Capital Gains Tax will hurt middle New Zealand
A capital gains tax (CGT) will hurt up to 2.8 million middle-income New Zealanders who invest in commercial property through their KiwiSaver schemes. It could also disincentivise commercial property owners from upgrading their building stock or reinvesting in the commercial property market, leaving New Zealand businesses out in the cold.
Commercial properties (such as office buildings, retail shops and industrial warehouses) house almost all New Zealand businesses. The quality and character of these buildings affect the overall productivity of the businesses and people they house. Imposing a capital gains tax is likely to negatively affect the ongoing investment property owners make into improving and maintaining these properties.
Commercial property investment, unlike residential property investment, generally is not speculative. This is because most commercial properties charge greater rent than operational costs so that investors can get a steady income stream and reinvest into commercial buildings to keep them safe and fit-for-purpose.
Many commercial property companies reinvest any capital gain into improving their buildings or when selling, buy another building with the intention of upgrading it. A capital gains tax would disincentivise buying new stock, reinvesting into the commercial building market or upgrading current assets. As a result, New Zealand may see an aging building population with little incentives to upgrade.
Investing directly in commercial property can be risky. Owning a commercial building is complex; the profitability of any one building can depend on the tenant and can change quickly as the economy changes. Many people invest via managed funds or listed property companies (i.e. companies listed on the NZX stock exchange). These are lower risk because the companies are professional building managers and own a diverse range of property that provide a buffer to economic fluctuations.
Middle income New Zealanders invest in commercial property
Almost all KiwiSaver funds (and other managed funds) have a small but significant portion invested in commercial property. On average 5-6% of their funds are invested in commercial property (with a range from 3%-15%). Over 2.7 million New Zealanders are in KiwiSaver, so rely on commercial property to some extent for their retirement. These are low, middle and high-income New Zealanders.
On top of that, over 100,000 New Zealanders invest directly in listed property companies, such as Kiwi Property, Goodman Property Trust, Argosy, Stride, and Precinct. While some of the investors can be considered rich, many are middle-income New Zealanders looking for the reliable income stream which commercial property generates from rental income.
About 1/3 of investors in listed property companies invest only small amounts (under $15,000). These tend to be middle-income investors.
Typical investors are:
Jane and David, teachers from Timaru, saving for their children’s university education;
Tony, a mechanic from Taumarunui, investing to be able to expand his auto repair shop and hire more staff;
Mavis, retired, using the investment income to supplement her superannuation.
How will a capital gains tax affect the commercial property sector?
The value of almost all KiwiSaver funds will decrease. Listed property companies, that KiwiSaver funds invest in, estimate that they would lose 10%-15% of their value if a capital gains tax were to be implemented. While the impact of a CGT is expected to be gradual for most businesses, the complex tax rules around listed property companies mean that their loss of value will be almost immediate once the CGT begins.
The investment income that many middle-income New Zealanders rely on will reduce. Property companies will not be able to pay out the same dividends they can now because the companies will be double taxed on some of their income and will need to hold some of it back to cover future CGT payments. Many investors rely on this dividend income to top up superannuation or as savings for other big life events.
Less money would be available to upgrade buildings. This is because the capital gain that would otherwise have been reinvested in the building will be held to pay the new tax. This will mean buildings are upgraded more slowly making them less safe and less fit-for-purpose which will hurt business productivity.
While some changes to the TWG’s proposed design could be made to address some of the above issues, they would add further complexity and cost to the CGT design which would create further loopholes and perverse incentives. It would be safer to focus any CGT on residential property speculation (as some on the TWG suggested).
Should you wish to find out more about Property Council's position on capital gains tax, please contact Jane Budge.
Author | Jane Budge
Jane brings a wealth of experience to the advocacy team, having worked in senior policy advisory roles at both local and central government level. Her experience spans many government departments including Standards New Zealand, the Ministry of Consumer Affairs and the Department of Social Welfare.
Jane also spent four years with the New Zealand Police, where she was responsible for the road policing strategy and policy development, and most recently she held a senior policy role at Taupo District Council. Jane’s aptitude for building relationships and eye for detail make her a formidable addition to the team.