Hard News by Russell Brown

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Hard News: A Capital Idea?

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  • Sacha,

    Gordon Campbell interviews Rod Oram on tackling NZ's corporate under-performance, and addresses CGT.

    Oram : “It would be one useful thing to do among quite a wide range of things to do. It would send some very good messages. It would send a very powerful message to many New Zealand businesses that their whole long term business model is about capital appreciation and not income along the way. Whether you buy a rental house hoping to sell it off later for more money and you don’t care if you don’t make any money in the meantime from rent….Or if you’re a dairy farmer, you are farming for capital gains.”

    “You load up with debt, you go hell for leather to pay that off, you don’t pay much tax along the way….but the problem is, easy money comes along, as it did before the global crisis and dairy farmers increased their debt fourfold in then years, to $43 billion dollars. And all that did was drive up the price of land. So not only then can you really struggle to keep your head above water – just to make that work economically, but you’re entirely dependent on somebody to come along to pay more, to take it off yur hands.

    Enter the Chinese, with an entirely different business model."

    What he says next is dynamite, highly recommend a read. Also adds that part of the value of a CGT is smoothing cyclical govt income.

    “Our government finances look pretty bad at the moment, because [they] are the most leveraged to the economic cycle in the OECD. The vast majority of government revenue is from things like GST, income tax and profits. Which are, of course, dependent on the economic cycle. In boom times, when all those are going well, the government gets disproportionately more revenue than the rate of growth [would indicate.] Which was to Michael Cullen’s great benefit….”

    On the downside though, it goes the other way around. “Government revenues fall disproportionately more than economic growth does. And that’s what we’re seeing now.” Other countries, by contrast, have sources of government revenue that are not so dependent on the economic cycle. For example, Oram explains, pretty much every other developed country has a social security tax on employment, a flat tax that helps to cover things like health care and pensions. “ Instead, we pay for those out of general revenue.”

    Ak • Since May 2008 • 16281 posts Report Reply

  • Keir Leslie,

    Day trading does have an economic benefit tho'; liquidity in the financial markets is a good thing, and day trading helps provide that.

    Now, sometimes particularly vicious forms of it are bad - Keynes' casino, basically. But I don't think the state should get too moralistic about economic matters. Just introduce higher taxes on rich people and have done.

    Since Jul 2008 • 1264 posts Report Reply

  • Matthew Poole, in reply to James Butler,

    The authors suggest that although home ownership will become more affordable under a CGT, rents might increase; so at first flush this seems like a win for “middle New Zealand” at the expense of the top and bottom.

    Short-term there will probably be rent increases, yes. Medium- and long-term, though, the market will find an equilibrium where rents are stable. I'm not even convinced about the short-term impact, TBH, because landlords who aren't in it for capital gains won't need to increase their rents since they're already charging enough to make a positive return. They may increase because the market is rising, or they may determine that they'll have a better pick of quality tenants if their already-adequate-to-cover-costs rents don't increase. That has a balancing effect on the area's rent market, and acts as a cap on the excesses of landlords who're in it for the gain.

    The rent impact is over-stated, IMO. A short-term pain increase for low-income renters can be handled through the social security net, and should not be used to justify doing nothing to address a long-term problem that has very serious negative consequences for the country.

    The pit from whence crawl… • Since Mar 2007 • 3889 posts Report Reply

  • recordari, in reply to Craig Ranapia,

    I'd prefer the "family home" (however that gets defined) not be excluded from a CGT

    Can I be confused by this, and thus ask for an explanation. Isn't that the standard around the world?

    And once on this slope, will we end up putting a CGT on the family jewels?

    Collectables acquired for up to $500. This includes art, jewellery, stamps, etc., held for personal enjoyment. Items normally sold as a set must be treated as a set for the $500 limit. If collectables sometimes rise in value then this exemption can be an advantage to a taxpayer collecting small items.

    AUCKLAND • Since Dec 2009 • 2607 posts Report Reply

  • Martin Roberts, in reply to recordari,

    Isn't it illegal to sell body parts?

    Auckland • Since Nov 2006 • 88 posts Report Reply

  • Paul Campbell,

    I think a CGT would only apply if you had a second set

    Dunedin • Since Nov 2006 • 2033 posts Report Reply

  • Sacha,

    Lew admires Labour's handling of the politics so far.

    And then there’s the class-consciousness, demographic wedge, which Chris Trotter got pitch-perfect: property speculators are “landlords”, and the object isn’t to win back disgruntled National voters, but to engage the 20%+ of the electorate who didn’t vote last time because they felt none of the parties spoke for them, and the thousands of people who were too young to cast a vote in 2008 and are now even further from the possibility of home ownership because even the worst recession in half a century has failed to bring sanity to real estate markets.

    This is positive-sum, strategically sound and tactically smart politics. Now what remains to be seen is whether Labour can win the battle of ideas over it.

    Ak • Since May 2008 • 16281 posts Report Reply

  • Rich of Observationz,

    I doubt rents will increase. The number of houses in NZ won't change, nor will the ability of renters to pay. Property prices *are* likely to fall (if the tax is effective) which will increase rental yields. At the end of the day, NZ will be spending less on a place to live, which can only be a good thing.

    Back in Wellington • Since Nov 2006 • 4362 posts Report Reply

  • Gareth Ward, in reply to Matthew Poole,

    landlords who aren't in it for capital gains

    What, both of them? ;)

    Auckland, NZ • Since Mar 2007 • 1720 posts Report Reply

  • James Green, in reply to Paul Campbell,

    I think that it's important to treat day trading and its equivalents the same way we treat house flipping, or currency speculation

    Day trading and currency speculation are taxed at your marginal tax rate. Profits are offset against losses, however. And if you are flipping houses, then you will also likely end up paying tax at your marginal rate.

    Dunedin • Since Nov 2006 • 682 posts Report Reply

  • Ross Mason,

    Like shares where it is beneficial for a company only when selling the initial shares, the only worth put into a house is in the building of it. After that it is speculation. I know a "home" can last forever and it is socially desirable for a family to have a roof over it's head. But "investing" in property for the sole reason of waiting for the price to increase is out and out speculation. Renting is another kettle of fishy. Do you call renting landlords speculators or "service providers"??? Hmmm.

    Yes, bring on the CGT.

    Upper Hutt • Since Jun 2007 • 1479 posts Report Reply

  • Idiot Savant, in reply to Keir Leslie,

    Day trading does have an economic benefit tho'; liquidity in the financial markets is a good thing, and day trading helps provide that.

    Sure. But are those benefits (which largely accrue to other market speculators) worth making it tax free?

    I think not.

    Palmerston North • Since Nov 2006 • 1625 posts Report Reply

  • martinb,

    More folk with their money in and available for companies like Charlies or V (or other non-drink related NZ success stories????) surely can only be good for our economy.

    Also how about a strong commitment to a buy NZ made campaign? Remember that used to say keep our country working...

    Going to the malls we are getting a lot of hand me downs from the Aussie chains- respect to Barkers and little Brother etc.

    Auckland • Since Jul 2010 • 156 posts Report Reply

  • Rich of Observationz,

    In the unlikely event anyone actually makes money at day trading of currencies or stocks in NZ, it would be taxable. But those few individuals probably just evade tax.

    (Also, I guess losses from such activities are tax deductible. It would be better if the IRD categorised it as a hobby and avoided the tax loss).

    Back in Wellington • Since Nov 2006 • 4362 posts Report Reply

  • Bart Janssen,

    One thing it's worth reminding the "end of the world is nigh if we have CGT" folks is - sure you pay CGT, so if you made $100k capital gain you pay $15k to the govt - you still get $85k "profit". If the rate matched you highest tax rate that might get more interesting.

    All a 15% CGT does is shift the balance a little away from a capital gain mentality.

    It's also worth noting that every tax review (by folks who are meant to know about such things) in the last 3 decades has recommended a CGT.

    Auckland • Since Nov 2006 • 3223 posts Report Reply

  • Nick Kearney,

    What I'll be looking for is whether the policy framework by Labour follows the recommendations of the experts: http://www.victoria.ac.nz/sacl/cagtr/pdf/tax-report-website.pdf

    Considering Goff et al have already discredited a land tax, I don't hold out much hope they will follow the experts.

    What I see happening to cover rent rises (which are almost inevitable) is another subsidy or tax credit of some sort, thereby making the tax system even more confusing and complex - the very thing the TWG warned against.

    At some point in time, the major political parties are going to have to consider what is the best thing to do for the country, rather than for the 10-15% they need to win an election. I don't know when that will come, but its time has passed.

    North Shore, Auckland • Since Nov 2006 • 67 posts Report Reply

  • Nick Kearney, in reply to Bart Janssen,

    ...so if you made $100k capital gain you pay $15k to the govt - you still get $85k "profit".

    At the moment, yes. But we all know once it's in, it is cannon-fodder for future politicans. Then there's the general issue of whether that $15K is better left in the hands of individuals, families etc or whether the government can allocate it better.

    I realise on this site I'm going to lose that one!

    North Shore, Auckland • Since Nov 2006 • 67 posts Report Reply

  • Craig Ranapia, in reply to recordari,

    Can I be confused by this, and thus ask for an explanation. Isn’t that the standard around the world?

    Can I put this is class conscious demographic wedge terms, Lew might approve of? :) Boo-fucking-hoo if Messers Key and Goff get taxed on the capital gain from their Parnell McMansions and lifestyle blocks if (as is not entirely implausible) they choose to “downsize” in their dotage to something a wee bit easier to manage..I am highly sceptical that would reduce John and Bronagh and Phil and Mary to a miserable old age of eating cat food while hunched over a one-bar heater.

    And honestly I could have lived with taking one for Team New Zealand if my cut of my Nana’s estate had been reduced by it paying CGT on the sale of her unit.

    I’m sincerely hopeful that the policy won’t be riddled with populist loopholes and wonky numbers that even that well known Rogernome Brian Easton calls bullshit on. The politics may be smart (so far), but this is one time Labour really needs to break the cycle of foot-in-mouth disease. (Though that's probably no more complex than making sure Goff sticks religiously to a single double-spaced page of talking points, while Cunliffe does the heavy lifting.)

    North Shore, Auckland • Since Nov 2006 • 11786 posts Report Reply

  • Gareth Ward, in reply to Bart Janssen,

    It's also worth noting that every tax review (by folks who are meant to know about such things) in the last 3 decades has recommended a CGT.

    I know the latest Tax Working Group didn't.

    Auckland, NZ • Since Mar 2007 • 1720 posts Report Reply

  • Nick Kearney,

    Their recommendations on such:

    Most members of the TWG have significant concerns over the practical challenges arising from a comprehensive CGT.

    The majority of the TWG support detailed consideration of taxing returns from capital invested in residential rental properties on the basis of a deemed notional return calculated using a risk-free rate.

    North Shore, Auckland • Since Nov 2006 • 67 posts Report Reply

  • Matthew Poole, in reply to Rich of Observationz,

    Also, I guess losses from such activities are tax deductible. It would be better if the IRD categorised it as a hobby and avoided the tax loss

    In which case the gains aren't taxable either. If you want to deduct losses, you have to declare profits. If you don't declare profits, you can't deduct losses. Or expenses. There is no way to "play" at being a day trader and gain while losing money. If you're not doing it as a business, the IRD doesn't care.
    In theory one can be a professional gambler - there's case law on the subject - but most people just take a punt for fun

    The pit from whence crawl… • Since Mar 2007 • 3889 posts Report Reply

  • BlairMacca,

    Jordan Carter (via NRT) has a good explanation here which Labour should push:

    If you own a business and apply your energy and talents to make a profit, you pay company tax on that profit (28c in the dollar).
    If you work hard as an employee – say as a nurse, or a callcentre worker, or a web designer, or one of those people who annoyingly applies parking tickets – you pay income tax (up to 33c in the dollar).

    If you sit on an asset for long enough and it goes up in value, you pay no tax on that unearned income when you cash it up.

    That’s not fair.

    http://jtc.blogs.com/just_left/2011/07/taxing-times-in-the-capital-gains-debate.html

    Wellington • Since Apr 2007 • 200 posts Report Reply

  • BenWilson,

    while I'd prefer the "family home" (however that gets defined) not be excluded from a CGT I get how that would be politically impossible, even if I don't understand the policy rationale.

    I guess they're targeting investment property. It is also exactly how it's done in Oz.

    Instead she gushes 90-95% utter tosh, while absolutely nailing it for a small minority of the time. What's up with that?

    Even a stopped clock is right twice a day?

    Key keeps talking about moving salaries to be the same as Oz - to do that we need actual local investment (not investment from the Oz retirement system)

    Oz has CGT and Super. I think we should too. Super makes for a massive pool of local reinvestment. CGT discourages property speculation, whilst actually encouraging property investment, in the more productive way - buy and hold, and develop.


    We've had quite a good discussion on CGT here before, will find the thread soon. DexterX was particularly outspoken against it and had much more cogent points than some crazies out there, I hope he comes back here for it.

    Auckland • Since Nov 2006 • 8305 posts Report Reply

  • Matthew Poole,

    Nick, go away and read the series of articles (1, 2, 3) by Chye-Ching Huang and Craig Elliffe discussing some tax ideas for NZ. Craig is definitely not a bleeding heart lefty, having been a partner at KPMG and Chapman Tripp, and as a taxation professor he’s got some academic kudos to boot.

    The short version is that the CGT nay-sayers’ predictions largely don’t pan out and the revenue realised is normally much more than projected.

    As for your suggestion that the money deducted in tax would be better-off in the hands of the seller, trickle-down is bullshit. It doesn’t work anywhere. Low-income people spend most, or all, of their income, but they’re the ones who don’t have significant capital assets to sell without then putting the proceeds into a replacement asset. High-income people don’t spend all their income, often do have significant surplus capital assets, and therefore have the least need of whatever extra they get from an untaxed capital gain.

    But, as you say, on this site you’re never going to win this argument. Because all of us, Craig R included, are quite sure that the only thing that’s trickling down is a steaming yellow stream.

    The pit from whence crawl… • Since Mar 2007 • 3889 posts Report Reply

  • Rich of Observationz,

    If you want to deduct losses, you have to declare profits. If you don’t declare profits, you can’t deduct losses. Or expenses. There is no way to “play” at being a day trader and gain while losing money. If you’re not doing it as a business, the IRD doesn’t care.

    I refer to those (a majority, I suspect) who embark on day trading to make money and fail to do so. They get a tax loss (as a business definitely. as an individual I'm not sure, but NZ doesn't ringfence individual business activities like the UK does, for instance).

    Back in Wellington • Since Nov 2006 • 4362 posts Report Reply

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