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Susan St John says the minority report from the Tax Working Group should be taken seriously if the desire is to reduce inequality and improve housing affordability

Susan St John says the minority report from the Tax Working Group should be taken seriously if the desire is to reduce inequality and improve housing affordability

By Susan St John*

There is an old four bedroom house in Epsom I drive past that has been left to deteriorate, uninsulated, mouldy and damp, rusty roof and leaking gutters set in overgrown unkempt grounds.

It was sold to an overseas owner five years ago, and it now belongs to another overseas owner who paid $500,000 more for it and has it in the hands of a letting agency. Rent has come down by $80 a week to $915 a week after it was empty for months. It is not alone, there are many other examples throughout Auckland.

In the meantime, the QV of this property has reached $2.5m. If they find anyone desperate enough to take it on, and only if they manage to rent for a full year, it would yield a 1.9% return before any of the usual costs.  After interest deductions alone, large rental losses can be expected at a cost to the NZ taxpayer.  This house is clearly not held seriously for rental, not does it add to the affordable housing stock.

When we look at the Tax Working Group final report we must ask- what was the problem to be addressed?  What did Labour really want?  Grant Robertson wrote the TWG a stern letter once he had seen the interim report. In it he instructed the TWG to “consider a package or packages of measures that reduce inequality, so that New Zealand better reflects the OECD average whilst increasing both fairness across the tax system and housing affordability".

Let’s remember NZ has been top of the pops for some time in the unaffordability stakes.

The TWG does not spend much time outlining the problem but inequality and housing affordability are linked.  The compounding of net housing assets at the top parallels the compounding of net misery and debt at the bottom with little understanding of how the two ends are connected in a finite planet.  A serious misallocation of housing resources has resulted from an over building of excessive housing for better off that has sucked out the lifeblood of the building sector and bid up the price of materials and skilled workers at the expense of affordable housing. The New Zealand housing boom reassembles the Irish one, but without the crash…. yet. 

Much as I greatly admire the work the TWG displayed in multiple technical documents on the internet, they didn’t address the Minister’s request.

The TWG’s Capital Gains Tax (CGT) CANNOT address the compounding growth in the wealth divide. It will only capture gains made after the date of valuation and only if gains are actually realised on sale. Moreover, it is only if the house is not a family home and only if a myriad of inevitable exemptions such as for roll over don’t apply. The best we can expect is for the proposed CGT on housing to mildly slow the growing divide if we are lucky.

The TWG proposes tax reductions as part of a revenue-neutral package by raising the bottom income tax threshold to make things fairer, but when the increased tax thresholds are analysed on a  household equivalised basis, Treasury shows they are worth the least to the poorest households. About five times more goes to the highest income decile than the lowest.

The TWG have essentially given us two choices: A comprehensive capital gains tax on absolutely everything that seems a one-way ticket to political oblivion, OR a more limited one on residential housing that leaves out the family home.

Yet Grant Roberston’s letter to the TWG went on to request that the TWG;

“Examines whether a tax on realised gains, or the risk-free rate of return method  (RFRM) of taxation (or a mix of both) is the best method for extending a potential capital income tax on specific assets - with the goal of extending New Zealand’s tax system is fair and balanced.”

The final report simply falls short. Over 95% of it is about CGT and the RFRM is not given a fair run.  The RFRM has many advantages over a CGT on housing. It has a clear rationale for a start in that it treats a person’s net equity in housing the same as if the money were invested in the bank at say 3-4%.  In effect it says to landlords if you cannot generate this modest rate of return what are you doing in the business of renting?  The plus for landlords is no more expensive accountants and disputes over what is deductible. For society, there can be no more expensive taxable losses, no more interest write-offs from gearing up to buy and no incentive to have houses lying empty or under-rented.

But there is the rather important issue of the family home. In 2000, in response to the Mcleod Tax Review Issues paper Michael Cullen as Minister of Finance took the family home off the table and tossed out the RFRM.  He has not been challenged in that view. 

The TWG should have had the courage to tell the government that the family home can't be left out entirely regardless of whether a CGT or a RFRM is considered.  With suitable exemptions, the vast bulk of owner-occupied sales can be ignored. But a full exemption for $20 million mansions is a very bad idea. Under the RFRM, net equity of $1 million per person in a family home could be exempt.  Younger mortgaged families would find they were not affected, while older owners of more expensive mortgage-free homes (over $2 million for a couple) may have tax to pay.  

We should have had a properly worked up RFRM option. As if leaving the door open, Cullen did say:

  “The Government doesn’t necessarily need to make a straight call over whether or not to adopt the Group’s preferred model for taxing more capital gains. It could choose to apply it to only some types of assets or stagger the inclusion of different assets over time. It may decide to apply the deemed return method to property. All these options are open to the Government.”

Unfortunately, the analysis of the RFRM is superficial. One of the papers argues that in theory it should not matter if a CGT or RFRM is applied (under given strict assumptions about how Capital Gains are accrued). Technically the CGT and the RFRM are posited as two methods that are ‘equivalent’. But we don’t start at the beginning of the world with a clean slate: We start with a world where decades of capital gain have already accrued for the wealthiest.   The RFRM is capable of addressing the wealth divide in way that a CGT on future realised gains only, cannot.  

The Minority report written by three of the 11 taskforce members clearly thinks there is a case:

“If unaffordable housing is the problem, the capital gains tax proposals are unlikely to provide the solution. If gains from residential property are to be more fully taxed, then this could be done with some modifications by extending current rules, including the bright-line tests. Alternatively, we consider that a simpler option could be to apply the risk-free return method, or something similar, to residential housing.  This method taxes net equity in an asset at a fixed rate each year.   Extending the tax base in this more limited way would generate much of the revenue expected from the comprehensive capital gains tax contained in Volume II. “

Why has the minority view not been taken seriously?

*Susan St John is an Associate Professor at the University of Auckland Business School.

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Deemed income will never get the support of the Government. The first forced sale of a home because the young family or the poor elderly widow could not pay tax on some imaginary amount that was never earned will be the death of any political party which introduces such a regime.


ha ha . Poor elderly widow! You mean the old bird in the million dollar home collecting Nat Super, healthcare and the gold card? Often forced to stay in the home by the kids so little jimmy doesn't have to see his inheritance use for residential care fees. Meanwhile the young family don't have a hope of getting into a home.

You are using an emotive argument perpetuated by the asset rich to keep the non asset owners in their place.

I'm currently a "non asset owner" and I would agree with HeavyG. It's ridiculous to think that you pay tax when you work to save, buy and service a loan until it's paid off and then have to pay imaginary tax on top of it. A CGT is one thing - paying when a gain is realised, but a deemed rate of return is just not on.
Being blunt, it's essentially a compulsory measure to get people to do what you think is best which in this case is kick the poor elderly widow out of her family home. Something like the "tyranny of the majority" comes to mind with ideas like that.

Agreed. There is no incentive for the State to be pennywise when it can just "put it on everyone's house" - people have a hard enough time with their own houses, imagine how bad it would be with public policy wonks champing at the bit knowing there's an endless stream of money to play with, provided they can just keep house prices as high as possible.

Emotive argument there yourself rastus.

Nope factually correct. Just said with emotion. Different.

Rastus your comment is just rubbish

imhenry (and others) let's try and do a bit better with our comments please. Why do you think the Rastus comment is rubbish?

Seriously Gareth?

Someone that uses a fatuous example with extremely loaded descriptors should properly be called rubbish. Making an assumption that the children of a superannuant will be forced to stay in a home so that the offspring will inherit the home shouldn't be considered rubbish? And just what is Nat super? BTW, one isn't living to a very high standard if one is subsisting solely on super. As of next week super will be at best 2/3 of the minimum wage.

The OP made a valid point about the negative potential media publicity with selective usage of edge cases. Just listen to a few nights of Checkpoint to hear just how effective these can be. Rastus response was not to counter the OP argument, but instead to belittle in a demeaning manner.

I am more concerned about what happens with this deemed income tax if the goal of stable house prices comes to pass? At that point, essentially all home-owners are renting their property from the government.

Want to fix home prices fast? Double the interest rate... that would bring the house prices back in line rather quickly. That, or any other mechanism that deflates house prices, will not get put in place anytime soon. The current government has stated quite clearly and definitively that they have no intention of doing anything to reduce the price of existing housing (and the prior government has demonstrated clearly that they had no intentions in that regard as well, to say the least). From that statement one can conclude that not much will be done to change the current paradigm. As the deemed income is likely to be similar in effect to a large increase in interest, it is unlikely to be considered seriously.

Thank you Yankiwi for a detailed response.

BTW, apologies for a few semantic typos that reduces the readability of what I wrote. I think that most would still be able to decipher my intent despite a few egregious typo errors on my part. I would have edited a few words quite a bit earlier except for the time lag to get approval which kinda reduces the appropriateness of editing a comment.

I'm somewhat gobsmacked that you needed someone to provide a rationale here... but then again my wife lets me know sometimes that what is clearly obvious to me may not be obvious at all to others. I am struggling a bit in that your request appears to give at least equal weight to both sides, with a request for justification on one side only but not any request for clarification or justification on the other side. I would hope for a bit more reckoning from


Not an argument, merely an observation of the political reality (as TOP discovered at the last election).

..yes agree Heavy G ... but only due the ownership of the message. I do hope the asset less wake up to the rigged system they are lumbered with.

Scaremongering prevents objective debate, The young poor family will have well under $1 million net equity in their own home and not be affected at all by any sensible RFRM. The poor elderly widow can have the tax on her net equity over $1 million accumulated against the property until she sells or her death. Lets say her property is $1.2m. Her taxable income is 200,000*.0.035= $7000. If she is really poor this is taxed at 17.5% so tax is only $1225 and that sum can be deferred if needed.
Imputed rentals for owner occupiers are not imaginary and they are even counted in GDP. For rental properties rents are clearly not imaginary- the RFRM tax takes the place of tax on such rents,

1m is of course an arbitrary number ( presumably your definition of "rich prick" ).
Have you considered what introducing a completely different tax treatment , starting from an arbitrary threshold would mean to property market , construction , etc.etc. ?

I don't think the term " R P " is helpful. I didn't have all the resources of the TWG at my disposal to consider a range of exemptions-- and $1 m may not be the right number-- the point of it was to remove the majority of family homes from being captured by this tax. Houses worth over $2m ( couples exemption) may be seen as a bit more than a family home- recent sales of such homes, some over $20million in Auckland are a huge way in which inequality is perpetrated, As for transitional issues I don't think they would be any worse than for CGT but a fully worked up proposal would consider these.

I agree with you that the term ( "RP") is not greatly helpful - however it is irreversibly present in the discussion- for that we have Mr Cullen to thank. NOT appointing him to lead ( supposedly "independent" ? ) TWG would perhaps keep the term out of it ..

The issues with an arbitrary threshold you suggest would not be transitional but permanent . Your in response in relation to them echos that one receives from TOP leaders when quizzing them about their tax policies ( it is going to be great .. no we do not have any details ..)

I understand the criticism of lack of detail- the work has not been done. The problem is that just as the details of the CGT are enormously complex as outlined in the TWG technical report, the RFRM theory and practice will also differ. My feeling from the analysis so far is that the RFRM would overcome many of the problems of a CGT: eg no more time consuming tax returns for rentals; no worries about valuation day as an annual QV would be used, no accountants need to determine capital gain and apportionment on sale ( short term bright line rules would still apply under RFRM). The family home (above a realistic threshold) would have to be included (but that is true of the CGT too if it is not to encourage an explosion in investing in mansions). It could be phased in at a starting rate of 1% rising to 3% over time. it needs a TWG technical report and then a proper discussion of the relative merits of CGT and RFRM for housing. Instead we are going to get bogged down with a debate between a comprehensive CGT on everything ( except the family home) and a limited CGT only on housing rentals.

The arbitrary threshold should be set as a multiple of median salary or set such that it affects only the top 5% of house sales.

So YOU definition of RP is different ... - this is the point really ; everyone has one - that invariably excludes oneself.

Do you have any estimate of the tax that would be gathered if you provided a $1m safe harbour?

Imputed rent is imaginary in the sense there is no rent that is paid to the owner. Taxing deemed amounts creates payment problems which your example gets around by accruing actual payment (presumably until the widow dies) while also reducing the wealth of the person (as equity is diminished over time).

There is a fundamental difference between taxing gains (taking a percentage of a gain) to taxing wealth (taking a percentage of a person's wealth). One shares in the wealth production of the earner while the other diminishes the wealth of the owner. One is sustainable the other is not. The $1m safe harbour and deferral of payment are an attempt to ameliorate the differences but don't address the underlying concerns.

The trouble is that two people, one with $2 m in the bank and the other with $2m in a rental investment or with net equity of $2m in their own home are taxed very differently. One of the principles of the NZ tax system is that income from different sources should be treated the same for tax purposes. Owning one's own home yields a non monetary benefit which we can see if two neighbours go and live in each others houses and pay rent to each other. This is why GDP includes an imputed rental for owner occupied housing. RFRM is intellectually very satisfying and more so than the notion of a capital gain that may accrue over a period but be only taxed if and when realised. The base for RFRM increases as the value of the house increases so that it draws in capital gains over time

I never realised our GDP figures included imputed rental for owner occupied housing. Now I know how the govt keeps boasting about GDP going up as more of use get poorer.

If politicians cared at all about anything 'intellectually satisfying' given a voter base that is anything but intellectual then policy around almost everything would be greatly different.

The tax system treats plenty of things differently; for instance, we have DTAs and Imputation Credits because we accept Double Taxation is bad. But then we're perfectly happy to tax income when it is earned and when it is spent. We charge people 33% RWT on interest, but if it's in a PIE fund, then 28% is magically acceptable, even if it funds exactly the same type of investments. We charge everyone the same regional fuel tax, regardless of if they live on a Link Bus route or somewhere with no transport at all. We expect student loan holders to keep repaying their loans to fund free education for people currently starting tertiary study. I could go on.

But let's assume that we do go down the RFRM road;

I might be being taxed on equity, but maintaining my house value takes time and expenses that I should, in theory, be able to claim back if I'm being taxed on income. Am I going to have to file a tax return? Is everyone going to have to file a tax return?

What incentive does a Govt have to help lower house prices when so much of their revenue would then be dependent on them being high? There's a massive agency issue here that isn't being addressed.

What discounting would there be for say, Auckland houses, where the land component of any house is being artificially inflated through strangled supply? Or are we proposing the same threshold for Horowhenua as we are for Howick, even though Auckland is having to absorb most new migrants and is sliding backwards in terms of livability?

There is a real risk of a perverse incentive here; where, in a ring-fencing environment, you've just handed an extra bill for what would effectively be ground rent to landlords. I wonder who they'll pass that on to?

Or maybe, just maybe, further locking in the idea of homes having to generate a return on investment with an even more complicated tax system just because it's 'intellectually satisfying' isn't the best way to wean people off housing as an investment.

Quick- reply. The costs of your own home are not deductible but there would be an exemption of say $ 1m net equity. No tax returns required.
The RFRM is likely to lower prices. Compared to a capital gains tax that is only paid if house prices increase revenue is positive for government.

regional variations in thresholds are possible but a same rate might encourage resettlement out of Auckland. The extra bill for some landlords may discourage investment in rentals for capital gain. The state may have to play a more dominant role in low income housing. The RFRM is simpler than CGT.

SSJ - "two neighbours go and live in each others houses and pay rent to each other." If two neighbours went to live in each others homes, why would they pay rent to each other? I assume this concept is that the two homes are essentially identical? What assumptions underlie this concept? this seems to me to be so artificial as to be ridiculus.

It is a conceptual experiment to show that there is an underlying rental service flowing to homeowners- there would be an actual rental amount if they rented their homes to each other that would be part of the output of the economy and counted in GDP. No one is suggesting they actually do this! The point is that a country where most people rent would look like its GDP was higher than a country where people own and live in their own homes- that is why imputed rental is included as a GDP output in our national accounts

Now that is a "slight of hand" attempt at changing definitions - "imputed rental" is not income - not anymore so than one's enjoyment of good health , attractive looks etc.etc. ( or do you think that should be taxed too ? )

The fact that GDP includes imputed income seems to be the only reason given to justify including it as taxable income.
This is dishonest in my opinion. The reason why imputed income is included in GDP is to keep GDP consistent regardless of the home ownership rate. I.e. if you don't include imputed income, and home ownership falls, GDP increases as more people rent. However there is no change in productivity. Hence the need to include imputed rent.

To then say that imputed income is real "because it is included in GDP" is dishonest.

Imputed rents are taxed in some countries- but it is a difficult idea to sell! Building in an exemption for home ownership is a concession to the difficulty of taxing imputed rents.The better way for RFRM purposes is to say if you have $x in net equity in housing ( after the exemption to allow for a modest family home) then it should be taxed the same as it would be if on deposit at the bank.. Then we don't need to worry about capital gains tax as the net equity will grow each year as house prices increase. It will discourage overinvestment in owner occupied homes for capital gain

"Imputed rents are taxed in some countries" - very few and in most significant cases applying to a small minority of owners ( e.g. Spain ) . Why should NZ copy those few outliers and not what most OECD does ? ( i.e. not taxing imputed rents).
"it should be taxed the same as it would be if on deposit at the bank" - the equity is not taxed on bank deposits ; this is the actual treatment at present of housing equity at present. ; I think your original argument has crumbled and your are trying to replace it with something you have not really given any previous thought to .

I have always suspected that a cash-strapped Gubmint will want to institute a deemed-return tax regime on houses, for three rather obvious reasons:

  1. Returns are immediate, because as 'deemed' means 'Unrealised' they don't rely on sales but on a value of some sort. Some definite munny Now is always preferable to someday, perhaps, indefinite future munny.
  2. Values already exist for LG rating purposes, as does the database of such valuations. While it can and will be argued that this value is not ideal for tax purposes, it already is accepted as just that for Rating purposes.
  3. The tax base is immobile. Unlike the more contentious aspects of a true Wealth (or Sumptuary...) tax, wherein goodwill, intellectual property and other intangible assets can vanish down the fibre strand to another, lower-taxing jurisdiction at the speed of light, or simply be Revalued downwards by the choice of a valuation method, a valuer, or a re-description of the asset in question, the house tax base is locked in place - a sitting duck or a fish in a barrel.

I'm not arguing for nor agin the idea. I simply propose that a Gubmint needing ready munny to hand out to those who will thereby want to re-elect it, will find the notion irresistible.....

One thing I struggle to understand is how a RFM works when prices stagnate. What possible logic is there for charging an RFM on assets in an potentially stagflationary environment? At this point it is not a 'tax on gain', it is a 'tax on stuff'. A capital gains tax and a wealth tax are separate ideas and attempts to muddy the distinction should be seen for the idealogical grab that it is.

Even if prices fall the logic is the same. The net equity in the asset should earn a return of at least bank deposit rate. the RFRM is instead of a tax on rentals. If landlords cant generate a 3-3.5% on their net equity why are they in the rental business? 80-90% of homeowners would not be affected because their deemed income from up to $1 m equity would be exempt.

" If landlords cant generate a 3-3.5% on their net equity why are they in the rental business?"

Same reason people own gold - store of wealth - core investment principles are 1. security of principal investment, then 2. return on capital invested -

So for people getting 2% yields they are doing so because they think safety of principle is very high (central city auckland, wellington land) - What 'safety of principle' has actually translated to in the past is capital appreciation of that 'very safe' land - however that should never factor into someones thinking if they are applying true investment principles such as those taught by Benjamin Graham to the likes of Warren Buffett

Gold is a non productive asset . Housing is a fundamental human need. We should not have investment decisions biased to housing through under taxation. Sadly it has been the way to save for retirement adding to the demand for houses and driving up the price..

I would say there is no under taxation specific to housing in NZ - But people are arguing and there is some logic (such as housing being a human need and so its value is underpinned by this making it somewhat unique and especially safe at least in the eyes of the banks) that suggests a higher targeted tax on housing is appropriate.

Under taxation of housing arises because relative to a bank deposit my net equity in my own home gives me an untaxed imputed income and a tax free capital gain-- or a TEE treatment ( taxed money used to buy the house, imputed rental exempt E and no tax or exempt E on sale. There is serious under-taxation of the rental housing stock as set out the in the TWG because of deductibility of interest in full and other costs that may enhance capital value and mostly no CG on sale.

Relative to shares or a business though as far as the capital gain goes?

And as far as the 'imputed rental' goes on people owning cars instead or renting them or paying to uber everywhere?

No sorry I don't agree with that at all. Currently relative to other comparable investments there is no under taxation on housing in NZ.

There are a lot of envious people who see easy gains by others, mostly through luck, some through simply being wise, and perceive it as a personal loss (opportunity cost of not buying more real estate when you had the chance). These same people will then peddle rubbish about how they would turn down free money due to their high morals and humanity values.

If you are looking at saving for retirement then housing has a massive tax advantage versus shares in Kiwisaver (which are subject to FIF - a tax on capital)

Are you saying gold would not be subject to a RFRM?

I agree with the minority report that we should be taxing housing and not worrying about other stores of value such as gold. Imagine a capital gains tax on gold when gold prices plummet and losses are made-- who picks up the tab for that?

I don't see people being able to claim losses on sales other then to offset other gains made

Ring fencing as with housing now.

Have you been in the public hospital lately? Have you seen the queues at food banks? Do you know why even middle income families show up at budgeting services because they cant survive? We have a damaging wealth and income divide and yes government needs to raise money immediately to address this not on the never never of a watered down CGT. The RFRM can be designed to leave the vast bulk of the population in peace and get the most revenue from those who can best afford to pay it.

I have been to a public hospital recently . People there work hard - many thanks to them ; there were no signs of under-funding that I could see.

We do not have a "damaging wealth and income divide" . What we do have is a surplus of irresponsible people who refuse to take care of themselves and a matching surplus of bleeding heart lefty academics in search of ways to get their hands on more Other People's Money.

Emergency and non-elective services are okayish AFAIK, but a closer look at elective and other healthcare funding (community, equipment etc) will show some serious issues with backlogs.

Not to mention that the great injustice of allowing this housing-based divide is that NZ's previously high rate of home ownership was only achieved through government involvement to help average Kiwis get into their own homes in the first place.

It's only in the last decades that the rules were completely changed in a way that turned land and housing into a speculative investment vehicle for generations born at the right time, at the expense of upcoming generations of Kiwis.

Ergo it behooves younger Kiwis to look to NZ's history and push for change acknowledging the reality that no, people did not do it all on their own two feet (ever), and housing should not be tax-incentivised for speculative gains while those who earn wages and salary for a living bear the tax burden.

Susan St John reveals the true thinking at last which is "rich prick " and that the government has to handle the cash. A common delusion of academics who work in a secure high imcome, low expectations environment.
I believe we have vast inequality and New Zealanders are underpaid overall.
But we need a small government which weilds it's considerable power to reduce costs to the population, and to increase their incomes. We don't need one that endlessly swells in size and has a hand in every transaction and passes vast amounts through it's book.
Essentially the government should be referree, not a participant.

All good - let's just follow the advice of free market capitalist Milton Friedman and implement land tax instead of making working wages bear the brunt of the tax load. We want to encourage capital to circulate and limit government to be a referee, and that's a good start.

as long as we follow the rest of his prescriptions as well.

Dead . Horse. Flog. Repeat.

Happy Easter Paashaas.


Great article. The working group could have got around the exemption of the family home by recommending that as the home is exempt, then non home owners should be given the same exemption up to the value of an average family home. i.e no tax on say the first $500k invested.

Labor need to show some balls here...the cgt with home exempt is a waste of time.

Disagree Rastus. You are saying that people should be penalised for making saving choices in buying a home, while those who chose the hedonist approach of lifestyle (travel, cars, goods etc) should be rewarded. The underlying message is that people should not be allowed the freedom to make their own choices and bear the consequences of them. The road of this Orwellian choice is not pleasant.

I think when Rastus was read "the Ant and the Grasshopper" as a kid he got the wrong message.

Speak for yourself or own social group. The good young people I know are not hedonistic. They don't get a benefit for doing nothing (like the 65yrs olds), they don't get a gold card, they don't get free Uni, they don't get tax breaks on their paye, they don't get wff. They get nothing.

They get taxed on their savings...unlike the home owners who have their savings untaxed.

So we have this great big ageing group who want to pay no tax and get free everything.

It's called tax fairness murray.

The tax on the home is a tax on income. Simle as. B

"They get taxed on their savings" is not correct, they are taxed on interest derived on their savings. No interest = no income = no tax.

quite a distortion Rastus. As HG says they don't get taxed on their savings, they get taxed on any interest they accrue. I'm a home owner, I don't get a tax break on my PAYE so don't know what you're talking about there. I get taxed on owning my home. Its called rates, and I also incur costs from insurance and maintenance, which those good young people who dont own a house don't face. If I had a mortgage i'd be paying interest too.

But what you are talking about is how the housing costs have got out of control, and a tax for fairness reasons or any other that is being discussed here will not fix that.

The savings in a house also gives you income, but received by way of accommodation provided. It's been explained a zillion times.

A renter is taxed on savings before he can use it to pay his rent. He has no more income to pay this tax than a home owner. The argument about inability to pay the tax by the home owner is a red hearing. Both are in the same position regarding disposable income.

Disagree with a change in tax law by all means. Bu it is an inescapable distortion of the tax system

"Its been explained a zillion times" As opinion Rastus, not fact. The fact that i am not paying rent doesn't automatically mean i am accruing an income. As a home owner I am accruing costs and liability. I strongly disagree with your opinion. I suggest it is a specious creation of accountants and economists who are perpetually trying to sound clever, but in reality are only trying to find ways to bleed hard working people of their incomes, as well as politicians who are trying to remove peoples ability to have control over their own lives. As a home owner I am not subject to the whims of a predatory, blood sucking leech called a landlord. this rankles a few people.

You are repeating your myth. A renter is NOT taxed on his savings. He is taxed on any interest accrued by those savings. So the tax comes from that interest and will not deplete his savings. Bank charges are another matter and perhaps you should take those up with the bank?

The inability for some homeowners to pay any tax isn't a red herring, it is an arrow to the true issue and problem, that of the authorites failing to properly regulate the residential property market, to the point where some existing home owners in a few places are sitting on properties that shouldn't be, but are now carrying a potential market value that is considerably more than they likely expected. BUT remenber this value is not real until the property is sold and the money is in the bank! To put a tax on a PERCEIVED value is as unfair as what you are claiming the renters are facing.

It is similar to the emissions trading scheme. People of the same mind set claim that by putting a price on carbon emissions, defining those emissions by some kind of unit and allowing them to be traded, globally warming carbon emissions will decrease to a sustainable level. Just a rank con job on the population

After a few minutes thinking I have come up with the following, currently I have 100% equity, if I sold house into a Trust with a loan from me interest free repayable on demand(Marshall clause), then equity is zero and no tax to pay. Need to then create other laws to stop this. Also everyone now has to do a tax return.

wouldn't your interest free loan be considered an asset to which a deemed rate of return would apply? So you get the exact same tax bill i.e say 4% of the 100% equity.

You have a $1m asset being the loan, any deemed rate of return regime on wealth/equity would deem income on loaned funds.

I don't think they will expand the deemed rate of return to all financial instruments as savings accounts that don't return the deemed rate of return will need to be caught, after all what is the difference of money lent to a financial institution for below the deemed rate of return and lent to a Trust for an interest rate below the deemed rate of return. They are both loans, what happens annually when you are locked into a 5 year TD and the deemed rate rises and your TD doesn't earn the deemed rate of return, The law of unintended consequences provides opportunities as always present themselves when we try and increase taxes.

Tax avoidance would pick it up or a rule requiring a deemed market rate for a loan if made to an associate e.g. your family trust.

These rules are already in the law e.g. interest free loan from a company to a shareholder is a deemed dividend based on a market interest rate set by IRD.

Excellent article.


I honestly can’t wait for this ridiculous idea of taxing imaginary income to finally die.

I’ve noticed that the parties that do support it dare not clearly articulate what their proposed tax policy actually is, lest the voting public realise how crazy it is.

David C, please ask/challenge your best buddy Geoff Simmons to write an article explaining clearly and definitively what TOP proposes to tax under its wealth tax and why. Ask him to tell the voting public in no uncertain terms that he wants to tax their recreational boat and the like based on the imaginary income it earns. He won’t because he is too shrewd and too scared.

If you can afford a recreational boat then you can afford to pay more tax.

paying more tax because you can afford it, is a logically poor argument (it is politically a very good one, as everyone will think someone else will need to pay more tax, so it is likely to be popular).

You can afford gluten free bread instead of having to eat white budget bread. You can afford to drink a cup of coffee a day. You can afford to have netflix. etc
The logical destination of this argument is all income and wealth should go the government, they then decide who needs what and how much. And as those in such government are selfless, loving, caring, just, fair etc people, they will never abuse their power. They exclude themselves from everything until all the needs of the all the citizens of the country are met.
Also as they are all knowing and very wise, they know exactly what everyone else need. As super-humans, they are not affected by imperfect knowledge, biases etc.

If you can afford to smoke, you don't need subsidized housing?
If you can afford to drink, you don't need childcare subsidies?

It's baffling why Labour are not looking at options that may only really affect the top 5-10% of the country, hardly their constituency...

somewhat less baffling once you consider it is the same 5-10% that pay the bulk of the tax ( in net terms ) at present .

Because some Labour bigwigs own houses in the 5-10% top band? We know Phil Goff needs a gun to keep down the pests on his big property.

The point of the article is that the TWG did not give enough analysis of the RFRM method, which the author says was actually within the scope of the TWG to consider.
However, the author has not given any argument as to why the analysis is insufficient (following the link to the document, it is 22 pages long). Not long enough? What doesn't it include?
Instead we are presented with a bunch of irrelevant opinions, such as: "A serious misallocation of housing resources has resulted from an over building of excessive housing for better off that has sucked out the lifeblood of the building sector and bid up the price of materials and skilled workers at the expense of affordable housing".
Classic left-wing thinking; the presumption of static resources that need to be managed by the 'learned oracle". And the initimation that the solution is a different tax system. Of course ignoring supply constraints in housing and land.
And this:
"After interest deductions alone, large rental losses can be expected at a cost to the NZ taxpayer." Is the government not ring-fencing losses? Has this happened yet?
And the weird point about offsetting the tax with an increase to the first tax threshold. Of course, someone who pays more tax, is going to get more relief if the threshold is increased. What would the author rather - a decrease in top tax rate?

B-Rocker if you read all the hundreds of documents on the TWG website and the interim and final reports and technical report on the proposed GCT you will see why a discussion paper of 22 pages and some other minor references is unbalanced and if you read the highly technical CGT report you will see the care they have gone to tease out all the underlying complexities and to counter objections. The RFRM was dismissed it seems because of worries about cash flow for some even though only the wealthiest are affected. If it is good enough for the minority group( led by Robin Oliver who is an impressive tax expert with 40 years experience in tax issues) to see the RFRM as an option surely as much time should have been devoted to exploring it? Of course there are fish hooks just as there are with CGT but perhaps the RFRM has fewer fishhooks and a number of other advantages, like more simplicity for one?

The point about eh .

Cool so what doesn't it include? Or are you just looking at the size of the document and saying it is not sufficient?
And I think you need to clarify exactly what you have a problem with. Is it that CGT got a lot more analysis than RFRM, or is it that the conclusion didn't recommend an RFRM?

No I was responding to your point about the 22 pages. The analysis of the RFRM does not look at counter arguments- eg to the complaint that there is no cash flow. It is not treated as a serious option because the TWG put the energy into CGT and that was all consuming. My problem is that both options should have been evaluated against the government's objectives given to the TWG of reducing inequality and improving housing affordability. If they were both clearly spelt out then we could better see which is best. I fear we are in for a huge protracted debate over how to do CGT regardless of whether it helps reduce inequality or not, A foregone conclusion is that CGT the only way to go. Just look at the pages that are devoted to how you might define a family home / roll over provisions etc to get a sense of the controversies to come

Hi Susan, thanks for responding. It is difficult to tease out a definite frame of the situation based on your article and your responses.
So far I think I can focus on two points that you have a problem with. 1) The analysis of RFRM does not look at any counter-arguments. If this is so, I agree that there has not been enough analysis done. 2) The analysis of RFRM does not include any evaluation of the method against the objective of the method being put in place. If this is true, I find it unbelievable. What the hell was the analysis even about, and what were their conclusions even based on?

The biggest thing that scares the govt. away from a deemed rate of return on rental property is the massive rent increases it would trigger - Every auckland rental negatively geared (owners get tax refund) now would be paying a decent amount regardless of rent received - cashflow issues would be crippling - they would go to there accountant or bank and say ok, rent needs to 150 a week more or this doesnt work - So they'll try it on, or be forced to sell - some will get away with increasing rents enough to justify holding - overall effect is rent increases like nothing before seen.

As a side note at 4% deemed rate some cashflow investors like myself would actually pay less tax. I think higher yielding type properties would immediately get re-rated higher until value is such that this tax advantage disappears - Either way good for me. Unfortunately it will never happen as the negative geared believers are too dominant in NZ and the resulting rent increases would not be pretty

Yes landlords would begin to pay their fair share of tax and the RFRM would reduce incentives to hold housing for capital gain and to borrow heavily to invest in housing. This would leave more housing for first home owners to get on the ladder. Yes some investors/good landlords who look after tenants would pay less tax than now and not have to pay accountants etc. It is a whole new way of looking at taxing property. The point is the RFRM may be socially more effective and beneficial than the CGT as proposed but we have not been given the benefit of a researched and argued choice in the matter .

But what about the rent increases? Were I invest rents are going up close to 10% p.a. I know at least 1 place of mine is over crowded which I'm turning a blind eye to until I suggest they move on to something bigger (which I can guarantee they couldn't afford).

The negatively geared houses are not first home buyer houses - and owner occupiers don't cram as many people into each house so each rental that sells is say 5-8 people out for 2-3 (couple with flatmate) in.

Scarce rental environment means labours healthy homes, ring fencing, nats insulation requirement about to kick in etc etc all mean there's enough fuel on the rent fire as is.

90% of rentals are privately held also - so unless councils start making it easier to add dwellings to plots (auckland has and its helping) then rents are going up more and more. And until supply of rental accomodation keeps up with demand (NZ pop growing and will do at least to 15 million where we might have the capital be able to compete globally) , no way anything as extreme as a deemed rate of return will be implemented

I absolutely agree the housing situation is dire. But are negatively geared rentals like the one in my example providing good secure long term tenure or are they held for capital gain? If you are a good landlord and making a modest return on your investment you may be better off under a RFRM. I agree that care needs to be taken in the transition. The RFRM is not a cure-all for the woes of too much demand from rapid population change. More state rentals, shared equity models, build to rent and other innovations are needed.

Landlords pay their fair share of tax, all expenditure results in the supplier paying tax, if I was to negatively gear, the tax take would not reduce as any increased expenditure I undertake will be taxed to the recipient, I.e I pay tax on 50,000 of net income, if I negatively gear by borrowing to reduce my income to zero, the bank will pay tax on the $50,000 of interest, tax is still paid on the same amount of Income. The tax take has not changed, yet as a landlord I pay less tax, but it is now paid by the bank, tax liability has shifted, not disappeared or been lost.

@Susan St John .......... I beg to differ with you .

How are landlords all suddenly going to pay tax ?

In our practice we have a good few hundred property-owing clients, and around 80 - 90% of them pay no tax on the rents , simply because there is NO NET INCOME and therefore no tax to pay .

A significant proportion of investment properties are cash-flow negative , and its dangerous for Government to promote the narrative to suggest there is some massive pot of gold in this .

We have been advising clients not to claim the shortfalls by way of offsets against other income as this exposes them to a tax liability (clawback ) later when they do sell

Secondly , we have something called a NET HOUSING SHORTAGE of somewhere between 15,000 and 40,000 housing units , depending on who you believe .

A section in Auckland is $600k and a new pokey little 150m2 3 bed house costs $450k to build , so we have little pokey $1,000,000.00 +++ houses, which no one really wants .

Older bigger houses can be bought for the same money or less , so we have a situation where secondhand homes in older established suburbs are being chased up in price by the costs of new builds

So where are these affordable homes going to come from ?

We also have 10,000 families on the State -housing waiting list ( these are folk never likely to own a home ) , so there is no cheap solution for the FHB or the renter .

I agree with you that the whole thing is shambolic, but promoting some massive redistribution of perceived wealth is likely to turn around and bite anyone who thinks it can be done.

Quite honestly , we need to get younger Kiwis back to the concepts of thrift , the discipline of saving for a home over a long horizon of years , and living within their means, as we were taught in the 1950's 1960's and 1970's .

thank you for your comment and it is indeed shambolic. Why do your clients invest in these houses if their return is zero or negative? Isn't it proof they are expecting untaxed capital gains?

The biggest thing that scares the govt. away from a deemed rate of return on rental property is the massive rent increases it would trigger - Every auckland rental negatively geared (owners get tax refund) now would be paying a decent amount regardless of rent received - cashflow issues would be crippling - they would go to there accountant or bank and say ok, rent needs to 150 a week more or this doesnt work - So they'll try it on, or be forced to sell - some will get away with increasing rents enough to justify holding - overall effect is rent increases like nothing before seen

Nonsense. There is no empirical evidence to support the argument that the removal of NG would result in large rent increases. But let's assume that your argument is correct. You're talking about an equivalent amount being lost to consumer spending, which is the main engine of the economy.

I'm taking no only about removing negative (so a tax refund get replaced with a zero tax) but it being replaced with a deemed return tax which would be going from a refund to a tax bill in the 10s of thousands. This transition for many would not be pretty and I think it's the key to why this seemingly good on paper idea will never happen

The road to hell is paved with good intentions and this capital gains tax is just this generation's 'think big'.

"Grant Robertson wrote the TWG a stern letter once he had seen the interim report. In it he instructed the TWG to “consider a package or packages of measures that reduce inequality."
Inflation and money creation have been overwhelmingly the biggest contributors to inequality in the last few decades if not more, one of which the government mandates and the other it permits. This is just beyond stupid and a CGT is purely revenue raising to buy votes dressed up as "reducing inequality." If you want to fix a problem you must look at the cause not the symptom.

The moment the coalition used the words 'housing exempted' and 'fairness' in the same sentence, the opposite outcome was inevitable. Ardern and Robertson have backed themselves into a corner from which they will be forced to propose an expensively complex pared down version of their grand socialist 'stick it to the rich pricks' promise.

Bit of a distortion Mid? they said the 'family home' exempted, not housing! there is a monumental gulf in meaning between the two.

Murray88. will call you on the 'monumental' bit in the total private wealth context where owner occupier residences comprise the vast majority.

Regardless of how it is cloaked, just lift the lid and light a match, the mission by this Labour goviernment is to remove wealth from those that deem as being rich pricks and distribute it exactly where? somebody here quoted an exchange years ago between then Finance Minister Douglas and Prime Minister in waiting Clark, where the latter apparently stated she didn’t care about where it comes from, just about where it goes, or something like that. It is typical and cynical. Like her NO1 Cullen, if you are rich enough to afford health insurance, then you don’t need a tax rebate for it. It will go on. Next step, hey! What about death duties!

Mid, you are falling into the trap most athers are here. You perceive a monetary value in a home. That value is not real until that home is sold and the money is in the bank. I own my own home and have done so for about 15 years and as i am not looking to move, i have no idea as to it's market value, so i only understand it's value as being what I paid for it. I also understand that it is a liability, as every quarter I have to pay not inconsiderable rates installments (more than are paid in AK), not to mention the ongoing, frequent maintenance and upkeep costs. The real value for me is that it is my home, I am not subject to the whims of a predatory, parasitic leech called a landlord. I can update it or modify it to my hearts content and only have to worry about the local councils rules and consents process's.

I will assume you own a car - how would you feel if someone came along and told you it is now worth more than what you paid for it and now you must pay tax for that value? And by the way, if you disagree with their valuation, tough, you don't have a say. If it is worth less, you can't claim that as a tax loss.

Best to address the equality drivers first and not have the government tax one group so to subsidise others. New Zealand would be better to raise the incomes of the lower paid, and probably by quite a lot. If we stopped the immigration of low income workers wages would have to rise. Such would lead to a big difference in the way our industries worked, but why have an economy that depends on low wages.
Well paid workers at the lower end would sort the poverty and inequality question, with no need for government to do it via tax transfers.

The largest component of inequality is AKL housing price increases, largely caused by excessive immigration. Despite this generally low quality immigration not increasing NZ's per capita productivity and a strong groundswell of public concern about the high levels of new arrivals, the coalition not only continues the previous government's passive following of treasury policy on migration, it also exacerbates our supposedly tight labour market by relaxing sanctions on welfare. Peters promised action but is either asleep or suffering amnesia.

And the largest components of house price increases are twofold:

  1. Land prices surges caused by dopey Zonerating - the Productivity Commish noted way back when that there is a 9-10-fold increase in land value per hectare a few km's either side of the RUB.
  2. Dopey Gubmint incentive schemes such as Welcome Home loans brought in in 2002/03, and acting as both a credit source if applicants could pass the simple test of fogging a mirror, and as a Universal Pricing Signal to all and sundry because the maximum loan amount available was vastly in excess of the lowest-quartile house prices for the fixer-uppers etc where most people started out. Instant result: overnight addition of a 1, (or a 2,3,4) in front of Yesterday's asking price. Note the graph in the article, and note the timing of that steep rise. Unintended consequences, and my, What a consequence.....

Welcome Home loans were the brain-fart of the Good Intentions Paving Company (2002) Limited. We await, in awe and wonderment, what the Good Intentions Paving Company (2017) Limited manages to come up with......and with what new taxes.....

They will expand WHL dramatically in response to a falling market.

It worked for Australia.. ( kicked the can a bit further down the road at least)

Unfortunately both parties are equally bad in that regard. English was pushing the same schtick last time around:

Problematic KH but good intent. i agree in essence about wages, but that will not address spending habits, hence the focus on CGT. To other commenters as well, housing costs can easily be addressed with a raft of regulation on rentals including rent controls. This would go a long way towards addressing inequality and child poverty and a bunch of other ills. it just needs to be dome properly.

We have too many poor people, sadly. And they're being paid to breed. This is not going to end well.

Some very interesting discussion here.

For me, what better method to eliminate incentives for saving for the future than instituting RFRM. It would seriously bother me if I owned a house free and clear (not a rental, but a home that I bought to live in personally), and my neighbor living in an equivalent house was not paying RFRM tax as that neighbor bought with an interest only mortgage hoping for big capital gains whereas I bought with saved funds for long term possession without consideration for potential capital gains. The ant and grasshopper fable referenced earlier in the thread, well, RFRM rewards the grasshopper and penalizes the ant, which has serious future societal consequences. The societal construct should not reward spendthrifts, and should reward prudent savers. And yes, this construct should seriously tax all realized capital gains of every category, including the family home.

If there is a realistic exemption on the family home neither of you would pay RFRM tax unless net equity is over $1 m. Lets say you live in identical houses worth $2 million each. You are debt free and would pay tax on $ 1m equity as if it has been invested at 3.5%. Your neighbour has say $1m mortgage and therefore would pay no RFRM tax. The neighbour however has interest at say 4.5% to pay on the mortgage and is worse off than you. If his intent is CG then short term Capital gains on sale should be caught under existing law- maybe better enforcement of that is the answer

To continue with your example. Remember that it is supposed to be tax neutral. Will my other taxes go down by $14k per year? Most likely not. It would be likely that the neighbor and I would share that $14k tax reduction. In other words, I would be contributing $7k every year to my grasshopper neighbor via paying $14k RFRM tax on my mortgage free property, subsidizing his mortgage payment.

And yes, I agree with your last sentence that better enforcement of the current capital gains tax is important.

If you have a mortgage then the bank is the holder of the capital and it will have to pay tax on it. So it is likely that mortgage rates will increase by the same amount as the tax - so no-one wins and there is no benefit to holding more or less mortgage

We shall see, as various comments above (including from the author of this piece) strongly suggest that some capital holdings have more weight in terms of taxation than others. My guess is that a bank would be able to claim an offset of this capital in that the bank would be lending more money against this capital, resulting in at maximum a zero sum ( our banking system tends to result in a very negative total sum, should the bank then get an anti-RFRM tax, aka rebate?).

Isn't the frame of reference of the article itself too narrow? To me the problem is misallocation of capital leads to falling productivity leads to societal decline. We have wired up the motor to run backwards.

Foreign capital inflows have pushed up Auckland house prices, from non-residents, new residents, and via the Aussie banks borrowing in wolrd capital markets. Yes, there are secondary tax effects, but why is that the accounting fraternity don't turn their understanding on the major factor? It is driven by balance sheet changes as money flows into the country in excess of our needs. This distorts our economy so we run a capital account surplus, which is a fancy way of saying we borrow to fund current consumption. Read Michael Pettis.

Looking at NZ Inc as a business, we find it easier to sell shares than make a profit. So money flows in and we waste it on causing congestion and chaos. The solution is to stop selling shares and turn a profit. This we can still easily do, but the window will close in time.

A mansion tax, which St John is suggesting, would need to be weighted, otherwise many people on average incomes in Auckland would be paying far more tax than people on similar incomes in say, Hastings or Invercargill, simply because home prices rise more because there is more demand. Local body rates work that way already, in effect. And really, unless you move regions, you'll never benefit from the equity in your home, unless you use it as retirement fund. GST and income tax, simple effective taxes. Our top income tax rate rate is way too low, the bottom one too high. Tweak GST so luxury goods have a higher rate. Change the rules around negative equity, have a 20--year tapering bright line test, and better rights for tenants, oh and punitive taxes on empty houses and landbankers. Anything more than a token CGT will be a vale of tears. Lots of unintended consequences are lurking, not least giving the Nats oxygen.

"Tweak GST". Oh (as Small Dead Animals would have it), Sweet Saint of San Andreas, hear our prayer and preserve us from any attempt to foobar GST.

Instituting differential rates for GST will wreck it. Comprehensively. Compliance will rise, accountants, software providers, consultants, lawyers, and others will have an absolute field day. Not exactly gonna Raise Productividy, eh?

Just ask an Aussie food outlet.....

Thank you for stating the obvious !

Any form of taxation is going to make some individual ( or many individuals ) poorer .

Capital Gains Tax is no different , it WILL remove money from the individual who may otherwise have spent it on productive goods or services , or saved it , or it invested it in the Capital markets ( which are inherently weak in NZ) or invested it in a small business.

Its a tax for goodness sake , its taken away from you , dumped into the general Government bank account , and spent by the Government far less carefully than you have to spend our own money .

And lets get something clear , Government produces NOTHING......... they dont make anything, they dont grow anything , they dont process anything , they dont refine anything , they dont package anything , they dont transport anything, they dont build anything , they are net consumers , who provide some services such as healthcare , education, law and order and oversee transfer payments through welfare and a few other services .

So a Capital Gains tax , which is a resentment tax , is simply going to take more from the productive sector and spend it on nonsense .

Its a dangerous idea to arbitrarily suddenly change the rules , take something from someone who has foregone consumption and carefully saved saved all they lives to ensure they are comfortable , and NOT be a burden on the nanny State .

So if CGT comes about , I will spend and enjoy everything I have, or borrow against all my assets before valuation date , give some of it to my adult kids to help them buy homes , and live off the Nanny States udder, because that's clearly what they want us to do

I do have to note that a RFRM (defined in this article as "Risk Free Rate of return Method". should result in a return that is at best similar to inflation. Using the term deposit rate of return, which is close to 3.5% at present, is a far higher rate of return than the "risk free" rate of return. Anyone read up on OBR??? Term deposits have definite risk involved, and one can successfully argue that the TD return doesn't adequately address the actual OBR risk, especially in the upcoming fiscal climate. I would politely suggest that a RFRM should be based on an average of the OCR and effective inflation. At present the OCR is tracking inflation reasonably well, and is approximately half of the oft bandied 3.5% RFRM number...

I am not at all surprised at the criticism of a report from a group with Cullen at its head.
The FIF tax that made 5% as an unchangeable notional rate of return is the example when over 11 years the real rate has varied enormously.