Tag Archives: capital gains tax

Legacy investments versus speculative investments.

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14

Among the arguments about instituting a capital gains tax in NZ (common in many parts of the developed world) is the claim that much property is family residence or inheritance in nature. The argument goes that it is unfair to not differentiate between the sale of a family home, granny flat or holiday residence by middle and working class people and the sale of properties bought by developers and speculators with the intention of “flipping” them for a profit. The first category are long-term, emotionally laden investments whereas the second is simply about making money.

I see merit in the argument for differentiation of property investment categories. In particular, I see a difference between legacy investments and speculative investments. Legacy investments are those where property is bought for family use over time. These can be the main family home but more often are second, smaller flats or holiday homes that are passed on between the generations (think of the archetypical bach or a crib). The emotional as well as financial investment in such places is not based on eventually securing returns but on preserving collective experiences and traditions from generation to generation and giving off-spring the chance to acquire a property stake without the exorbitant financial costs associated with the contemporary real estate market (for example, an equity share in a family bach may help towards securing a first time mortgage loan). It specifically excludes using family members as fronts for speculative purchases (say, of a family farm).

Speculative investments are just that: property investments that are designed to be on-sold in a relatively short period of time in order to secure a positive financial return. Here the intention is to make short-term money off of the buy/sell transaction.

I would suggest that a capital gains tax is appropriate for all speculative investments. They become another cost of playing the real estate flipping game and will eventually be incorporated into the real estate price architecture. On the other hand, I do not think that capital gains tax is appropriate for legacy investments. If a family property is on-sold within blood lines or divided into part ownerships to children and grandchildren, it seems to me that the less financial burden imposed the better for all. People get to keep their properties within the family and share in the collective benefits over time and generational change. That includes rental income from family owned property subject to the requirement that the property must be used by family members for given periods within a specified time frame (this would allow seasonal rentals and other short-term lease arrangements to non-family).

The system would work if there is a legacy declaration made on a property at the time of purchase. Again, this may be less appropriate for a main family home that could likely be on-sold to strangers as the family demographic shifts. There a capital gains tax would apply. But it very much should not apply to properties that families hope to preserve within the bloodlines for posterity. Here on-selling to relatives should not incur capital gains taxes.

On-selling under the legacy clause will require verification of family lineage, and any sale to non-family voids the legacy declaration and makes the sale subject to capital gains tax. Those who try to cheat the system and are caught will be subject to heavy financial penalties in excess of the tax otherwise to be paid.

I am not an economist much less a taxation expert but it seems to me that distinguishing between legacy and speculative investments in the property market strikes a good balance between profiteering and homesteading. I admit to not having thought through all of the implications inherent in this proposed scheme so if any readers want to illuminate me please feel free to do so.

I have no doubt that clever devils will immediately try to game the system and seek out ways to turn legacy homesteading into profit-driven speculation. But with a detailed code of compliance and robust enforcement regime in place, it is possible for this approach to split the fair difference between an all or nothing capital gains tax on property and one that reflects the nuances in property buying preferences. Or perhaps that is simply too much to ask in an ideological climate where the very idea of taxing something other than salaried income, business earnings and consumer purchases and services is considered sacrilegious by the Right.

PS: I have been informed by the smarter adult in my house that this is a silly idea and unworkable. She also points out that trusts already allow for inter-generational transfers of wealth/assets without being subject to tax on the transfer. I am not familiar with trust law and am not going to risk savaging by pointing out that family trusts are something more likely to be created by the well-to-do rather than the middle class, so must accept the scolding and move on. If anyone is familiar with the intricacies of trusts, please feel free to explain.

Two current events

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8

Since I’m in the middle of deadline crush, and I spent yesterday afternoon socialising instead of working, just a couple of quick notes.

Vulnerability of Labour’s Capital Gains Tax:
Overall my initial impressions of the CGT and associated policy is that it’s pretty good, but vulnerable to attack. There are the usual economic and ideological objections — full of loopholes, won’t raise enough revenue, raises rents, punishes people for getting ahead, will require more borrowing in the medium term, and so on — but for mine the best attack line rests on the coincidence of taxation rates between CGT and GST. If I were running the National party’s attack campaign, I’d be leading with “Tax off fruit & veg, tax on houses”, or better yet, “tax on bricks & mortar”. Just another of many reasons why GST off fruit & veg is bad policy.

Misunderstanding of Hone Harawira’s Oath Stunt:
So Speaker Lockwood Smith ejected Hone Harawira from Parliament for swearing his oath to the Treaty of Waitangi rather than to the Crown — despite having pulled a similar stunt in 2005 without incident. There is the usual sort of wailing and gnashing about this around the traps, and it seems to have pressed everyone’s ‘sanctimonious outrage’ buttons. What I find strange is that people seem reluctant to see the stunt for what it is — mutual base-arousal, brand politics for both Harawira and Smith. Hone Harawira was, to a large extent, elected to anger and infuriate uptight honkeys like Smith and the KBR and the talkback haters, and inasmuch as his defiance of procedure has achieved that he’s winning. Smith, for his own, has brought a new dignity and solemnity to Parliament, and his personal brand of conservatism requires that he takes a firm stance. Both acted perfectly well to type, and in a sense each has done the other a favour, by granting an opportunity to grandstand. The people who are hating on Hone were never going to vote for him; and likewise for Smith. To an extent there’s also some base arousal by the māori party, too — they have fallin in behind Hone, and are calling for the Treaty to be included in the oath. That’s a useful societal discussion to have.

I find it particularly ironical that the sort of people who are so scathing and disrespectful about Māori ceremony have their dander up regarding this rather minor infraction of procedure; many seem to be raising the counterfactual of ‘imagine the outcry if this happened on a marae!” The thing is, though, in Te Ao Māori as elsewhere, kawa are made to be broken. How and when and why they are broken, and by whom, is key. With suitable mana, ihi, wehi, you can get away with a lot. There is a famous account of Dame Whina Cooper lifting her skirts to remind the men present to respect where they came from. I think, in these terms, it was much worse for Hone that his korowai fell off.

Contra this view, however, Annabelle Lee-Harris from Native Affairs says she’s heard from left-wing Māori who are angry with Hone for trivialising and causing another sideshow; that they thought he was “indulgent when Māori in Te Tai Tokerau are in dire straits’. So maybe I’m wrong. But the bottom line is: Hone Harawira was elected to Parliament by a higher power than the Speaker; all else is procedural.

L

Capital punishment

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11

Do yourselves a favour and listen to this morning’s debate between Chris Trotter and Deborah Coddington on Morning Report. This is (or ought to be) the agenda for this year’s election, and this is (or ought to be) how the national debate runs.

The leak of Labour’s purported capital gains tax (by former One News deputy political editor Fran Mold, now Labour press secretary, to her former colleague Guyon Espiner) is undoubtedly Labour’s play of the year to date. It takes an issue of great public interest and thrusts it into the national debate at a time when the electorate is preoccupied with less directly political considerations. As Maxwell McCombs famously said, what the voters think isn’t as relevant as what they think about, and this is a great example of taking the initiative and giving the electorate something to think about.

But not just the electorate. Everyone is thinking about this, because it is — finally — a genuine flagship policy from Labour. John Key’s comments on the topic take up two-thirds of the Vernon Small’s Stuff article yesterday. The property investment lobby are predictably livid about it. David Farrar has come out swinging, despite having been cautiously supportive of considering a CGT earlier in the term. Deborah Coddington, in the linked discussion above, saw fit to analogise CGT to child prostitution laws. Seriously.

The announcement has riled ’em, and it’s not even official yet. They’re scaremongering furiously, and if Labour have an ounce of sense the pitch of the official policy announcement (tomorrow next Thursday) will be to allay the worst of these fears. It should be framed as “redirecting investment to more productive sectors in theeconomy” and “paying our fair share”, with Phil Goff and Labour MPs (many of whom own investment properties) laying down a challenge to others: “we’re prepared to suffer a bit for the good of the rest of the country: are you?”

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.

L