Two University of Auckland researchers argue New Zealand already has taxes on its books that can be used to tax property investors. Photo / 123rf
Prime Minister Jacinda Ardern may waive the capital gains tax, but there is already a tax on books that can do the job.
This is according to two University of Auckland researchers, who say that the CB6 section of the Income Tax Act has existed since the 1970s but is not widely known because it is rarely enforced.
However – if given a simple change – it could be turned into an effective capital gains tax that targets the profits investors make when buying and selling homes, Michael Rehm and Yang Yang said in a new research paper.
They argue that the recent skyrocketing house prices have brought the tax debate back into the spotlight.
And instead of considering the new tax, CB6’s section already states that anyone who buys land with the intention of making a profit from resale must pay income tax on those gains, Rehm said.
The government has not enforced this in the past because they think it is too difficult to know the intention of the buyer when making a purchase.
But Rehm said his decade-long analysis of rental housing purchases in Auckland showed nearly all had incurred initial losses and counted on the gains on resale to be considered a wise financial investment.
“This cash flow based stuff is a complete dog,” he said.
“The only rhyme or reason you’re going to invest in property is that you expect to get some sort of payment in the end.”
That means investors can safely be said to be acting as speculators hoping for house prices to rise – and that has broader consequences for society, Rehm said.
Auckland’s average selling price has now jumped to $ 1 million for the first time in October, while national prices have also ballooned to new highs, the Real Estate Institute reported.
This kind of price hike has further transformed housing from where Kiwis seek refuge and raise their families to golden geese treated as egg nests, Rehm said.
It has two problems.
This helps create a rift in society between the rich, those who own property, and those who don’t, Rehm said.
And that’s funneling billions of dollars of investment from KiwiSaver accounts, stocks and businesses into real estate, where it yields less broad economic benefits, he said.
Politicians across many of the political spectrum have expressed similar concerns over rising prices.
Labor, the Greens and even the Reserve Bank this week suggested broader taxes were needed to help curb rising house prices.
Investors are already taxed like capital gains in the form of what is called a bright line test.
First introduced by the National Government in 2015, it initially required property investors who sold homes within two years of purchase to pay tax on their profits.
In early 2018, the Labor-led Government then extended the bright line test to five years.
Last week, Treasury Secretary Grant Robertson asked the Treasury Department to investigate further extension of the bright line test.
But changing taxation policies is fraught with political risks, given that opposition parties now accuse the Government of canceling its promise not to impose new taxes.
The Minister for Housing and Labor Revenue did not answer questions about whether they would consider investigating or implementing Rehm and Yang’s suggestions.
The Inland Revenue said it conducted a “very similar” study in 2014.
“It was concluded that there is systemic evidence of the turnover rate of residential properties, which is higher than normal,” he said.
“However, identifying possible speculative activity based on analytics and having enough evidence to prove speculative behavior are two different things.”
Rehm admits – even though the CB6 section already exists – enforcing it politically is another matter.
“I am not naive, I know this is a bitter pill that any politician should throw,” he said.
“I’m just trying to show that there’s a solution that’s already in the book.”
He said the enforcement of the CB6 section would be more thorough than the bright line test because there was no time limit and also thought the analysis behind his paper was thorough.
His team used a new method to identify 117,000 rental property purchases in Auckland between 2002 and 2016, he said.
To calculate the profitability of purchasing a lease, his team then weighed the costs involved in running the various properties – such as home loan repayments, property management fees, and maintenance costs – against the rental income.
The results were clear, he said.
Leased property investment almost always goes bad compared to comparable investments when capital gains are excluded, Rehm said.
That means everyone is speculating on expectations the price will go up, he said.
“We beat our chests and said speculation is bad behavior and it needs to stop,” he said.
“But nothing has been done to try to persuade people not to continue speculating.”