Apr 15, 2019 9:03:08 AM

Capital Gains Tax (CGT) for Property Investors

Topics: Property Investment, nz mortgage, NZ Mortgage Adviser, Capital Gains Tax, CGT, Home Loan Advice, Mortgage Terms, Mortgage Advice 0

The Tax Working Group, a Government advisory body, has been looking at ways to reform New Zealand’s taxation system and make it “fairer”. In particular, the group has been focusing on taxing more income from capital gains taken off the profit from the sale of a property or investment. The Government’s expected statement on whether CGT will be introduced and how that will look is due to be announced in April 2019.

Capital Gains Tax

What is Capital Gains Tax?
A Capital Gains Tax (CGT) is a tax charged on the profit made from the sale of a property or an investment.

One of the advantages of introducing a CGT is that it addresses the issue of fairness. Instead of giving one form of income special treatment, all income would be treated equally and it would be equally subject to income tax.

Some view CGT as a way to ease pressure in a heated property market by opening up more opportunities for buyers, as some investors will be deterred from buying property because of the CGT they have to pay upon the sale of their investment property.

For wage and salary earners, there is a potential tax cut at the bottom end of the scale with some discussion around raising the income tax threshold, along with changes to the way KiwiSaver will be taxed in an effort to encourage more retirement savings.

The argument against Capital Gains Tax is that it would discourage people from buying investment properties and instead encourage them to “invest” their money in their own home – the so-called Mansion Effect. The logical result being less investment by middle New Zealand families in rental properties, further reducing an already critical supply of rental properties and even driving up rents.

What does the Tax Working Group propose?
The Tax Working Group is recommending to Government to tax capital gains made on investment housing, shares, business assets and some intangible assets. The tax would only apply from a future valuation date and not on past gains in a property’s value. The tax would be paid at the taxpayer’s marginal rate.

Group Chair of the Tax Working Group, Sir Michael Cullen, says New Zealand’s tax system has many strengths. However, the inconsistent treatment of capital gains is a clear weakness.

“New Zealanders earning just salary and wages are taxed on their full income but we have several situations where you can earn income from gains on assets and not be taxed at all.”

The group has recommended to Government that a tax on capital gains be levied when an asset is sold or changes hands and would be applied with no discounted tax rate and no allowance for inflation.

The Tax Working Group estimates that broadly taxing more income from capital gains will raise roughly $8 billion over the first five years.

“If the Government chooses to proceed down this path, it then unlocks opportunities to reduce taxes in other areas so we have given them some options to consider,” says Sir Michael.

What could the outcome be?
Government has a variety of options to choose from in formulating its policy around CGT. From not introducing CGT at all, to introducing a partial tax on some assets only, to a comprehensive CGT which would include assets such as shares. Profits made from the sale of the family home and the land it sits on would be exempt from CGT.

Whatever the outcome of Government’s announcement in April 2019, there’s no doubt that all New Zealanders will be watching this space with interest. If you are considering buying an investment property and would like advice around how a Capital Gains Tax could impact you, get in touch with one of our mortgage advisers today.

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