Saturday, October 3, 2009

ZenTiger Capital Punishment in NZ

It was a blogger who said "In New Zealand, the only thing certain in life is death by taxes."

Actually, it was said back in 2009, on this blog and in this post.

Back then, (being now if you read this blog frequently) I might have had no idea how prophetic that statement would be. Or maybe I did? Time will tell.

Even though NZ already has a tax of Capital Gains, it doesn't officially have a Capital Gains Tax. Apparently, the entire civilised world has one of these. It's purpose, we are told is to stop inflated property prices and consequent property crashes. Except of course, countries with a CGT still experienced the same problems in their housing market a CGT will protect us from here in NZ.

So let's cut the crap excuses, and admit it's just another excuse for a tax.

The point of this post though is to discuss what kind of form a new tax might take. This is not as cut and dried as one might think.

There is the standard expected CGT form of "tax the profit on a sale of a house", and with that is the usual rider clause "but not the family home". A small diversion at this point - I wonder which home that would be for Bill English, or are all his homes "family homes"? This is not merely a flippant question. As Minister of Finance he's going to be in the drivers seat for adopting these new taxes, and he might want to empathize a little stronger than previously with people affected by new tax laws.

Anyway, that is not the only form a new tax might take. I've seen reports from the government appointed Tax Working Group twice now mentioning the "benefits" of a land tax. This would be a yearly tax based on the value of the land.

Think about it: A yearly tax based on the value of the land.

This is in addition to rates.

Pricewaterhouse-Coopers tax expert, John Shewan (a member of the Tax Working Group) noted this gets around the problem of the government only getting revenue when the home was sold. Says John: "The land tax problems were not as deep seated [as CGT] and could be applied across the board, including owner-occupied homes"

Presumably we (the citizens and land owners of this tax-grabbing country) will get to make submissions if this idea makes it to the recommendation stage.

I suggest making a submission would be a lot less stressful than a full blown revolution, for all concerned, and hopefully as effective, if not as productive.

My time living in Australia saw rising rates plus a land tax force an increasing number of pensioners to sell their homes. Through no fault of their own, they happened to live their entire lives in areas that became fashionably popular and therefore fashionably expensive. In Sydney, some modest homes increased in value so much that many were valued at more than a million dollars at the height of the property boom.

Asset rich and cash poor, to pay their taxes and rates, eventually the only option was to sell up and move out to an area that was unfashionably affordable.

A Land Tax will hit this sector of the community hardest. It could be the issue that gives NZ First it's opportunity for a comeback. It would cement National's positioning as a party of the left. They might try to offset it with promises of lowering the top tax rate, but so what? We took a higher GST to lower the top income tax rate to 30%. Good deal some said. So what's the top income tax rate today? 39%.

A Land Tax will also affect others though. For example, young families on tight budgets, trying to meet mortgage payments and cope on one income during the period children come along, with no real option of actually living off one income will see this as just another way of punishing those with the grand ambition of escaping a life time of rent.

An annual land tax, on top of rates does more to undermine the financial independence and social benefits of home ownership than most other forms of taxation.

And the irony of this process of hunting for new taxes is the acknowledgment in the paper today that IRD have failed to collect an estimated 200 million dollars from property investors that owe taxes on capital gains on the sale of property.

For a country that supposedly doesn't have a capital gains tax, it's strange that 200 million dollars remains outstanding from the taxes of capital gains. That's 200 million outstanding. I'm not sure what the total revenue from this is.

A new land tax will be New Zealand's own brand of Capital Punishment. And if I could quote a blogger I know:

"In New Zealand, the only thing certain in life is death by taxes."

5 comment(s):

Gooner said...

The only other certain thing Zen is if politicians say it's not on the agenda it will happen next week.

Good post Zen.

Lucia Maria said...

Why doesn't the Government just take all our money and possessions and give us back what they think we deserve!!!

To think, that Medieval serfs only had to give their Lord 10% of their crops. The tax system we have now enslaves most people. The only ones exempt would be those whose income exceeds $400 a year.

Really, if the Government has run out of money (and I've read it's currently borrowing $400 million a week), then why not cut back on all non-essentials, like the rest of us have to.

ZenTiger said...

I presume: The only ones exempt would be those whose income exceeds $400K a year.

Before the moment.

JodoKast said...

Just with regards to the IRD having 200 million of non paid dollars, when I worked there I discovered that certain property individuals were avoiding paying tax on property developments by simply not having the company pay it...

And it's not a capital gain so much as a trading gain. A capital gain occurs over time and is a natural process. A trading gain is the result of buying low and selling high. The first is current tax free, the second incurs large tax bills.

ZenTiger said...

Thanks JodoKast.

That subtle distinction is why we technically don't have a CGT yet. I also realise that the tax kicks in because of the frequency of the trading, more than a natural growth in capital. Makes a better rant though to point out that we do have some form of tax over property investors, even if they aren't always paying it :-)

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