TOP's Geoff Simmons & Andrew Courtney on why we need to bite the bullet and include the family home in an equity tax

TOP's Geoff Simmons & Andrew Courtney on why we need to bite the bullet and include the family home in an equity tax

By Geoff Simmons &  Andrew Courtney*

There is growing awareness of the need to tax assets in New Zealand, but this morning the Labour leader reiterated the party was ruling out a capital gains tax on the family home. Taxing the family home may be politically unpopular, but exempting it will kneecap any serious attempt to reduce inequality and improve the allocation of investment in our country.

Labour wants to get experts to review our tax system, but this has already been done in 2001 and 2010, and those experts stated that it was a ‘no brainer’ to include the family home. This blog explains why TOP’s tax reform includes the family home, and why we should not make an exception.

TOP would like to introduce an equity tax through which income from all productive assets, including land and houses, would be taxed.  

One thing to make clear is that we do not have an issue with people owning their own home, quite the opposite in fact. We just want to make sure that all New Zealanders have a realistic chance of having secure, healthy housing. This is something that the current system is making incredibly unlikely for everyday Kiwis.

Here are three reasons why we shouldn’t exempt the family home. We will finish by looking at, if we did want to create an exemption, what the fairest way to do so would be.

1. It is the biggest tax break, and is the root cause of rising house prices.

Currently the centre of the unfairness in our tax system is owner-occupied property, due to a loophole in our income tax regime. To exempt it would, in effect, not deal with the issue. As it stands this loophole is worth around $11 billion dollars per year in forgone tax revenue. The vast majority of this loophole - some 60% - is from people owning their own homes. Exempt that and you are only dealing with less than half of the problem.

Here is why. If you are saving to buy a house or simply have money in the bank you get paid interest, on which you pay tax. You are then free to spend your net interest income on renting a house, buying smashed avocado breakfasts or holidaying in Bali. But remember you have paid income tax on the money you’ve saved and also tax on the interest those savings generate.

If however you have enough savings to buy a house, you avoid that second tax. The savings you now have invested in property return you at least two material benefits: firstly, a house to live in but being both the landlord and the tenant you don’t recognise the underlying or imputed rent for the house; and secondly the untaxed capital gains.  Because no money changes hands, no tax is paid. This is a large loophole that is distorting how we invest our savings.

Because everyone is chasing this tax efficient investment, it’s little surprise that housing is the most favoured place to invest our savings and it’s also no surprise that property values keep rising.

Even if we taxed the capital gains in property it wouldn’t make much difference. Recently capital gains have been as high as 25% per annum in some parts of the country. Think about that for a second. If you owned a $500,000 house in 2016, and sold that house in 2017, without giving it a single lick of paint you would have made around $125,000, and in most cases you would not pay a single cent in tax on the way through. 

Yes that is an extreme example, but even the average New Zealand house rose in value $48,142. That’s almost exactly the same as the median wage. Sure, speculators and property investors are among those who are taking advantage of these prices, but it’s only rational, they are simply doing what the system encourages. TOP’s tax policy will remove the tax advantage of property ownership, but the reality is that 60% of the houses in the country are owner-occupied, and if we exempt them, we will in effect, not deal with the issue.

Those who are lucky enough to have a foot on the housing ladder are able to reap all these benefits. The rest of us – about 50% of Kiwis – are forced to pay rising rents that are steadily outstripping wages, and we have little prospect of ever owning a home. Yes, people have traditionally worked and saved hard to buy their own house, but for a growing number of people hard work and frugal living is no longer sufficient to get them on the property ladder. TOP’s tax reform is all about giving your kids and younger generations the same opportunity you had.

2. Exempting the family home means the tax loophole remains.

Some family homes in New Zealand are worth $50m. Do you think those houses should be exempt too? Exempting the family home will only incentivise wealthy people to invest more in their family home. That means they will buy the place next door and extend on to their section. Expect more McMansions as a result of that policy. Instead of five houses worth $1 million, you will just get one worth $5 million.

If you are going to dole out tax breaks, exempting the family home is a very poor way of doing it. Far better to tax everyone, and spread the gains fairly through reduced income taxes. Then most people (80%) in fact, will be better off. This is TOP policy.

3. Exemptions are the enemy of any tax system.

One of the major benefits of TOP’s tax reform is that it’s comprehensive. All assets will be required to generate a minimum rate of return, or be taxed on the assumption they do. A business is not actually a business unless it generates a taxable profit at least equivalent to what can be earned in the bank. It is more likely to be a tax shelter for the proprietor’s personal expenses.

Making the tax comprehensive with no exceptions means we fully close this loophole. Having exceptions, such as not taxing the family home, will only make manipulations possible. And believe us, wealthy people can afford to hire accountants to make sure they exploit any loopholes better than anyone else can. After all, what actually defines the family home; does my bach count? What about the family farm? Or the family business that operates out of the family home? Is it only one house per person, or per family? In that case can I gift one house to my brother, and one house to my sister, one to each of my grandchildren?

There are all sorts of ways to skirt the system, and when such large sums of money are involved, you can guarantee that people will.

The fairest way to create a tax break

No doubt when TOP gets into negotiations about how to implement this policy there will be pressure from establishment parties to exempt the family home, as Labour have shown today. For all the reasons above, exempting the family home would be a dumb idea.

Instead, if there was a desire for exemptions, The Opportunities Party would prefer to set a threshold per person. How much tax free equity do you want each person to have? Before you answer remember that 40% of Kiwis own nothing. Okay so how much should the great Kiwi tax break be?

$100,000? $11b just became $7b.

$200,000? $11b just became $4b.

$500,000? You get the picture.

Such a system is still avoidable, people will start gifting money to their relatives that are under the tax free threshold. It sets a better precedent than an unlimited exemption on the family home but it protects tax dodging – that is both unfair and a drag on economic efficiency, productivity, income and jobs. Why would you do it, except to favour your political mates?

Do we really want a fairer society?

The whole premise of this policy is to create a fairer society. One third of the wealthiest New Zealanders are not in the top tax bracket, not because they are breaking the law, but because of the legal tax breaks provided by our system. What this means is that workers often pay a higher rate of tax than those with significant property investments. The family home may be held sacred in New Zealand, but this is just stupidy en masse.

The current system is not working; it’s making an already unequal society more starkly divided. You may get incensed at what you see as an attack on your home, but such a reaction is founded on a lack of knowledge. Remember, most New Zealanders (80%) will actually be better off under TOP’s tax regime. It’s the wealthy who will pay more, and even then, these people will benefit from a fairer, more vibrant economy. 

It’s no longer enough to just fiddle round the edges. We need to make drastic changes to our tax policy, and the sooner we make them, the better. Not just for you and me, but for our kids, who will always wonder how it was possible that Aunty Jane could own 14 houses, when they can barely afford to pay the rent.

-----------------------------------------------------

*Geoff Simmons is Deputy Leader of The Opportunities Party and its candidate for Wellington Central. Andrew Courtney is a researcher for The Opportunities Party.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

309 Comments

Comment Filter

Highlight new comments in the last hr(s).

"Your(sic) trying to tax a side effect of another problem when you try to tax a personal dwelling." Then the answer is to treat all personal dwelling equally. Personal dwellings are either individually owned or occupied ( rented) yet the tax treatment in a very few country ( Australia, Japan, and New Zealand) allows one class of occupants to be discriminated against. eg; Owners and Landlords are treated differently for what in many cases can be the same asset - the house. The answer, of course, is to treat all property owners similarly. They all get the same tax treatment - whatever that is. ( Many other countries - the UK and the USA amongst them recognize that fact and address the matter in different ways). Until we too equalize property ownership tax treatment, abuses and outright lies will continue to occur.

Its all a matter of taxation of personal assets and double taxation. It means if you have personal assets that are valued as being in demand in the economy than there is always an ideology that will want to tax it If you Treat all property equally then that means taxing personal assets, and that means all assets you own as portfolio assets. It simply ignores that fact that people dont understand the economy and are fixated on a part of the system and it not the problem. In fact it means that the state now wishes you to understand that almost every thing you own if it has a substantial value it will be a potential taxation target.

So I will have to rent out my leather jacket "All assets will be required to generate a minimum rate of return, or be taxed on the assumption they do". to cover the tax I will have to pay on it. It keeps me warm and dry just like my house does and it makes me look good which is something my house never does. Will I be able to claim depreciation on it and repairs and maintenance?

you could put a case to the Tax Department. Double taxation is something that government and tax departments do not want models developed for in case it reduced the receipts that treasury require. Overall taxation when you take in to account all the taxes you pay including GST and council and environmental taxes is already very high. Taxing the family home is not going to help create wealth in new zealand. Increasing land for building houses and creating innovative solution to create dwelling is the only solution. Taxing something never solved fundamental problems. If demand and supply dont align then price movement will occur and if you tax something it merely becomes a transaction cost that the market bares and it become built into the price after a while. Markets adjust rapidly and policies that are implemented by government tend to be reactionary long after the causes that created the market problem and tax has never been a solution that corrects a market direction. tax is tax and is used by governments to fund the policies of the government in power. Taxing the family home is a populist solution to a much deeper problem of global over population....... and limited resources. It will be like .... on a fire...

People have already paid tax on these assets. eg build a house, heaps of compliance costs plus GST on those, GST, on materials, wages for builders which are taxed etc. This would create a huge number of valuation businesses all over NZ, and even more compliance costs.

Far more fair IMO to tax on income, and higher rates for higher earning people. In fact I saw on the news that most people agree with taxing people more if they earn more. So it is really a no brainer.

Wow over 300 comments .......... this new tax idea is never going to fly

I worked damn hard scrimped & saved to buy my first home! At the time (1990's) it was cheaper paying a mortgage than renting which I've already spent half my life doing. Now you want to tax me for it, if & when I decide to sell it? I don't think so!! I contribute enough to the tax system as it is thank you very much!! I will not donate any further to this or any other government!!!

The Right to tax does not rest with political parties.
The Right to tax is only for such services as defined by the constitutional arrangement.
Personally I have never made, held or otherwise had an agreement that grants TOP or any other political party to have authority over me including the Right to tax.
Given I have never granted authority to anyone else anyone who takes my authority and uses it for their own will have to come to an agreement with me as the value of that authority and pay me annually for the trouble and costs I would incur!

Why use the word tax loophole? It is not a right to tax everything! But it is a Right to be able to have a home and provision yourself with shelter suitable for your needs.
People have the Right to self-determination - the last we need in NZ right now is an equity tax. If one wanted to avoid paying the equity tax wouldn't one just increase their debts by buying more houses to lower their overall taxable equity held annually.

How about removing taxes off all assets - people would not favour one over the other that way.

People who own their own home already pay indirect tax called rates!
Will people be able to claim for all expenses occurred in maintaining the propert? Tax relief on mortgage interest? And in the event of negative equity claim it as
a tax loss against income?

Pages