Tax on all housing necessary to correct the “distortion of the social fabric”

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A new tax is needed to address growing inequalities between New Zealanders who own and those who don’t, according to two researchers.

Tax expert Terry Baucher and Susan St John, director of the University of Auckland’s Retirement Policy and Research Center, drafted a discussion paper calling for an equitable economic return approach to housing, which they believe could generate $ 1 billion a year in taxes. .

They said housing has become New Zealand’s primary vehicle for wealth accumulation thanks to low interest rates, readily available loans, and tax-exempt earnings.

“Housing is seen as a tradable commodity and a store of wealth, rather than a human right or a basic human necessity.

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“The fortunes accumulated in real estate allow and reinforce a landed nobility whose incentives to work and to contribute in a meaningful way are blunted. “

But, they said, the government felt that neither a capital gains tax, nor a property tax, nor a stamp duty nor a wealth tax was the solution.

“Yet the widespread malaise that the growing division of wealth in housing is socially damaging makes any action untenable. Other tools such as light line tests, loan-to-value ratios (LVRs) and non-deductibility of interests for some owners may be useful, but they are by no means sufficient on their own.

They said a capital gains tax could in theory achieve horizontal equity, but only if capital gains were measured on an accrual basis. It was more likely that the capital gain would only be measured on the sale and there would be questions for Inland Revenue to define when a person had bought and sold outside of the light line test.

“Any feasible future CGT has no impact on the accumulated untaxed capital gains in housing that have worsened over years of neglect to date, and is therefore limited, if not powerless, to address the profound damage to the housing market. housing inequality. “

A flat tax on land was likely to have more of an impact on those who had cheaper homes on expensive sections.

But they said a fair economic return (FER) could provide a better outcome. It is based on the deemed rate of return approach, whereby money invested in property is deemed to have yielded a certain rate of return each year, whether or not it has been realized.

The tax would apply to all residential properties.

Baucher and St John said funds held in housing should generate at least as much return as money in the bank.

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Shane Jones claimed that New Zealand First eliminated the capital gains tax in June 2019.

Under this approach, net worth – the value of the property minus the related mortgages – is treated as if it were a term deposit with interest at a rate such as 2% or 3%.

This return is then added to the owner’s taxable income and taxed at his marginal tax rate.

Baucher said there would be a $ 1 million per-resident equity exemption, which would mean that only the top 20% of landowners and absentee owners would be taxed.

Someone who earns $ 150,000 a year, with a $ 2 million house in his name alone and without a mortgage, would pay about $ 7,800 in additional taxes a year.

The FER would use formal CV valuations that would capture the appreciation in the equity base over time.

“The FER rate itself can also be a tool that can increase escalation. It may, for example, have a possible range of 1% to 3% under the conditions prevailing from the early to mid-2020s. It could be introduced at a rate between 1 and 2%, then the rate gradually adjusted to the rise. “

Baucher and St John said the approach would mean keeping land and houses empty for future gain would not be so profitable.

“Likewise, serious homeowners may find themselves encouraged in an FER approach by a lower overall tax burden and easier, cheaper compliance. This can mitigate any perception that the FER is designed to attack and undermine the rental market.

“By making explicit the imputed returns on housing investments, resources are likely to be diverted from owner-occupied luxury housing and second homes, and the culture of treating housing as a traded investment good. profit is undermined. Better use of existing stock should follow.

Baucher said fixing the housing tax was the most important thing for the economy to do.

“Housing distorts our economy and our social fabric.

“I think housing eats our young people. It is a terrible problem. We need to change the tax parameters in a way that is outside the box that we have been thinking about.

Government policies increased complexity and potentially created unintended consequences, he said.

With a value of over $ 1,000 billion, housing eclipses other asset classes, he said. “If it’s considered the only game in town, it becomes the only game in town and you are heading for a bubble.

PWC’s tax partner Geof Nightingale said the main problem with the deemed rate of return proposals was that people didn’t like paying taxes when they didn’t make a profit.

He preferred a capital gains tax as it applied at the time of the transaction. People would know why they sold a property and have the cash to pay the tax, he said.

“At least you have the money there. In some cases, with the fair economic return method, you might be able to pay cash in a year when you had negative cash flow.

A capital gains tax with appropriate exclusions, such as an exemption for KiwiSaver or family farms, should be salable to the majority of New Zealanders, he said.

He said that whatever taxes are applied, the money generated should be recycled into tax cuts for average incomes.


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