Aussie property investors fear introduction of CGT in NZ

Australian investors who hold New Zealand property in their portfolio are going to be watching the upcoming election closely.

The Labour Opposition seems set to unveil plans to introduce a capital gains tax on investment properties if it wins the November election.

Labor's proposed tax overhaul, which will be unveiled next Thursday, is presumed to be grandfathered and only apply to property purchased after its instigation.

But any new tax will have a serious dampening effect on the attraction of its property market (internally and externally) given the New Zealand commercial property market has become increasingly attractive to Australian investors over recent years.

The light tax regime has been a strong factor in seeing Australian investment across the ditch, although presumably the Australian government can tax investors for capital gains made offshore. The rise in the value of the Australian dollar during the past two years against New Zealand’s currency has assisted the buying interest from Australia, along with the effects of its three-year property price downturn.

Mortgage interest rates in New Zealand are more than 2% lower than they are in Australia, increasing the attractiveness of buying for investors who sourced their funding from New Zealand banks.

There’s also been no stamp duty and no land tax. And New Zealand’s 4% deprecation allowance is higher than Australia’s.

Last month an Auckland CBD office building providing a rental yield of just under 9% was sold to an Australian, with the buyers borrowing half of the price from a local bank at a fixed 6.5% interest rate for five years.

New Zealand property investment is not quite a national obsession like it is in Australia, but there are about 200,000 property investors in New Zealand.

It typically seen as the kiss of death to propose a tax before getting into government, but Labour, seeking lower deficits, has little choice but to find a new source of revenue to keep fiscally credible. Just like Prime Minister John Key saying before the last election he would not raise GST, and then doing so.

It is understood the capital gains tax rate would be set at about 15%, so if an investor had bought an investment property at about $400,000 and sold it for $500,000, making a profit of $100,000, the investor would pay 15% or $15,000 of that to the government in tax.

It has been reported Labour has been swayed by the prospect such a tax could raise up to NZ$4.5 billion. In 2009, the Tax Working Group estimated a broad-based capital gains tax could raise once in a steady state up to $9 billion a year, and excluding the family home, would cut that to NZ$4.5 billion a year. Its estimates were based on property price inflation of 2% a year.

The Prime Minister has been quick to say the only short-term winners from a capital gains tax will be accountants, as the tax doesn't raise a lot of money upfront.

"People only pay the tax when they sell the asset and so people tend to hang on to those assets for longer. They are hideously complex and people spend their life with their tax accountants," Key says.

Key has said a capital gains tax would need to be levied at 30% to raise the NZ$4.5 billion revenue. At 15%, it would be 15 years before the government collected $500 million a year, he said.

The Greens have previously supported a capital gains tax.

"New Zealand's problem over the last decade has been a lot of capital has gone into housing because of the tax incentives when where we really needed it was in the productive sector," the Greens co-leader Russel Norman has been reported as saying.

Labour leader Phil Goff has declined to comment about the tax before the official announcement on July 14. It is understood the party considered many options, including a land tax, before settling on capital gains.

Capital gains tax was introduced in Australia on September 20, 1985 – one of a number of tax reforms by the Hawke/Keating government. The tax applies only to assets acquired on or after that date. Gains (or losses) on earlier assets, called pre-CGT assets, are ignored.

New Zealand had a property speculation tax, introduced by Labour in 1973, and repealed in 1979.

By not comprehensively taxing capital gains, New Zealand is unusual amongst OECD countries. In contrast with the treatment of capital gains and property, New Zealand taxes corporate taxable income at a relatively high rate.