This NZ Herald editorial on Capital Gains Tax (29th October 2012) is factually incorrect, misleading and biased.
Under the heading “Editorial: Tax change would help ease housing“, the NZ Herald Editor has taken another shot at property investors, blaming them for the high cost of housing and suggesting that the Government is “shying away from capital gains” tax.
For some reason, Capital Gains Tax is still being seen as the solution to the high cost of housing. I’m not going to cover the pros and cons for CGT in this blog but I am going to take the Editor to task for incorrect and misleading reporting. In short, his editorial (which could perhaps be better described as “populist rabble rousing”) is wrong. Wrong? Yes, wrong. Not just because I disagree with his opinion but because his facts are incorrect.
The editorial was in response to Finance Minister, Bill English fronting in the media to discuss some proposals from National in answer to the high cost of housing in NZ. Bill quite rightly explained that the situation was a complicated one and he has tried to play down expectations. The media, ever the ones for a “quick-fix” (preferably sensational), don’t like his proposals for the release of land and stream-lining of council processes. This would take years and even though it would help with housing costs through expanding the supply of affordable land, it’s just not fast enough for them. We want it and we want it now.
Creating yet another tax is seen as a nice quick way to instantly fix the price of housing. After all, it’s worked in Australia, the USA and the UK, right? It didn’t? Oh… well, let’s not let facts get in the way of a good story ok!?
The crux of the editorial is this;
If property was placed on the same tax footing as other investments through the introduction of a capital gains tax, demand from that quarter would drop, there would be less money driving up the price, and the supply of houses would increase.
And predictably, there was much wailing and gnashing of teeth from the “poor me” crowd who don’t think life is fair enough (for them). Fortunately, I was also pleasantly surprised to see a number of comments from people telling the editor how ridiculous their suggestions were.
Regardless of the whether or not a capital gains tax is a good idea, let’s just review that statement above – “… the same tax footing …”. This clearly indicates that there is somehow an unfair tax advantage to be gained by investing in property! It’s true that we do not have to pay capital gains tax on property in NZ but does this mean that it is somehow treated differently to other investments? To compare true capital gains (which are different to something like interest on a term deposit), we need to compare property investment with alternatives that produce capital gains, such as shares or business investment.
I made enquiries with Chartered Accountants Kennedy Allbon Tane, and spoke with partner, Scott Kennedy. I asked him to explain how capital gains tax works and to clarify the tax status of these three different classes of investments. As you can see in the table below, the tax status of Shares, Business and Property are identical.
|
Investment Type
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Short Term Trading
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Long Term Investing
|
|
Shares
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Taxable
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Non-Taxable
|
|
Business Sale
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Taxable
(but rarely happens) |
Non-Taxable
|
|
Residential Property
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Taxable
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Non-Taxable
|
It seems clear that property has no unfair tax advantages over comparable investments with regard to capital gains. So why would the NZ Herald print this? In fact, why would they print it considering that they have already reported in previous years that there are no tax advantages in property investment?
NZPIF Vice-President, Andrew King said so in “Income tax cuts admirable, but let’s look again at winners and losers” – NZ Herald 12/04/2010
National’s Finance Spokesperson, Bill English said so in “Landlords’ tax breaks in the firing line” – NZ Herald 20/06/2007
“Yes”, you say, “But why should we listen to Bill and Andrew? They’re biased, capitalists!”. We should listen because firstly, it’t true. And secondly, the opinion comes not from them but from Inland Revenue Deputy Commissioner, Robin Oliver.
This is a direct quote from the NZ Herald article, where Andrew King wrote;
When asked by a Government select committee if there were tax advantages for investments in rental housing, Oliver said: “The short answer is there are none. Rules about expenses for deducting costs such as interest, upkeep and maintenance, as well as paying tax on income were the same for investments in shares or anything else. In fact under the housing case there are tighter rules to what is a capital gain.”
It looks like the NZ Herald are either intentionally reporting something that they know to be untrue, are incompetant, or don’t care either way and report whatever they think will sell the most newspapers! You might be surprised to read that I’m not necessarily against a capital gains tax. However, the form of the tax is important. There are many downsides for a tax that penalises second homes, doesn’t take into account inflation or catches genuine long-term investors out, possibly creating another housing crisis.
