There’s been ongoing debate about the merits of introducing a Capital Gains Tax (CGT) for many many years, and with the current government in power this tax has the best chance in years of becoming a reality.

Not that I’m particularly worried if it comes into play. I’m a landlord and yes, a capital gains tax would impact on my property investing decisions too. But it doesn’t worry me greatly, because of a lot of the reasons I outline below. However, I am 100% interested in what a capital gains tax might end up looking like, and when I know some more I’ll definitely be letting you know.

One of the lines you often hear supporting capital gains tax is that property investment enjoys preferential tax treatment and this fact encourages people to become landlords. Amongst other things, it’s an unproductive use of capital and makes houses unaffordable, thereby creating a big imbalance in society. I’m not sure that I’ve got that exactly right and frankly, I don’t care if I have!

The truth is that the thing which makes property such a popular investment class is the ability to buy it with borrowed money.

You see, if the property goes up in value then the return to you is calculated on the value of the entire property, not just the percentage you put in to it. A capital gains tax might knock the shine off the return but it won’t stop people leveraging themselves into property. So if you think capital gains tax is a silver bullet then you’re wrong.

Look, at their core taxes are designed to do two things:

#1. Taxes are used to raise revenue so that essential public services can be provided.

They pay teachers and cops, build roads and bridges, pay for rats and stoats to be killed, provide social housing – you name it the list goes on. There’s plenty to moan about within this, but that’s all to do with how the tax is applied after it has been collected.

#2. The other thing that taxes should be used for is to influence behaviour.
Smoking is a good example of the kind of influence I’m thinking of. You put up the tax on smokes and more people decide to give up. People get into vaping as an alternative. Dairies get robbed by people who want smokes but don’t want to pay heaps for them. It’s all behavioural change for better or worse.

Apply that thinking to a capital gains tax on property and the likely outcomes include people deciding not to get into rental property thereby reducing the amount of property available for rent; or existing landlords deciding to get out of italtogether; or rents go up as landlords seek to pass on the tax burden they face; or maybe they suck it up and accept smaller returns. Hmmm, and on a personal note, mortgage brokers would earn less income because they’d lend less money etc, etc!

Whether or not the consequences of a capital gains tax are a good thing depends on your own standpoint. I’m not offering a view on that in this post.

What I would like to propose however, is that rather than making property investment less attractive maybe other investment choices (in particular savings and superannuation) should be made more attractive. Don’t hammer property to death. Make the alternative really appealing instead.

It’s like saying don’t tax smokes harder. Make vaping cheaper. Both are stupid,but you know what I mean.

Everyone knows that building up a nest egg for your retirement is a worthwhile goal. It’s what KiwiSaver is all about and it’s why we have a Retirement Savings Commission and sorted.co.nz banging the drum about ‘saving’.

So how come interest you earn on the money you’ve got in the bank gets taxed? Why does your KiwiSaver get taxed? Imagine if they weren’t! I reckon you’d see more people piling more money into these investments rather than always thinking property, property, property. At the end of the day it comes down to how much money you walk out with at the end… the end being retirement. And at the moment, the prospect of property is a heck of a lot more rewarding than a 3.5% interest rate on savings, with tax on top.

Truth is that to bring a bit of equality to the investment market you probably need to do a bit of both – making saving sexier, as well as rental regulation. The brightline test and tougher regulations around the quality of rental property may be enough ‘hurt’ for landlords. Combine that with a better tax regime on savings and maybe, just maybe you’ve got a decent balance?

If my KiwiSaver wasn’t taxed then I’d certainly be piling more into it. Wouldn’t you?

Thinking property? Whether it’s investment, first home buying or moving on to your next home, we’re here to give you straight-up advice with no strings (or costs!) attached – get in touch.

About Campbell Hastie

Cam is one half of Auckland based mortgage brokers, The Go 2 Guys.

He makes a living by sharing what he knows about mortgages with people, arranging mortgages for people and then insuring people.

He doesn't claim to know everything about mortgages himself which is why he teamed up with David Mercer — hence the ‘2’ in Go 2 Guys.

He writes posts regularly on his blog and has been told he has an ability to share his knowledge in a simple and sometimes memorable way.

Feel free to comment and ask any questions. Contact Campbell Hastie m: 027 697 7789.

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