(capital gains tax – 7 minute read)
Capital Gains Tax is the elephant in the room no one talks about.
The tax working group in 2019 has recommended that capital gains tax be part of our tax landscape. More recently,an open letter from wealthy kiwis ask that capital gains tax become a thing. But yet, Capital Gains Tax (CGT) keeps getting kicked down the road. No major political party will ever touch it, and it’s become a vilified policy.
Kiwis are grappling with a cost of living crisis and our public and health sector workers struggle under low wages. A well-enforced CGT regime will create additional revenue for our government to deploy to address these issues.
So what would CGT look like for Aotearoa? Let’s take a look at what other countries are doing for CGT as it relates to property.
Capital Gains Tax in Australia
Where the wages are higher (debatable), taxes are lower (not really – the highest Aussie tax bracket is 45%) AND they have CGT on property sales.
Like Aotearoa, you include gains on capital sales in your income tax in Australia. If you have held the property for more than 12 months, you may be eligible for a 50% discount on your CGT. This only applies to individuals and trusts. You may also get an additional 10% discount if you provide affordable housing.
You calculate gains using the sales price of the property minus the cost price of the property and any costs incurred in selling it. Interestingly, you can index the cost for inflation if you acquired it before 21 Sep 1999. This means that you can declare a higher cost price than you actually paid when calculating CGT.
Your main residence is exempt from CGT of course. This is a common clause for tax payers in countries that have CGT.
Malaysia – Real Property Gains Tax
I grew up in Malaysia, so it would be remiss of me to not write about Malaysian Real Property Gains Tax (RPGT).
Malaysia had implemented a form of CGT called Real Property Gains Tax (RPGT) in 1995 to curb speculative activities in the property markets. To better protect local buyers and first home owners from escalating property prices.
The RPGT is separate from your personal income tax and uses its own rate to calculate taxes. You calculate gain on the difference between the sales price and the cost price of the property (and other costs incurred in the sales). The tax rate is based on how long you have held the property for before you sell it:
|Disposal Period||As of 1 January 2022|
|Within 2 years||30%|
|In the 3rd year||30%|
|In the 4th year||20%|
|In the 5th year||15%|
|In the 6th year and thereafter||NIL|
The table above shows the tax rate as it applies to citizens and permanent residents of Malaysia. For Malaysian companies, it is the same as above but in the 6th year and thereafter it is 10%. For foreigners, it is 30% for all categories, except for in the 6th year and thereafter where it is 10%.
Like Australia, your main residence is exempt from RPGT. However, you can only apply this exemption ONCE in your life!
No CGT in Singapore
Singapore is one of the most developed economies globally. But it’s also one of the most expensive places in the world to live in.
Singapore also doesn’t have a comprehensive CGT system in place. Generally speaking, any gains made on sales of capital assets (including property) are tax-free.
BUT, if you buy and sell property with a profit seeking motive, you will be deemed to be trading in properties. Your gains may be taxable. There are some criteria used to establish this. But if I was an accountant in Singapore, you can bet that I will be coaching my clients on how to get around this criteria.
The average Singaporean home costs SGD 2,080,533 (NZD 2,509,123). Ok, there are a lot of factors for that – but the lack of CGT certainly doesn’t help! By comparison, Kuala Lumpur, the urban capital of Singapore’s neighbour (and major trading partner) Malaysia has an average house price of MYR 780,564 (NZD 281,438), and they’ve had RPGT since 1995. But, y’know, correlation doesn’t necessarily imply causation… or does it?
Property Gains Tax for Aotearoa
Currently, we have the bright line test on property sales which has been recently extended to 10 years (totally NOT CGT according to our politicians). However, this system is flawed because 10 years is such an arbitrary cut-off point.
The average kiwi tax payer sits in the 33% tax bracket for income tax. If you sold a property that you owned for up to 9 years (which is still a long time) you could suddenly be paying tax at the highest bracket (currently 39%) just for that one year in which you sold it. Does that sound fair?
In my opinion, NZ politicians need to stop kicking the can down the road and propose a CGT that is fair and equitable to kiwis.
I’m in favour of an RPGT – style regime that Malaysia uses. Where the amount of tax you pay on property gains progressively reduces over the number of years you’ve held the property for. This would encourage investors to hold on to long-term rentals and make it expensive for property speculators to buy and sell in the short term. Naturally we’ll need to tweak the rules so that it suits the needs and aspirations of Kiwis. Maybe add in a tax break for investors that don’t AirBnB-ify their rentals to encourage more long-term renting.
Australia has a cool idea with the 50% discount, but it’s really just our current bright-line regime… with a 50% discount slapped onto it. And without a 10 year cut-off point.
At the end of the day, we Kiwis need to have a frank discussion about CGT and how we can best implement it. Let’s not jeopardize our future generation over our inability to do the right (albeit unpopular) thing.