In spite of its apparent hefty rates, many eligible property owners would pay less capital gains tax per year than pack-a-day smokers, Thomas Coughlan reports.

All the huffing and puffing over the proposed excesses of the Tax Working Group’s proposed capital gains tax could make one believe the nation’s property investors are about to be turned into a cash cow for the Government.

In fact, the capital gains tax would initially raise very little money and, when set against some of New Zealand’s most onerous forms of taxation, hardly looks that bad at all. 

If a capital gains tax had been in place for the 2017/18 financial year, a pack-a-day smoker would have paid only slightly less in cigarette excise than the average property investor. 

A smoker would have paid roughly $6,500 in cigarette taxes and GST last year. Each year tobacco excise rises by 10 percent, plus the rate of inflation. Smokers also pay GST on top of the excise. That pushed the price of a packet of cigarettes to roughly $35 last year.

The rates kick in on January 1, meaning smokers would have spent the first half of the 2017/18 financial year paying a rate of 73.8 cents per cigarette and the second half paying a higher rate of 82.5 cents. 

The tax working group’s proposed capital gains tax would mean that any capital gain will be added to a person’s income for the year and taxed at the appropriate rate. Increases will only be calculated from “valuation day” (likely to be the first day the tax takes effect) which would be some time in 2021.

But had the tax been put into effect on the first day of the 2017/2018 financial year, an average property owner who sold their investment property on the last day of the financial year would have had $30,000 added to their taxable income, based on median house sale prices from RIENZ.

The national median sale price at the end of June 2017 was $530,000,and at the same time the next year it stood at $560,000. 

Someone who had their investment property valued at that median price and sold it for $560,000 one year later would have $30,000 of additional taxable income. If that person earned over $70,000 and paid the highest rate of income tax, it would equate to an additional tax of $9,900, which would be $3,400 more than the average smoker for that year.

Breaking out the figures regionally, much of the country would actually pay less in capital gains tax than a pack-a-day smoker. 

An Aucklander would even be in for a tax cut. The median Auckland house price fell $6000 over the 2017/18 financial year, giving the average Aucklander a $6000 offset against their other income. Over the same period, the median Auckland income was $72,000, according to TradeMe jobs. A person earning this amount would find their taxable income reduced to $66,000, pushing them out of the top tax bracket and giving them a tax cut of roughly $1,200. 

People in the Bay of Plenty region, including Simon Bridges’ electorate of Tauranga, would have earned $16,500 of taxable income over the year, equating to $5,445 in additional tax if they were paying tax at the top rate — $1,000 less than a pack-a-day smoker. However, if the investor earned the Bay of Plenty median income of $56,200, they would pay even less tax: just $4950. 

In fact, the property owners who would have been hit hardest by the tax last year live in the Wellington region, which includes the electorate of Finance Minister Grant Robertson. Wellington saw record gains in 2017, when the median sale price jumped from $530,000 in June 2017 to $600,000 a year later, creating a taxable capital gain of $70,000. 

Wellingtonians in the top tax bracket who sold their property at this price would have to pay an additional $21,000 in tax, three times more than pack-a-day smokers. 

But it’s important to remember that the version of capital gains tax recommended by the tax working group is only paid when the property is sold and it is only paid on properties that are not the family home. This means capital gains would accrue year on year without being paid. 

If the tax had been introduced in 2015, when the median house price was $450,000, an investor would have had to pay tax on the gains accrued between then and the time the house was sold. If the property had been sold in June 2018 for the median price of $560,000 it would created a taxable capital gain of $110,000, resulting in a bill of $36,300. 

Of course, over that same period, a smoker would also have paid many thousands of dollars in tobacco excise.

It’s little surprise the Tax Working Group recommended that when the current schedule of tobacco excise increases ends in 2020, the Government “priorities other measures to help people stop smoking before it considers further large increases in tobacco excises”. 

According to Treasury, tobacco excise will net an extra $2.2 billion by 2021. This is also the year the capital gains tax would kick in, if adopted by the Government, although it would only earn $400 million in 2021, less than a quarter of what smokers will pay. It won’t be until 2024/25 that the capital gains tax nets more income than smokers.

In that time, smokers will have paid $6.6 billion in excise duties — enough to rebuild EQC’s depleted national disaster fund to pre-Christchurch earthquake levels.

With revenue like that, the Government might find cigarette taxes a difficult habit to kick. 

Leave a comment