A plea to change the name of CGT to Realty Tax

I am taking a break from articles on tariffs. Not because the changes have stopped. In fact, anything but! Every few days, there is a new announcement and new tariffs imposed or threatened. How you impose tariffs on films, for example, seems perplexing even to USA experts. And the impact of China dumping has caused the closure of 4,000 Thai companies in the last three months alone, resulting in mass unemployment along Sukhumvit row (a major manufacturing and distribution hub just outside of Bangkok).

Instead, I am going to focus on the boogeyman of New Zealand (NZ) politics. A ‘capital gains tax’ (CGT) rises once again like a phoenix from Pandora’s box. It is a brave political party that is prepared to stake its future on a CGT, which has been the downfall of many before them.

And while I generally think this is a good idea, I also think they have made a serious mistake by taxing inflation on commercial buildings. But I will come back to that later in this article.

Is this really a CGT?

Is it? Or is it a Realty Tax with a different label? And if so, I would plead with the Labour Party to call it what it is: a Realty Tax.

NZ has been a capital-importing country since I studied economics at University. And believe me, that was a few decades ago. In fact, NZ has been a net capital-importing country since the United Kingdom (UK) joined what was then the EEC (for the younger reader, the precursor of the European Union) and the oil shocks of the early 1970s. This is not a history lesson, but it does demonstrate just how long NZ has been a net importer of capital… almost 55 years. And there is no reason to think this is going to change, at least in my lifetime.

For more than 30 years, I have been promoting NZ as an investment destination all over the world, particularly from the US and Asia. There is no natural reason for NZ to be high on their list. We are far away and, quite frankly, too small to interest the North American College or equity funds. Except for the fact that we do not have a CGT. That has been my only hook to at least get them to look at an investment in NZ.

So, my plea to the Labour Party is to call it what it is: a Realty Tax. Which means people like me can continue to promote NZ as one of the few developed countries without a CGT, and we will not have entirely turned off the capital tap.

Is a Realty Tax a good idea?

Simply, yes. NZ is fixated on residential property because the gains (even after considering inflation) have been generally very good and tax-free. Particularly, if the tenant is mostly paying the mortgage.

The Realty Tax will even out the investment returns and provide a much more level playing field when considering long-term investments. It should drive some capital into other areas of the economy, which have long been starved of much-needed investment. And perhaps in the long term, subject to supply, reduce the house/income ratio, which is clearly not sustainable. Most home buyers tap the bank of mum and dad to even get a deposit together, which has a further impact on their retirement incomes. This tax might help align the house/income ratio over time.

Hong Kong and Singapore

Hong Kong (HK) and Singapore are two developed economies that have no CGT. So, the next time you hear some politician saying NZ is the only developed country not to have a CGT, you can correct them. I have just returned from Singapore and HK, helping NZ exporters access ASEAN (Association of Southeast Asian Nations) markets from Singapore and China via HK. Singapore is literally booming. And HK, after a few speed wobbles since the riots and extradition treaty, has been revitalised by a special residency visa for Chinese who invest HK$30m in HK for seven years.

But even though both of them have no CGT, they do have various forms of Realty Tax. In HK, it is via stamp duty. In Singapore, it is a levy imposed on investment property not owned by Singapore citizens.

In short, NZ is in good company by taxing realty gains and not imposing CGT on other investments.

The details matter

It seems Labour had to make an announcement in a hurry as there was a leak. And there are a few things probably not yet fully thought through. These include things like: will you be able to offset capital losses against capital profits? Could you carry forward capital losses to be used in future years against capital gains?

The lack of inflation indexing is concerning but not a deal breaker. But where I think they have it entirely wrong is Commercial Property.

Commercial Propertyis an income play, not a capital play. It’s all about returns on investment paid out each year and taxed each year as income, not on future capital gain. So, I think they have got this one entirely wrong.

Broadly, because the rental income is paid out each year and taxed each year in the investor’s hands, the value of commercial property increases at the rate of inflation. By including commercial property in the Realty Tax and not inflation indexing, you end up taxing just inflation. No one would wish upon an economy a tax on inflation alone.

The looney left and politicians meddling

We hope, now, that Labour has announced this policy, the wealth tax, and transaction taxes of the far left are dead. Those policies can only be described as ‘whacky’ and would result in capital and entrepreneurial flight. In short, a death knell for NZ.

My only concern is that politicians can’t seem to help meddling. Is Labour calling this tax a CGT to soften us up for a full-blown CGT later? I hope not. But that is a story for another day.