Dunne Speaks: PM Gets Her Capital Gains Tax After All

George Orwell once observed that “political speech and writing are largely the defence of the indefensible… Thus political language has to consist largely of euphemism, question-begging and sheer cloudy vagueness…”.

The current argument about whether the government’s decision to extend the so-called bright line test for the taxation of profits arising from the sale of non-owner-occupied resident investment properties from five years to ten years provides a good example.

At present, capital gains arising from the sale of non-owner-occupied residential investment properties sold within five years of purchase are taxed at the taxpayer’s marginal tax rate (usually 33% or 39%, depending on their income level). The government has now announced the doubling of that five-year period to ten years, with virtually immediate effect. It argues it is doing so to rein in rapidly rising property prices and to curb speculation. It has also vehemently denied that this amounts to a capital gains tax on investment property sales, so does not break its earlier promises not to introduce such a tax.

In classic Orwellian style, the Finance Minister has also denied it breaks his own earlier promise not to extend the bright line test. Rather than admit to an about-turn he merely says now that his original commitment had been “too definitive”. It is eerily reminiscent of the language of the fourth Labour Government where the phrase “we have no present plans to” actually meant that the decision was still being finalised. Both statements are true as far as they go, but they convey a clearly different meaning to those hearing them, which conveniently hides their true intent. But then no politician ever likes to admit to breaking an election promise.

On the broader question of whether the extension of the bright line test constitutes a capital gains tax, the Prime Minister says it does not because it relates only to investment property and does not include land, shares, business and intangible assets as recommended by the Cullen Tax Working Group in 2019. But in the infamous words of Mandy Rice Davies “(s)he would say that, wouldn’t (s)he”. After all, she promised to resign if her government ever moved to introduce a capital gains tax. Most people took that to include property, the most prominent asset of all.

For that reason, her comments have the air of Orwell’s “defence of the indefensible”, particularly given the “question-begging and sheer cloudy vagueness” that has accompanied them. In reality, the only difference between the government’s plans for taxing investment properties, and the Cullen Tax Working Group’s own proposals in that respect is one of timing. Both propose taxing the capital gains at the taxpayer’s marginal tax rate – the only variation is that the Working Group wanted that to apply to all such transactions, whereas the government is limiting the scope to changes within a ten-year period.

Admittedly, the Working Group also proposed including capital gains other than on property sales, something the government has ruled out so far. However, that does not mean, as the Prime Minister has argued, that the extension of the bright line test on investment property is not a capital gains tax because it does not include these other items.

More important, though, is what impact the government’s moves are likely to have on cooling the increase in house prices and making housing more affordable for new buyers. The Cullen Tax Working Group was cautious in its 2019 report, saying that it expected “an extension of capital gains taxation would lead to some small upward pressure on rents and downward pressure on house prices. These impacts are likely to be small…”. On a broader front, the Real Estate Institute is already suggesting that based on its own sales figures the new higher housing price caps announced in the package will help less than 500 first home buyers.

Herein lies the nub of the problem. The real issue with the housing problem in New Zealand is shortage of supply. We simply are not building enough new houses to meet the demands of our population. The Cullen Report emphasised the importance of other government initiatives in this regard, like the ill-fated Kiwibuild project, and there have been other reports over the last couple of years, highlighting the need to build more houses.

Yet, despite its apparent largesse, this week’s package contained no commitment to a more expansive government sponsored affordable home building programme. Much has been made of the package’s multi-billion-dollar price tag as if that alone means meaningful, action, a good case of “sheer cloudy vagueness”, if ever there was one.

Even when she ruled out the Tax Working Group’s recommendations for a comprehensive capital gains tax two years ago, the Prime Minister said she still personally believed there should be one on investment property sales. This week, she got her way, despite her persistent promises to the contrary.

George Orwell would feel his point had been proven.

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