Capital Gains Tax

[elZorro]

I disagree in relation to the principal household residence. It is a great investment. Your annual benefit is tax free. By investing in the house it means that you do not have to pay rent out of tax-paid income. You can obtain a mortgage to leverage capital gain or obtain a retirement capital release at reasonable rates, the funds from which enable your purchase of other assets if you want. If there is a CGT and the principal home is exempt, that would be an extra benefit.

Also with asset testing for long-term care, the owner-occupied main home is exempt if there is a spouse not in care. That could mean a substantial nest egg available for the surviving spouse, which may not be available if the couple had invested in financial assets, shares or a business instead and which would not have been exempted from asset testing.

In that case, why not do things the normal way, and buy a home first (or get into a leveraged home) and then start a business with the home as security? It would be less flexible and more expensive per week than renting, but maybe it would be better overall, as you say. Would you then think differently about working on that home, constantly improving it with tax-paid income and paying all that interest with tax-paid income, if the capital gain on the home that you also used for business finance security was to be taxed?

[Bjauck]

In that case, why not do things the normal way, and buy a home first (or get into a leveraged home) and then start a business with the home as security? It would be less flexible and more expensive per week than renting, but maybe it would be better overall, as you say. Would you then think differently about working on that home, constantly improving it with tax-paid income and paying all that interest with tax-paid income, if the capital gain on the home that you also used for business finance security was to be taxed?

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.

[SBQ]

Yeh i'll have to agree that the banks are not stupid when it comes to lending. They know it's FAR less riskier to lend on residential homes than on commercial (which only have a business focus and having more risk).

I don't buy into the argument of funneling all your $ into your home by buying a mansion size expensive home. That recipe just doesn't work because higher end / pricier homes are far and few and attract less capital gain over the long term. The reality what makes prices go is simply location. The largest house with the largest investment of it's kinds means nothing if it's in a poor location. Even in a new sub-divisions one would be foolish to build extravagant when there's no knowing what the demand will be in 10 or 20 years time (ie. Pegasus area north of Christchurch). While i'm all for home owners to improve the value of their own home, I don't believe CGT exemption on the principle residence would cause many to up-scale their house (especially when it's a common trend for seniors to 'down scale' by selling their 4 bedroom home to a small 2 bedroom 'elderly person unit' type housing). and if you want to get rid of your house by doing a 'reverse-equity' mortgage ; each to their own.

NZ's tax system is not like the US where are no exemption of CGT on the principle residence. But then they're allowed all sorts of goodies like deducting their mortgage interest rate off their income, and capital losses that can be applied forward and back (again something the TWG has not talked about). Therefore, it would be more prudent for NZ to have a more comparable tax system such as in Australia (or UK colonies) where they allow a CGT exemption on the principle residence.

I would not be surprised if Princess Leia is looking for a CGT model like Australia or Canada. The simplicity of NZ's tax system penalises the low and middle class and makes the equality gap wider. I'll reiterate, a simple tax on all people is not just for those that are not able. Those who are disabled clearly have the right to make a decent living and get into their own home without being a rental tenant for the rest of their lives. Those who are more skilled and affluent deserve to pay more taxes but do so by structuring their assets in the form of paying CGT (of course this approach is meaningless if the tax rate on CGT = the person's tax bracket).

[minimoke]

I don't buy into the argument of funneling all your $ into your home by buying a mansion size expensive home. That recipe just doesn't work because higher end / pricier homes are far and few and attract less capital gain over the long term. The reality what makes prices go is simply location. The largest house with the largest investment of it's kinds means nothing if it's in a poor location.

Location, or more specifically future demand is the key to the recipe - and it will help ensure the recipe work

Even in a new sub-divisions one would be foolish to build extravagant when there's no knowing what the demand will be in 10 or 20 years time (ie. Pegasus area north of Christchurch).

A golden rule is to avoid new subdivisions - simply because you dont know who your neighbours are going to be.

While i'm all for home owners to improve the value of their own home, I don't believe CGT exemption on the principle residence would cause many to up-scale their house

People will be wise to put their money in places that secure their capital it the most effective way.

(especially when it's a common trend for seniors to 'down scale' by selling their 4 bedroom home to a small 2 bedroom 'elderly person unit' type housing). and if you want to get rid of your house by doing a 'reverse-equity' mortgage ; each to their own.

All these people are doing is releasing their own capital for their own benefit

NZ's tax system is not like the US where are no exemption of CGT on the principle residence. But then they're allowed all sorts of goodies like deducting their mortgage interest rate off their income, and capital losses that can be applied forward and back (again something the TWG has not talked about).

Comparing others tax system is only of academic interest - and not part of this governments agenda. They apparently want a "Fairer" system

Therefore, it would be more prudent for NZ to have a more comparable tax system such as in Australia (or UK colonies) where they allow a CGT exemption on the principle residence.

Other than trade, we dont need a comparable system. We need one that is efficient - like NZ's GST

I would not be surprised if Princess Leia is looking for a CGT model like Australia or Canada. The simplicity of NZ's tax system penalises the low and middle class and makes the equality gap wider. I'll reiterate, a simple tax on all people is not just for those that are not able.

A tax system should apply equally to all people - that is fair. The more you profit teh more tax you will pay. That is fair.

Those who are disabled clearly have the right to make a decent living and get into their own home without being a rental tenant for the rest of their lives.

They dont have a right at all. They have an opportunity. As does everyone else.

Those who are more skilled and affluent deserve to pay more taxes but do so by structuring their assets in the form of paying CGT (of course this approach is meaningless if the tax rate on CGT = the person's tax bracket).

No-one deserves to pay tax. It is simply a burden we must all bear and we should all bear it equally and fairly.

One thing is sure in life - we need a roof over our heads when we stop earning - ie retire.

How is it fair I can put my money into an eventual mortgage free residential property and pay no capital gain as I release that capital. Compared with a renter, who ought to be putting their non-housing savings into a Superannuation, Kiiwsaver or other capital investment scheme , only to be taxed when they release that capital to pay for that roof in retirement

[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%