Capital Gains Tax

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The Labour Party said today that if elected in November, they would bring in a Capital Gains Tax – CGT – on profits from selling property.

For many years now, house prices have been increasing fast. If a landlord buys a house for $200,000 then sells it for $300,000 ten years later, this is a profit of $100,000. At the moment, there is no tax on this profit. Under a Labour government, the landlord would pay 15% capital gains tax on the profit. However, if this house is the family home, there is no CGT. It is only if the house is for renting or a holiday house.

The reason for a CGT is to help pay New Zealand’s debt. The Labour Party leader, Phil Goff, said that New Zealand pays more than $16bn to repay debt every year. The National Government plans to sell 49% of some state assets such as electricity companies to help pay off this debt. Labour’s idea is a CGT instead.

Selling state assets is not popular. Neither is a CGT. Voters will have to choose between two unpopular policies in the elections in November.

Listen to January 30 2011 to hear more about selling state assets.

Pronunciation
Note that debt has a silent “b”.

Questions
There are many advantages and disadvantages of a CGT. One advantage is that people wanting to invest money, could put this money into business to help the economy. One disadvantage is that landlords might sell their rental properties before a CGT starts on April 1st 2013 and there would be a shortage of rental properties. Can you think of other advantages and disadvantages?

1 thought on “Capital Gains Tax”

  1. The “profit” mentioned in this article is not “profit” as such particularly if referred to land since Rates and maintenence are direct costs which would need to be deducted along with the actual borrowing costs and or the alternative lost investment income on the original $100000 for a ten year period. The actual “profit” at a modest 6% per annum plus say rates and maintenence at $2000 per annum would in fact be a “loss” of over $3000
    Any Capital gains tax should therefor be indexed against both inflation and actual/alternative costs incurred.

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