker to the future.....go back 18 months and then see if the PTA has been breached!!!"

I noticed the same convenient Catch 22.

The RBNZ can never be in breach of their PTA. It is a meaningless document apparently.

I agree on the WOF for rentals not needed and even being awful on several fronts. a) the house would have conformed to the building code / council code at the time of its construction, legally that is all that is required, a WOF changes that. I meam even today for cars is all that is legally required. What the WOF's imply is the landlord will be forced to comply with every code improvement every year from now on or fail their WOF. So if say double glazing and solar water heating become mandatory for 2016 all rentals have to conform, no matter how old or what the expense is, this is plain crazy. b) Tenants have the right to select a rental or move out if it isnt up to the standard they want. So want a heat pump? and an insulated house? make that a criteria when you look brain dead simple.

No, I do think tenants know full well what they are doing. What they want is a cheap rental and then whine so that it gets upgraded and then pay no more rent for that. I listen to this sort of thing all the time in the green party forums it drives me potty.

In some respects the establishment of a capital gains tax (at say the normal 15-20% range) would substantially lessen the costs for major new greenfield residential developments.

Highly regarded, professional blue chip developers like Mansons, Fletcher Residential and the like no doubt pay their full marginal tax rate which is substantially higher than what would be payable if a capital gains tax was implemented. Professional developers have to pay 28-33% marginal tax on gains made whereas they could only be paying 15-20% if a capital gains tax was was enforced. Developers often work on an absolute $ margin requirement per development so they likely wouldn't pocket the full difference. With affordability an issue they would likely instead prefer to sell more and pocket more, even at a lower price per unit.

Isn't it ironic that National's stated goal of accelerating development and supply could be directly aided by a capital gains tax? A cynic would question the underlying reason for such resistance....

they are already paying the tax in the spec resale document. they're developers. ie no capital gain exists, its a manufactury process.

The capital gain is speculators, or for plant and equipment... ie "capital equipment". the term "capital" gives it away. Land purchased for development is not capital purchase (vs land purchased for their own offices)

I shake my head at people who who think capital gains tax is a good thing and don't even know what capital property/assets are.

What a crazy distinction. One doesn't invest in property do any thing other than make a profit, whether it be by capital gains or otherwise. It is like saying, it wasn't my intention to be paid from my employment, I cant help it that my place of work pay me. Really! This is just bollocks.