Implementation of CGT in South Africa resulted in house prices skyrocketing, says REINZ
The Tax Working Group’s final report has been released, with the raising of income tax thresholds and the introduction of a “broad extension” to the taxation of capital gains being among its key recommendations.
The group has recommended that the new Capital Gains Tax (CGT) be put in place from 1 April 2021, and should include land, shares, intangible property and business assets. Personal residential homes and personal-use assets are excluded.
Real Estate of New Zealand (REINZ) chief executive Bindi Norwell says that while the CGT recommendation may boost housing affordability in the short term, but this result will likely be short-lived.
“In the short-term there may be some initial relief in house price affordability as investors look to sell their property to avoid paying CGT,” Norwell stated.
“This may create opportunities for first home buyers. However, in the long term it’s likely to push house prices up as people look to invest more money in the family home, as there will be less incentive to invest in rental properties or other forms of investment, e.g. equities.”
“The report even recognises that any impact on housing affordability could be small, therefore, we question whether all of the administrative burden and cost to implement GCT is worth it. Especially as CGT coming at the end of a raft of legislative changes the housing market has faced recently including the foreign buyer ban, ban on letting fees, insulation, healthy homes and ring fencing.”
Norwell points out that South Africa was the latest OECD nation to introduce Capital Cains Tax, and the country’s house prices increased by 139% within six years of its implementation. She says that although this was not the only contributing factor, the tax had a markedly negative effect on affordability and is unlikely to fare any better in improving prospects for first-home buyers in New Zealand.
“We’re also disappointed that the rate of CGT is an individual’s marginal tax rate and that there will be no reduction in the rate such as is seen Australia and the US,” Norwell continued. “This means that New Zealanders will effectively be paying a much higher rate of capital gains tax than individuals in other OECD countries.”
“However, it is positive to get confirmation that the Tax Working Group has recommended that the family home is excluded from CGT and that the calculations of gains are not to be retrospective. Additionally, it’s great that some relief in the form of rollover provisions for small farms and businesses has been proposed.”
