Opteon Country Director – NZ, Derek Smith on our new government, potential new policy and its impact on the property market.
After much hype during the election around policy shakeup during the election, our new Labour-led government has not provided detail on much of it since taking office four months ago.
Over the next two weeks, we’ll be looking at some of the rumoured policy yet to be introduced, and how it may affect the property market.
First up, the Tax Working Group and potential changes there:
The Tax Working Group (TWG)
The TWG formed part of Labours promises during the election campaign. It would be set up to review a range of current taxes and make recommendations for the Government to take back to the electorate in time for the next election in 2020. Labours original intention was to go ahead and implement any TWG recommendations unilaterally but they flip flopped on this during the 2017 campaign.
The current timeframe for TWG processes is as follows:
- Established December 2017
- Final report with recommendations due Feb 2019
- Recommendations reviewed and passed by July 2020 for the 2021 tax year
Proposed Capital Gains Tax (CGT)
The CGT is the most significant discussion point. Rumour is that it is a certainty to come in. Some key points (regarding property specifically) include:
- Includes all property, family baches and farms but excluding your family home
- All assets to be valued as at a “valuation day”
- Rumoured to be 15% flat rate
- Payable on realisation on net gains from valuation day
- Losses could be carried forward but not offset against your income
- Uncertainty around owning family home in a trust, which is very popular in NZ. Will this be treated as your family home since you technically don’t own it, your trust does?
There are so many issues for the TWG to work through here, particularly around point 6 above. It will be interesting if or when more detail is released. Until then we shall keep guessing but expect valuers, accountants and lawyers to be kept busy as they re-structure their client’s assets to be CGT efficient.
The wider effect on the market remains unclear until more detail is revealed. Evidence in Australia shows CGT (and Stamp Duty) has done nothing to dampen rampant price inflation over recent decades.
We suspect the same will hold true for NZ.
Investment Property Losses to be Ring Fenced
Another tax-related policy of note is the ring-fencing of losses for investors who hold investment property in companies. Any losses will be restricted to that entity and will not be able to be offset against the investors other income streams, namely PAYE from their day-to-day job.
This makes residential investment property less attractive as many ‘mum and dad’ investors own negatively geared residential property returning less than the cost of ownership. Possible outcome is a flood of investment properties to hit the market in the traditional investment areas of South and West Auckland putting downward price pressure on the market.
Bright Line Test From 2 to 5 Years
The ‘Bright Line Test’ requires income tax to be payable on profits made from residential property that is disposed of within two years of acquisition. The family home is excluded as is property acquired through inheritance. The Labour government is considering extending this to 5 years.
Housing speculation has slowed right down as the market has come off its high of 2016. Those with the ability to hold their properties through the 5-year period will likely do so while those that have to or wish to sell will simply have to wear the tax burden. As they say, nobody ever went broke making a profit.