Reserve Bank revives capital gains tax threat

The Reserve Bank (RB) and the Inland Revenue Department (IRD) are at odds over how real estate is taxed in New Zealand.

Monday, June 18th 2007, 3:48PM

by Rob Hosking

Last week the two agencies gave a markedly different interpretation of the present law to different select committees.

The RB told the commerce select committee, which is conducting an inquiry into house affordability, that the New Zealand tax regime favours an over-investment in housing.

“The tax treatment of capital gains for owners of rental properties appears relatively favourable when compared to other countries.”

And the RB argued in favour of taxing those gains, including “ring fencing” of operating losses of property investments instead of allowing people to offset them against their other tax.

And the central bank also argues for a capital gains tax along Australian lines. “Consideration might also be given as to whether taxation policies could be more in line with those in Australia, where realised capital gains on rental properties are taxed, but at half the normal tax rate.”

That is quite different to what tax officials were telling the finance and expenditure committee last week.

Asked by National finance spokesman Bill English what tax advantage real estate has over other forms of investment, the Inland Revenue's head of policy, Robin Oliver, said, “the correct answer is there is none”.

And as far as taxation of the capital gains on property, Oliver said if anything the tax rules for real estate are tougher than for other forms of investment.

That is because investors can have their capital gains reassessed as income and be required to pay tax on them.

“In housing, the capital revenue boundary is a brought back a bit, there are tighter rules for what is and isn’t capital gain.”

The real concern with housing, Oliver told MPs, is that banks will more readily lend a larger amount to investors than they will for other forms of investment.

That, though, has nothing to do with the tax system, and Oliver reiterated, “there is no tax advantage under the law and I don’t think officials have ever said anything different”.

The IRD was given an extra $14 million, over the next three years, in this year’s Budget to enforce existing tax laws around property investment, and the main focus of this looks like being on enforcing the tax rules which reclassify a capital gain on a property sale as income – and thus taxable.

The IRD has already been cracking down on this area over the past three years.

English raised the issue of whether the extra $14 million is necessary, and whether, because both Finance Minister Michael Cullen and RB Governor Alan Bollard have been talking about the need to use the tax system to induce a slowdown in the property market, “there’s been pretty strong political pressure on the IRD to look like its doing something when in fact its probably unnecessary”.

Revenue Minister Peter Dunne responded that the change was because the IRD has responsibility for maintenance of the revenue base.

The new Commissioner for the IRD, Bob Russell, told the committee the first part of the spending would be focused on raising awareness of the tax rules.

“The increase in the audit activity will be more over years two and three,” he said.

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

« Property investors refocus on cash flow

Free Investment Property Showcase Events: Auckland, Wellington and Christchurch »

Special Offers