By Hannah McQueen*
I love property. I love it because of the immense power of leverage.
You put in, say, 20%, the bank lends you 80%, but you get to keep 100% of the gains.
When it comes to generating investment returns, that's powerful. In addition to that, what it costs you to make the 100% - the weekly top-up you have to pay to cover the shortfall in rent vs outgoings, is tax deductible. So, if I have to put in $100 per week, I then get $30 back. As a tax expert and adviser to many clients, that is a beautiful thing.
Given that passion, it might surprise you to learn that I think a Capital Gains Tax is actually a good idea, whoever is in Government after Winston makes his choice.
I'm well aware that implementing a Capital Gains Tax has long been considered to be political poison because Kiwis' love affair with property has been paying them serious, untaxed dividends.
Reserve Bank figures show exactly how serious. Between September 2008 and the end of March 2017, (the last three terms of the National Government) there was a $320 billion rise in the value of housing and land, untaxed.
That $320 billion is more than the entire country generates in a year, just in property gains, and represents a serious increase in wealth for property owners. The return on investment property is up to 300% higher than other investment options where you can't use leverage.
But it's time these phenomenal gains were taxed. Not each year, but when you sell.
Yes, there should be an exemption for the family home, and I think the longer you own the property, the less tax you should pay. I do get that the landlord takes on the risk, so they should get the return, that it's easier than you realise to buy a lemon, and that tenants can be painful. But a tax on money you would never have earned without the strength of our economy, needs to feed back into the economy somehow. Even if it is just a little. A smidge. Something.
International evidence suggests it won't have any long-lasting effect on property prices - these returns are enabled by bank lending policies, not the government tax policies - so why are property owners so petrified?
We should also prioritise New Zealanders. People who are not New Zealanders who buy in our country should be taxed a whole heap more. I am sick of travelling to other countries and seeing New Zealand advertised on their TV screens as an amazing place to invest, where it's easy and tax-free. The irony of this is that they will be taxed in their own country when they sell the property, even if they don't pay tax in New Zealand. So, their country benefits from our growth, but our own economy doesn't. That's ridiculous.
A good tax system needs to be fair, and ours isn't. The Tax Working Group assembled by the National Government reported as much in 2010, saying there's a "major hole in our tax base concerning the taxation of capital", which results in the tax burden being shouldered by wage and salary earners.
The implication of this distortion being, why work and pay tax when you can borrow money and own property? Why indeed. The strength of any economy is based on the middle class doing well and when they are struggling the gap between rich and poor widens, and that puts downward pressure on any economy. Pretending it won't, doesn't mean it doesn't. Whereas, when the middle class is thriving the economy does too.
Sir Paul Callaghan says what New Zealand needs is 100 great companies.
But creating 100 great companies will take innovation and innovation will take capital. You need a whole lot of cash.
How can our businesses have a shot at growing when it makes little sense to invest in them over property? There's more debt against the housing market than the entire capitalisation of the share market – a place where companies go to raise capital.
It's easier to get a property loan than a business loan, because banks want security, and their preferred security is always property. If we don't incentivise people to invest capital in good local ideas, then it ends up being sold to someone in another country who has the capital to grow that idea. I don't blame the innovator – but imagine if our great ideas had more capital behind them to become rock-star companies based in NZ, self-propagating more growth? Genuine growth. Not growth brought on by inflation or immigration. That's not growth. That's a Ponzi scheme.
As a business owner who also advises many other business owners, I know better than most that it's laborious work and if you've managed to build a high-growth business, cash flow funding is relentlessly hard. As a Masters of Taxation Studies, I also know a bit about tax. As a mum, I also want my kids to have a chance at success because we live in a fair system.
So, if the politicians' aversion to upsetting property-owning Kiwis remains, it's time Kiwis led the charge. Ask yourself, would it really be such a bad thing if there was more capital for businesses to grow and be better and a little less tied up in housing?
*Hannah McQueen runs financial coaching firm EnableMe.