Capital Gains Tax

[elZorro]

It may have been normal back in the day to buy a home when still young and then use that asset as collateral for a business. Certainly in Auckland that Avenue is more for the wealthy family member or for those on high incomes and good luck in trying to obtain a mortgage with sufficient funds available to invest in a business in addition to being able to afford the house itself.

A business or shares bought and added to with tax paid income should have the net income taxed and capital gains taxed but an owner-occupied home that is not liable to tax on net imputed rent should also not be liable for capital gains? I do not see the logic or fairness in that.

I don't think they'll use the marginal tax rates with the CGT, and they'll have to be very careful around businesses and share portfolios, as you say.

But the difference between a landlord's rented house and a private dwelling is stark. In the first situation a paper transaction can be made, leveraged against other property, and over the full term the landlord pays nothing to hold that asset, they even derive a small income from each property. Tax losses from earlier years defray their income tax. The private dwelling is more expensive to hold onto than renting something equivalent, for the average household. They might not pay rent, but they have to pay interest and usually some capital too, out of tax-paid income. If you really look hard at all the costs associated with owning a home and redecorating or adding on, in many cycles there really is no return on that spending and effort. But, that home is worthy capital to borrow against for other projects, and it gives the household stability.

The govt cannot undo that incentive to home ownership by imposing a CGT on it.

[fungus pudding]

I don't think they'll use the marginal tax rates with the CGT, and they'll have to be very careful around businesses and share portfolios, as you say.

But the difference between a landlord's rented house and a private dwelling is stark. In the first situation a paper transaction can be made, leveraged against other property, and over the full term the landlord pays nothing to hold that asset, they even derive a small income from each property. Tax losses from earlier years defray their income tax. The private dwelling is more expensive to hold onto than renting something equivalent, for the average household. They might not pay rent, but they have to pay interest and usually some capital too, out of tax-paid income. If you really look hard at all the costs associated with owning a home and redecorating or adding on, in many cycles there really is no return on that spending and effort.

That pretty much sums up renting out residential property. The owner occupier however gets the return of rent-free accommodation.

[777]

I don't think they'll use the marginal tax rates with the CGT, and they'll have to be very careful around businesses and share portfolios, as you say.

Marginal rates is what they want and what the TWG came up with. Remember the TWG was told what the result was to be.

[minimoke]

Marginal rates is what they want and what the TWG came up with. Remember the TWG was told what the result was to be.

Which will only be another shot at the "poor" people as they are elevated into the next tax bracket on the sale of what little capital they may have.

[Bjauck]

Which will only be another shot at the "poor" people as they are elevated into the next tax bracket on the sale of what little capital they may have.

Only for the amount that is in the top bracket in the year in which the asset is actually sold and any gain realised.

As any CGT is supposed to be neutral on the total tax take. Those “poor” people with little capital* may well be better off overall - taking into account tax reduction in other areas. So they could well pay less income tax if income tax rates are adjusted down. In addition they may benefit from other taxes being reduced.

* Maybe they have a multi-million dollar principal house that will still be exempt from a CGT under the TWG’s proposals.

[minimoke]

Only for the amount that is in the top bracket in the year in which the asset is actually sold and any gain realised.

As any CGT is supposed to be neutral on the total tax take. Those “poor” people with little capital* may well be better off overall - taking into account tax reduction in other areas. So they could well pay less income tax if income tax rates are adjusted down. In addition they may benefit from other taxes being reduced.

* Maybe they have a multi-million dollar principal house that will still be exempt from a CGT under the TWG’s proposals.

A gain will bump people into the next tax bracket, not necessarily the top bracket

Income	Tax rate	Effective tax rate
$0 – $14,000	10.5%	10.5%
$14,001 – $48,000	17.5%	10.5 - 15.5%
$48,001 – $70,000	30%	15.5 - 20.0%
Over $70,000	33%

[Bjauck]

A gain will bump people into the next tax bracket, not necessarily the top bracket

Income	Tax rate	Effective tax rate
$0 – $14,000	10.5%	10.5%
$14,001 – $48,000	17.5%	10.5 - 15.5%
$48,001 – $70,000	30%	15.5 - 20.0%
Over $70,000	33%

Sure - their top bracket. Someone with few non-exempt assets will probably end up paying less tax under the TWG proposals.

Besides If the TWG’s are ever introduced and CGT receipts become meaningful then maybe those tax bands will be more generous and the top rate of income tax may be dropped to 28%...However our “poor” taxpayer may have already shifted all his equity into his over-capitalised multi-million Dollar exempt principal residence by then.

[minimoke]

Sure - their top bracket. Someone with few non-exempt assets will probably end up paying less tax under the TWG proposals.

Which results in what we know all along. The "rich" will be taxed to pay to the "poor". Its all about wealth redistribution.

[SBQ]

Sure - their top bracket. Someone with few non-exempt assets will probably end up paying less tax under the TWG proposals.

Besides If the TWG’s are ever introduced and CGT receipts become meaningful then maybe those tax bands will be more generous and the top rate of income tax may be dropped to 28%...However our “poor” taxpayer may have already shifted all his equity into his over-capitalised multi-million Dollar exempt principal residence by then.

Poor tax payers investing in their MM$ home? First you need to find where the buyers of these high end homes? Have we forgot there's a ban on foreign / non-residents buying real estate in NZ? Kiwis are not use to investing into their own home as the focus has always been through property accumulation and NOT property improvements. This is evident in how N. Americans view home ownership with multi-generational living vs NZ's change the house as often as "changing cars" point of view.

Is it me or the media is slow at releasing more news about this CGT? Beehive isn't talking much about CGT and isn't the reporting deadline in April?

[Bjauck]

....
The govt cannot undo that incentive to home ownership by imposing a CGT on it.

As home ownership rates fall (in Auckland it is down to close to 50% of homes) the “incentive to home ownership” tax breaks for owner-occupiers is a form of a benefit for the middle class.

Those who rely on KiwiSaver for their pension fund either through choice (for some, home ownership may not be appropriate) or because they simply cannot raise the deposit or finance to buy a home (and consequent ascent of the principal residence property ladder) end up helping to pay the tax that is not levied on owner-occupiers. So the young and the poor end up paying higher tax on their wages, term deposits and KiwiSaver whilst the old and wealthier enjoy their tax-exempt homes which they are able to trade down or use for a reverse mortgage in retirement?

Perhaps The tax foregone as a result of the exemptions for owner-occupied housing should be costed and published as a subsidy or benefit in the same way as other benefits paid by the government.