Three magic words: Capital Gains Tax

Photo: Old verses new by Sean Hamlin

There has been so much hype over the Tax Working Group (TWG) releasing a recommendation on how the NZ tax system could be changed. It's generated tonnes of media stories and opinion pieces.. but is it worth the worry?

As a property investor, it's the TWG's recommendation around Capital Gains Tax (CGT) is what you are most interested in. Let us summarise the main points of what is proposed:

  • CGT to apply to the residential property (exempting the family homes)
  • Gains to be added to the seller's overall yearly income
  • Tax rate to be set at the income-earners top marginal rate, up to 33%
  • Applied to gains made after April 2021 and not to be calculated retrospectively.

What is important to remember is that this is a recommendation only and so many things can and will change over the next two years. Rates, start dates, details - nothing is set in stone. The new tax may not be as bad as it's feared or it may not happen at all.

It is important to remember that this conversation is not new. A partial tax on capital gains was already introduced in the form of the Bright Line Tax. The bright-line test catches all residential property investors with the firm intention of resale, who sell within five years.

So is it time to change your investment strategy?

There are two types of property investors - the long haul investors and the speculators.

  • For those who held their properties for years, kept their debts low to moderate and chased properties with high rental growth to generate steady streams of income any change will come easier. Potential introduction of CGT is not likely to make a huge difference to their lives, and they won't be likely to rush to exit the industry.

  • Those investors new to the market, with high mortgages, who were happy to accept low-income yields in return to speculatively high capital gains are likely to be affected the most. For them, it's a good time to review their property portfolios and see if they can reposition themselves.

Is there a suitable alternative to property investing?

There are many other investment options out there - sharemarket, art, collectables. But nothing quite similar to property. So maybe paying tax and making a capital gain is still better than not being involved in the property business at all.

What's next?

We are waiting for the Government to release its official response to the recommendations next month. So stay tuned

The information contained in this article is exclusively for promotional purposes. It does not in any way constitute legal advice and should not be relied upon as the basis for any legal action or contractual dealings. The information is not and does not attempt to be, a comprehensive account of the relevant law in New Zealand. If you require legal advice you should seek independent legal counsel. does not accept any liability that may arise from the use of this information.

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