By doubling the bright line test for the sale of residential property, the government has just made thousands more sellers liable for tax. But what kind of tax? Justin Giovannetti asked a bunch of experts whether this is really a capital gains tax in disguise.
This week saw the start of a political debate that’s likely to last for the next three years and beyond: whether Jacinda Ardern broke one of her unbreakable promises – not to introduce a capital gains tax – by doubling the bright-line test on residential property sales.
The Spinoff reached out to a number of economists to attempt a clear answer to that question.
On Tuesday, the government announced that as part of its new housing programme it’s extending the tax on properties determined by the “bright-line test”. The test currently applies to properties sold within five years of purchase that aren’t family homes. The government is extending that to 10 years, but is excluding newly-built properties from the extension.
In short: the profit on an existing house that you purchase after Saturday, do not live in, and resell before 2031 will be taxed as income. With a few more exemptions, that’s the bright-line test.
It’s not a tax in its own right, it’s just a provision in the country’s income tax law.
New Zealand does not have what would generally be seen as a comprehensive, economy-wide capital gains tax. That kind of tax applies to any income someone makes not from their labour, but from their investments. In most countries around the world, you’re taxed on all kinds of investment, whether it’s the few cents of interest you make from a savings account or much larger sums of money from selling shares.
Some countries treat investment profit like work income and tax it at the same rate. However, the vast majority of countries tax investment profits at much lower rates than work income through what’s called a capital gains tax. The lower rate is based on the theory that you’re more likely to invest your investment income into the economy than your work income. That’s why New Zealand set the rate at 0%.
The bright-line test was introduced in 2015 by the National party as a way of stamping down on speculation in the housing market. Prior to the test’s introduction, investors were supposed to report their intentions with the sale of a property to IRD, who was then responsible for determining whether the profits should be taxed. It was messy business. John Key’s government made it clear that a sale within two years of purchase was speculation and should be treated like regular income.
In 2018, Labour extended the test to five years. Now it’s been extended to 10 years in many cases.
Act leader David Seymour and National finance critic Andrew Bayley now call the extended test a “capital gains tax”. Jacinda Ardern, meanwhile, has taken to calling it the “National party’s bright-line test”. She generally then mentions John Key right away.
So what do the economists say?
Four economists were asked whether the extended test is effectively a capital gains tax.
They were also asked to rank the new test between 0 (definitely not a capital gains tax) to 100 (it’s a comprehensive economy-wide capital gains tax).
Shamubeel Eaqub, economist at Sense Partners
Score: 75, it’s a pretty high capital gains tax you’ve got there
“It is a capital gains tax. It’s a tax on gains and capital. The end result is a tax on the gained value of a home,” said Eaqub.
He gave it the highest score of all the economists. Why? “It’s unusual as a capital gains tax because the rate is very high. Generally the tax is set at a much lower level, not the highest marginal rate. That’s why I give it a 75.”
Labour once ran on introducing a 15% capital gains tax. That was before Ardern identified the tax proposal as Labour’s achilles heel and promised never to create a capital gains tax in her political career.
Some investors might now wish that she did follow through with the party’s old capital gains tax idea. Profits above $180,000 will now be taxed as income at 39%. By international standards, that’s pretty high.
Brad Olsen, senior economist at Infometrics
Score: 65, capital gains in all but name
“Yes it’s a de facto, limited or asset-specific, capital gains tax,” said Olsen.
“I’d probably rate the 10-year bright-line as 65 out of 100. It’s not an indefinite time period and it only covers housing. But housing is a large part of the asset base and 10 years is above the average house turnover period.”
“The TLDR is that a 10 year bright-line test is a capital gains tax in all but name.”
Eric Crampton, chief economist for the New Zealand initiative
Score: 20, it’s just a badly designed tax on capital
“It is a bizarre capital gains tax that applies only to investment properties and is levied at a very high rate. Yes, it is a capital gains tax,” he said.
Most capital gains taxes around the world allow investors to offset their capital losses against the tax. New Zealand’s income tax system doesn’t in the same way. That means the government will rake in money when houses sell for big profits and won’t lose any if house prices crash, added Crampton. That’s good news for the treasury.
He gave the tax a 20 on our meter when compared to the entire economy, because it doesn’t apply to most capital gains. It also doesn’t apply to family homes, which would be taxed under most capital gains systems.
“It’s definitely a capital gains tax at this point. It’s a very poorly designed and administered capital gains tax, but it’s sophistry to say it isn’t,” he said.
Craig Renney, economist for the Council of Trade Unions
Score: 0, absolutely not
“It doesn’t matter what it is called, it’s what it does that counts. What this change does is rightfully bring the income that housing speculators are making from buying and selling homes into the income tax system. On this basis it is not a capital gains tax, it’s simply ensuring that income is being treated more consistently,” said Renney.
He gave it a 0, the only economist we spoke with who wouldn’t label it a capital gains tax.
“A proper capital gains tax system would not end after 10 years. It would treat all sources of income the same, both the tenant’s income and the landlord’s income,” he said. “This change helps, but it’s not a capital gains tax that other countries would recognise.”