ASB endorses capital gains tax

Property

ASB advocates for a 'targeted' capital gains tax; Sees 'inappropriate constraint' placed on Government's Savings Working Group

8th Dec 10, 4:07pm by Gareth Vaughan

By Gareth Vaughan

ASB, the country’s second biggest holder of residential mortgages, says the Government ought to consider a "targeted" capital gains tax.

In what is so far the only submission to the Government’s Savings Working Group from a bank, ASB’s general manager for regulatory affairs Simon O’Brien, bemoans the narrow Terms of Reference imposed on the group, which is led by ex-BNZ chairman Kerry McDonald.

Finance Minister Bill English announced the creation of the Savings Working Group to consider savings policy in August, but ruled out the consideration of changes to the existing New Zealand Superannuation or the introduction of either a land tax or a capital gains tax. The Retirement Commission recommended yesterday lifting the retirement age and changes to the level of the pension, but both the Government and opposition ruled out changes within minutes.

However, O’Brien encourages the Savings Working Group to “not hesitate” to comment on capital gains or land tax options if it considers those matters will contribute to an improved domestic savings performance. O’Brien says that while this year’s Budget went some way towards rectifying an over weighting of domestic investment in non-productive assets such as residential housing, debate on other measures to remove tax distortions should be encouraged.

May's Budget reduced the rate of depreciation for buildings with an estimated useful life of 50 years or more - such as rental housing and office buildings - to 0% from the 2011-12 income year. The Government said the changes will affect landlords, property investors, property investment companies and some business owners who can currently claim depreciation at 3%, via the diminishing value method, or 2% per cent, by the straight line method, of the purchase price of their building. The change is expected to raise NZ$685 million in 2011/12, rising to NZ$690 million in 2013/14.

“While we do not necessarily support a general capital gains tax, international experience suggests the ‘too difficult to administer’ argument which has underpinned current government thinking is inconclusive,” says O’Brien.

“A targeted capital gains tax may be an alternative that warrants further consideration.”

He also suggests that differentiated tax of labour and investment income could also encourage "desirable behaviour" in domestic savings and lead to greater capital markets depth and breadth.

“We also support debate on the merits of further re-weighting of the tax base away from personal and corporate income tax to consumption tax,” O’Brien adds.

He notes that about 65% of ASB’s asset base comes from residential property exposure. Some 72% of its residential property exposure is to owner-occupiers and 28% to investment properties. At NZ$42 billion, ASB's mortgage book is smaller only than ANZ's NZ$54.7 billion book.

“Our view, based on customer behaviour and feedback, is that real property, relative to financial assets, is perceived as safe and better understood as an investment class,” says O’Brien.

“It has historically met the ‘twin goals’ of capital gain and capital protection."

He argues that removing property tax incentives relative to other asset classes is the main lever available to curb this demand over time. Following this year’s Budget, there is “merit” in the Savings Working Group considering additional ways of removing property tax incentives.

“ASB concurs with the consensus view that New Zealand has a savings imbalance,” O’Brien concludes.

“It is disappointing that the Savings Working Group’s terms of reference unnecessarily constrain a thorough analysis of, and delivery of advice on, all options to redress that imbalance.”

* This article was first published in our email for paid subscribers earlier today. See here for more details and to subscribe.

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.

25 Comments

by Nicholas Arrand | 8th Dec 10, 4:41pm 1291779678

Sacré bleu ! Heresy. .."He argues that removing property tax incentives relative to other asset classes is the main lever available to curb this demand over time"

A few mixed mesages in his comments, but noteworthy, all the same.

by chrissy | 8th Dec 10, 6:00pm 1291784400

Capital gains tax is the other side to capital loss credit. This would lead to a greater tax intake for the government while asset prices were going up. It would also lead to a tax burden for the government while assets were losing value.

Good times would lead to government adjusting their budget upwards due to gains, that would make it harder to cut their budget when times were hard and assets falling in value.

It's an idea, and a bad one at that.

Government should decrease their public servant numbers an keep their activities to the minimum and keep it simple. Especially the ird.

It is a good start that they are stopping MPs from deciding their own salary packages.

by Kate | 8th Dec 10, 7:06pm 1291788362

Which is why a capital tax is a more useful option to a capital gains tax. With the former, one pays less tax on an asset reducing in value, but there is always tax.

A comprehensive capital tax provides the incentive to make wise use of capital.

by muzza | 8th Dec 10, 7:02pm 1291788135

Wouldn't they say that it would be a tax on any capital gain but if no gain or a loss, simply zero rate it and not allow a capital loss claim??

How does it work in other countries, are property sellers writing off income tax with capital loss taxes??

by Matt in Auck | 8th Dec 10, 7:29pm 1291789761

really we should all be on the streets cheering this guy, Fran OSullivan, Bernard etc on.

that is if we had any foresight whatsoever

I fear we will all be on the streets- like the Irish - when it is far too late

by chrissy | 8th Dec 10, 7:30pm 1291789811

finweb.com

A capital tax loss occurs when you sell a capital asset for less than the amount you paid for it. The IRS has a very broad definition of capital assets, but generally they include stocks, bonds, mutual funds, real estate, precious metals, coins and collectibles.

When a Loss is a Good Thing

Although no one likes losing money on an investment, a capital loss on certain classes of capital assets may be deducted from your gross income when computing your taxable income.

In this way, through tax savings, you undo some of the negative impact of a capital tax loss.

When a Loss is Not a Loss

Not every capital tax loss may be used as a deduction on your income taxes. It is important to understand that only the losses on investment property, not on personal property, may be deducted. As an example, a commercial fisherman could deduct a portion of the loss on the sale of his boat. You could not deduct the loss on the sale of a boat you owned for the personal enjoyment of your family.

Additionally, only $3,000 of an allowable capital tax loss can be deducted from your gross income in any one year.

by Justice | 8th Dec 10, 9:06pm 1291795585

Pretty much what i said yesterday

by Red Dog The Pi… | 9th Dec 10, 8:11pm 1291878696

A country with no land tax,inheritance tax,death duties,stamp duty,capital gains tax and gift duty is not logical.

We will see a capital gains tax in this country.

The logic is quite simple.

The only people I have seen make REAL money over my working lifetime are those who have made CAPITAL gains.

Over my lifetime,the capital value of major assets in this country has INCREASED due to INFLATION.

Naturally over that cycle there have been troughs and peaks,winners and losers.

But the overall scenario for the state is that the existence of capital gains taxes over my lifetime would have gathered much additional revenue for the state.

In addition,the non-existence of such a tax skews investment in the wrong areas.

Kerr of the Roundtable has done much bleating in regard to how farmers were the privileged ones pre Rogernomics.

But he conveniently overlooks that those who have benefited from the absence of a Capital Gains Tax are rather wider than the farmers he criticises.

by chrissy | 9th Dec 10, 9:42pm 1291884172

The current situation for a lot of speculative farmers and vineyards coming up for sale is a capital loss.

Can the government afford to give tax credits to speculators caught on the losing end of a sales transaction?

In rational economies the capital gains shouldn't be huge and speculative capital losses shouldn't be huge.

I think that the distortions that have allowed this to happen over the last five years, is a one off situation. It came about by the Japanese money market early in the decade, followed by the lax american economics that went global via retail banks.

Manage inflation, stop retail bankers lending so much money, cut government spending and welfare to EVERYONE.

Bailout, oyster farmers - herpies, farmers - draught, homeowners - leaky houses, investors - finance companies. Every news item could be and often is, followed by the insinuation of a further taxpayer credit.

When can taxpayers watch tv and not see their money being spent on their behalf, either directly via taxes or via inflation.

by Kunst | 9th Dec 10, 9:56pm 1291884992

chrissy - time for a "100%NZ pure" Economy" a visionary long term success story for New Zealand.

The world changed forever and is changing even faster by the year/ month - smaller nations should start thinking smaller, but with greater ideas.

by RJ | 9th Dec 10, 10:01pm 1291885269

in regards to the above i.e thinking small and all that

where is "small kev" and " anonymous"

by Red Dog The Pi… | 10th Dec 10, 2:52am 1291902730

I am extremely well qualified to comment on agriculture in NZ,as servicing it has been my working life.

I am extremely aware of what is and has been happening in regard to farm sales transactions,and the attitudes of financiers towards farmers.

When you refer to speculative farmers,if you are referring to vineyards,this industry has contained an element of people who have dived in due to the prestige of being associated with the same which provides a discussion topic for dinner parties.

Like the numerous collapsed stonefruit and kiwifruit investments of 20 years ago,many vineyards were always a financial joke.

By comparison,dairy farm syndication has been a much more wise investment,and while at present we see milking platforms back some 25 % in value,and due to financiers running around with wheelbarrows full of money,some are operating at cash losses.

In this geograhical area,we have seen very few forced sales in the dairy industry.

In fact I am aware of only one.

In this area,there were 46 dairy farms for sale when the payout was $4.50.

Post the increase in the payout,34 of those farms were taken off the market.

As with all forms of land,we will in due course see an escalation in values and the next high will be higher than the last.

This is all part of history repeating itself .

NZ used to have a NZ person as head of IRD.

Then it was an Aussie.

Now a Canadian.

The NZ and Aussie IRD are continuing to build closer relationships.

We have moved toward a North American tax system,and in the future will move closer to the policies of our Aussie and North American counterparts.

CGT in Aussie applies only to assets acquired on or after 20 Setember 1985.

I would therefore suggest to you that if a CGT is introduced in NZ,it will apply only to acquisitions after the introduction date,and a logical time to introduce it would be when land values are somewhat recessed.

Unless there has been some change since I last looked,,Aussie CGT allows the offset of capital losses against capital gains,but does not allow capital losses to be offset against other assessable income.

Historically,on sale the acquisition price was subject to a CPI relief adjustment when calculating the CGT.

I believe that this may have altered and now 50 % of the CGT is caught without CPI indexing.

There are roll over relief provisions applying tobusinesses of a certain size,which of course will also apply to farms.

That means that your speculative farmers would be unlikely to gain anything from a CGT regime,only a deduction of their losses against present of future CGains.

The taxpayer would not be giving them a handout.

You talk about rational economies.

Post Rogernomics,NZ has been a small boat on a large ocean,subject to the whims of those who wish to speculate with its economy.

As the world is essentially corrupt,there is no such thing as a rational economy.

We are puppets on a string.

by The Real The Man | 10th Dec 10, 6:28am 1291915710

"I am extremely well qualified to comment"

Yes, you are, just as the people whose financial lives have been reliant upon the property bubble are "extremely well qualified" to comment on the property bubble.

They too are desperate to defend it. What else would we expect them to do? Be honest and admit that the property bubble was the farcical nonsense of greedy and stupid people?

When you've devoted your life to something like that you'll never concede that it was the wrong thing to do and that the thing to which you've devoted your life was little more than a blight on the nation's future.

Spin away.

by Red Dog The Pi… | 11th Dec 10, 1:16am 1291983382

I assume you are referring to real estate agents,bankers,those who promoted property investment seminars and the specialist accountants and lawyers who clipped the ticket.

My career extends somewhat considerably longer than those who were involved in the property bubble which commenced domestically with the collapse of the NZ dollar in late 2000,the lowest interest rates for 40 years and as the text books always warn you,lasts for seven years.

As an observer of this phenomenon from the outside,where the cocktail set would gather for elevens and discuss their latest conquests in the real estate market as they did in the heady days of the 1980's sharemarket fashion show,I knew the inevitable crash would come.

You see old chap,living in the rural sector gives someone a somewhat more sober view of the world.

While the cocktail set were quaffing champagne on the Hauraki Golf in the heady days which led to the introduction of FBT,I was immersed in the depressed world that was Rural NZ.

by The Real The Man | 11th Dec 10, 11:15am 1292019321

Whooosh!

I was referring to those people who even though they know they were in the wrong still desperately try to defend and justify their crap decisions.

by chrissy | 10th Dec 10, 9:29am 1291926575

I was not targeting you personally or anyone you know. I was just suggesting that there are cycles to business. On the way up, people climb aboard, ostriches, kiwifruit, grapes, olives?, and RE, dairy? When they are growing it has positive spin for the economy and tax intakes.

Then on the way down it is bad for the economy and taxes fall away. This could presumably be exacerbated by tax credits for capital losses.

If sectors are 'promising' why can't there be rationality to keep our senses at such times and maybe develop more slowly and less costly for the country both on the way up and the way down.

There are business cycles - it is not linear. Whatever the government tries to tax this year will probably backfire next year. Government is always late to the party. They are reactionary.

by Red Dog The Pi… | 11th Dec 10, 1:40am 1291984802

AAH yes the heady days of purchasing a stud Angora Buck for $160,000,setting up a company in a tax haven to soak up the profits,spending $300 on feral does and employing vets to utilise them as surrogate mothers,farming possums,blackcurrants,North and South proclaiming on its front page that the Merino was the only sheep worth owin,investing in horse stud syndicates where you would have been better off putting your funds on the bar at your local,and yes the Aussie ostrich investments where you bought an egg for $15,000 based on a brochure which featured a picture of an idyllic desert island..but oh no 12 months later sorry your bird did hatch but it died.

How about the Pakistanis and Carragreen Currency where they let you win fist time up,got your confidence and then got you go double your bet....and you always lost....or Quantum Investments where you could access an investment scheme returning 50 % interest per annum, which previously was available only to the very wealthy,and where you had to had an offshore trust based in Antigua...Interpol seem to have given up on that particular Ponzi Scheme. after they fled to Switzerland..

As for dairy farms,dairying is this country's biggest export earner..It is a real not fake industry.

For the vast majority who can hang in there,it has been and is an excellent long term investment.The drop in debt servicing costs and increase in payout has reinforced this industry.

Of course the tax take fluctuates.A dairy farm producing 430,000 kgs/ms has a turnover of $3.3 million with a $7.70 payout,and a turnover of $1.9 million with a $4.50 payout.

Try losing a third of your lambs and a fifth of your ewes due to climatic issues and see what that does to your turnover.

Try a hail storm and some decent rain on your cherry crop and watch your turnover drop by 50 %.

You give me the distinct impression that you are undertaking a PHD in economics and lack experience in the real world.

by Gummy Bear Hero | 12th Dec 10, 8:39pm 1292139591

Walter K. & me are setting up a sea-horse stud near Kaikoura ........... Wanna get in on the ground floor ........ Or sea-bed-floor as we call it ? The problem of drowned border-collie-x's has been solved , we're utilising dog-fish to round up straggler horsies . ......... . They're a big affro-dizzy-ache in China . You can't lose with sea-horses , maaaaaaaaaaaaaaaaate !

by chrissy | 11th Dec 10, 1:05pm 1292025956

Red Dog. I think I like you

And no too the assumptions.

Unfortunately family have been affected by such 'ostrich' scenarios.

And no, I don't have anything against dairy, I actually like dairy and sheep farming.

Anyway, I don't know how that relates to capital gains at this stage of the dialogue.

As for a PHD - absolutely not.

I am curious to hear the actual figures and anecdotes of those other investment ideas. Because the details are hushed in the ensuing bust.

As I see it, the main economic activity in NZ is agriculture. I think there are small sectors that have been over invested in that will have experienced capital gains and soon to experience capital losses too. They aren't big enough to have dire consequences to the NZ economy.

And you are right, there is no business cycle in dairy.

by Red Dog The Pi… | 12th Dec 10, 2:59pm 1292119177

The details are known to those of us that are working with people who dabbled in such areas.

Agriculture and Tourism....That is all we have.

The media tend to get hold of various new kids on the block that are waved around as our salvation,but inevitably they are but a pimple on an elephant compared to our core economic generators of economic activity.

It is what we do cross border that is important.

by Red Dog The Pi… | 12th Dec 10, 2:52pm 1292118765

I assume you are referring to one of my business partners,who is one of the Generation Y people who want a work/life balance with the emphasis on life,do not expect to have to work as much as 37.5 hours per week,do not believe in attention to detail,want it all today,are completely self-centered,have no respect,and when it all goes wrong,deny everything and try to put the blame on someone else.

by chrissy | 12th Dec 10, 7:52pm 1292136741

Heck yes we must be be talking about the very same person!

Anyway, we don't name names here do we. It is impolite to do so. Yes he is very annoying, but he is related and therefore we love him.

I think that is why we have to be more rational in the future and and balance multiple viewpoints. A bit of weighing up ideas, experience and people even from different disciplines, and patience.

I know we are capable of it. Maybe we just need to chill more.

He needs to take himself less seriously.

by Red Dog The Pi… | 12th Dec 10, 9:04pm 1292141064

The problem is that he has a Narcisstic personality,so it is therefore not a simple matter to deal with.

If you do not flatter and admire him,he doesn't like it.

by chrissy | 12th Dec 10, 8:01pm 1292137271

Heck yes we must be be talking about the very same person! But no, a baby boomer in this case.

Anyway, we don't name names here do we. It is impolite to do so. Yes he is very annoying, but he is related and therefore we love him.

I think that is why we have to be more rational in the future and and balance multiple viewpoints. A bit of weighing up ideas, experience and people even from different disciplines, and patience.

I know we are capable of it. Maybe we just need to chill more.

He needs to take himself less seriously.

by Red Dog The Pi… | 12th Dec 10, 9:06pm 1292141215

Narcisstic people are not interested in other viewpoints....The only viewpoint they are interested in..is theirs...and how much they can put on their own side of the death...Everyone else is disposable...