Capital Gains Tax? Keep related posts in this thread, please.

[Eugene]

lol
You've got a dollar each way?
If it's passive then you do nothing.
If you manage stuff and treat it like a business then you're doing something.
If you're doing something then it can't be passive.
Or did I misread your post?

Moving on, does it matter if it's passive?
Or should we apply CGT on passive investments but not active investments?

In fact in some tax jurisdictions passive income is treated differently from active.
I am fairly certain this was the case in NZ the 80's and early 90's but don't recall the details. Could have been to do with ring-fencing.

[Simmo]

When a business buys plant and equipment, it pays tax on the income earned, less costs. That plant and equipment depreciates and has little value at the end of it working life. When an investor purchases a property, they are mostly making a lost day-to-day and the profit is made on the capital gains on the appreciating asset, which is tax free.

Both operate under the same rules, but most people would say that is a significant tax advantage to the property investor.

I still haven't met any large scale investor that make a loss each and every tax year. What I've found is banks don't like that. Sure the 95% odd percent of PI's with 1-2 property owners (which aren't really PI's by definition) might fall into this category.

But then if we applied the same test to a 'productive' business sector like farming, I'm pretty sure the majority of the profit doesn't come from cashflow.

[eri]

Kiwis work 15 per cent more hours a year than the OECD average

but despite the longer hours produce 20 per cent less economic activity per hour.

The report said productivity growth had stalled since the year 2000, and the gap between New Zealand and its peers - including Australia - was widening.

The report said New Zealand's productivity growth rates ...were in the bottom third of the OECD, sitting alongside Slovenia and the Slovak Republic.

http://www.stuff.co.nz/business/indu...lagging-behind

so we should expect our living standards to continue to slide from australian levels to slovenian

seems it's not work rates per se but "smart work rates"

ports of auckland vs. port of tauranga comes to mind

seems there is a desire by some to opt out of the globalisation process

but somehow keep the fruits by increasing taxes on those making it work

what to do when the little red hens realise they've been conned

take away their passports?

[elguapo]

But then if we applied the same test to a 'productive' business sector like farming, I'm pretty sure the majority of the profit doesn't come from cashflow.

Where does it come from then?

[Wayne]

Where does it come from then?

Farm values increasing - capital gain.

[Bluekiwi]

I guess the issue is though Ross is that whilst an individual investor may begin making a profit over time, on the whole, the collective NZ property investment sector is not beginning to turn profits over time, as the cycle of gearing by investors keeps going higher and pushing up prices. This is why the sector remains a $500m net drain on the revenue 12 years after the property boom started. This is one of the key reasons the TWG was so adamant that reform of the taxation of property was required. The ability to highly gear property, and the happiness for banks to facilitate this with huge lending to the residential property sector is what sets property apart from other businesses, share investors etc.

And people obviously take the hit of funding losses in the knowledge they will get up to 33c in the dollar back as a tax refund and hopefully more than the remaining 66c in the dollar back as capital gains.

No I think you are missing a few key points, and fall into the fallacy that property investors are a drain on the economy.

1. They provide accomodation that the government or other business cannot do. Where would people live if investors did not provide housing.

2. They employ tradespeople and service industry (such as yourself I might add), and business / tax / GDP, is generated off that.

3. A lot of unpaid time and hours is put into property investing that the investor cannot claim as an expense.

Harvey, if you take a close look at the valuers, bankers, brokers, accountants, solicitors, builders, painters, hardware suppliers, landscapers, construction industry, building supply materials, surveyors etc etc etc.
The endless bills that are associated with property investing.
There is a huge amount of economic benefit the country as a whole is seeing, and the govt is taxing.

Without us.
You have shit homes, that are not renovated, that fall over and everyone goes to ausie.

The new generation dont want to work hard to have a nice new home, they want it handed to them on a plate, they wont fill the gap and buy houses themselves to live in.
Too much easy credit and toys to spend money on, makes it mighty hard to save a deposit.

There is a huge amount of

[Bluekiwi]

A good article which echoes the arguments of many:

http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10437671

Amid concern that increasing house prices are putting the dream of home ownership beyond the reach of many people, little attention has been paid to the obvious role the tax system plays in fuelling the property market.The demand driving up the value of homes in New Zealand comes not only from home buyers but from those who are purchasing additional properties as rental investments.

It has long been recognised that New Zealand investors have an unhealthy attraction to the rental property market. Compared to almost all other countries, more New Zealanders invest their capital in the domestic property market, thus pushing house prices even higher. One solution regularly suggested as a means of correcting this over-investment in rental properties is the introduction of a capital gains tax.

It is often reported that New Zealand is the only country in the OECD that does not have a capital gains tax.Despite the policy of all Governments since 1984 to expand the revenue base, for political reasons capital gains generally remain untaxed. The absence of a capital gains tax means that, except in limited circumstances, profits from the sale of rental properties are free of tax.When compared with virtually all other forms of investment, this lack of tax provides a strong incentive for investors to put their money into rental properties.However, what is often not recognised is that the tax-free sale is only one of the tax benefits to be gained from investing in rental properties.

While the rent received by domestic landlords is taxable, it is noticeable that rents often lag far below the value of the properties themselves. The pre-tax return to investors is often dismally low or even negative.This apparent willingness by investors to accept little rental return on their investment can be explained by the significant tax advantages they receive.This benefit results from the ability to claim a deduction for all expenses from the rental activity, such as mortgage interest, rates, insurance and depreciation. In particular, expenses incurred on repairs and maintenance of the property are deductible. While a one-off, large-scale renovation would generally be treated as capital and therefore non-deductible, incremental improvements to different parts of the property remain deductible. This allows investors to improve their rental property gradually over a number of years and claim a tax deduction for the cost.

In effect, the tax law reflects the old maxim that it is wisest to buy the worst house in the best street, by subsidising the cost of improvements to the property. With rental returns lagging behind the capital value of the properties, the deduction of expenses generally gives rise to a net loss from the rental activity. The favourable treatment of this loss is the most significant benefit provided by the Income Tax Act. The New Zealand tax regime is almost unique in allowing net losses from this type of passive investment to be fully offset against an investor’s other income. So investors can use the loss from their rental properties to reduce the tax they pay each year on their salary, wages or other income.This general offset rule gives an immediate tax subsidy to property investors.

So our tax system supports and rewards investment in rental property. Coupled with the fact the sale proceeds of the (now improved) property are tax-free, rental properties have the most favourable tax treatment of any type of investment. No wonder so many New Zealand investors are not being put off by increased interest rates (which are of course deductible) and choose to put their capital into the property market. Most other countries do not allow this tax subsidy of rental investments. Not only are the long-term gains from the sales of properties taxable in those countries, but any losses from the rental activity are quarantined so they may not be used to reduce tax on the investor’s other types of income.

Many commentators don’t recall that this restricted use of rental losses also applied in New Zealand until 1990. Rental losses incurred before 1991 were subject to specific rules so that only the first $10,000 of rental loss could be offset against other income. All losses above that sum had to be carried forward to later income years.In effect, the losses from the rental activity were quarantined so that they could be used only to offset future profits derived from rental activities.

If the rental property never produced a profit (normally because it was re-sold before profits were generated), the rental losses would remain unused and be carried forward indefinitely. This negated the tax subsidy that currently drives taxpayers to purchase and improve rental properties.That loss offset restriction on rental properties was removed in 1991.While all commentators agree imposition of a capital gains tax in New Zealand is politically unpalatable, it must surely be possible to reimpose a restriction on the use of rental losses as one of the responses now being considered to rising housing prices.*

Mark Keating is director of the master of taxation studies programme in the department of commercial law at the University of Auckland

So Ring Fencing, yep, I dont mind that.

[elguapo]

Farm values increasing - capital gain.

Farm prices only increase in expectation of the increasing profit to be made from farming. It's far from the 'majority' of profits farmers make.

[Wayne]

Farm prices only increase in expectation of the increasing profit to be made from farming. It's far from the 'majority' of profits farmers make.

Maybe, maybe not.
A farmer friend of mine is always crying poverty (well not really crying - he know whats up and isn't deluding himself).
Seems all his wealth is tied up on farm capital.
Cows are expensive.
Spend money on pastures (mostly expense rather than capital improvement) which happens to increase the farms value. When he sells the farm (finally) he'll be sitting pretty with his gains.
His income is so low he gets state support while having assets of a few million (net) because the assets make such a low rate of return (profit).
Poor him!

Now I don't really mind as that is his choice and I don't want to be a farmer so can hardly complain.

[elguapo]

Maybe, maybe not.
A farmer friend of mine is always crying poverty (well not really crying - he know whats up and isn't deluding himself).
.

lol, I've never met a farmer who didn't cry poor, even when they pick up the new Range Rover from the dealer...

There are of course farmers who make more money from the land sale, I'm sitting on a farm that is being turned into a dairy factory at the moment, and he didn't sell cheap. I'm sure there are more than a few who have made a ton from zoning changes, this bit of dirt isn't worth $100m for growing lettuce!

http://www.trademe.co.nz/property/residential/sections-for-sale/auction-599446639.htm

[Simmo]

Farm prices only increase in expectation of the increasing profit to be made from farming. It's far from the 'majority' of profits farmers make.

LOL...Farm prices do not only increase in anticipation of increasing profits, of course they're linked, but in the last 3 generations of my family cashflow pales into insignificance over the capital gains over that time.

Wayne has hit the nail on the head.

[Simmo]

Just to put that into perspective,

20% rise in farm values (year to Aug 2013)
5% in the month prior

The best part...............on say, a 10,000,000 (zero's added for effect) million dollar farm. Crap, even on a $2 mil holding you just built 100K equity in a month.

http://www.stuff.co.nz/southland-times/business/9224911/Farmers-holding-on-in-favourable-conditions

The amount of offshore sourced debt is a whole other story. If it were easy everyone would be doing it, but the fact is they can't. Farm prices have risen so much it's virtually impossible unless you inherit something.

Landlords are a much easier beat-up.

[elguapo]

Just to put that into perspective,

20% rise in farm values (year to Aug 2013)
5% in the month prior

Sure, lets get some perspective....

Fonterra has bumped up its forecast milk price for the season to a whopping $8.30 per kilogram of milksolids, a new record.
The 50c increase from the record $7.80 announced last month comes on the eve of the dairy heavyweight's annual financial


That's a big increase in just a month too...

From the article you linked;

REINZ spokesman Brian Peacocke said demand was outweighing supply as farmers enjoying the favourable conditions appeared disinterested in trading properties right now. "The majority of farmers are in good spirits and many appear to be happy to retain their properties for now in order to capitalise on the higher returns being predicted by the export sector,"

So, farm prices are skyrocketing, but farmers are quite happy to keep farming because they are making plenty of money. If the money was 'mostly' to be made with capital gains, why wouldn't more be selling out? Not only are they making plenty of money, they expect to make more in the future too. How are farm prices not linked to farm profits?

[Simmo]

LOL...Farm prices do not only increase in anticipation of increasing profits, of course they're linked, but in the last 3 generations of my family cashflow pales into insignificance over the capital gains over that time. Wayne has hit the nail on the head.

Sure, lets get some perspective....

So, farm prices are skyrocketing, but farmers are quite happy to keep farming because they are making plenty of money. If the money was 'mostly' to be made with capital gains, why wouldn't more be selling out? Not only are they making plenty of money, they expect to make more in the future too. How are farm prices not linked to farm profits?

You missed these bits in bold. I reckon it's because they're likely to make more out of capital gain by holding/gearing up in a relatively low interest environment.....at least in the medium term (probably in the longer term too)...

My family runs dry stock. Mediocre lamb, wool and beef prices, well actually, they're quite poor by long-term standards. Yet the land has still been going up of late, more modestly than dairy land...but still more than the cashflow it produces.

I see a few parallels in the long term business model of both the farmer and the buy and hold investor.

1. Buy property
2. Maximise income production capacity of said property
3. Increased serviceability enables one to buy more property
4. Maximise income production capacity of said property
5. Repeat step 3 and so on....
6. Primarily - Provide income in retirement and legacy/employment for offspring. Secondary - Capital Gain.

But we all know who is more likely to be at the receiving end of government policy.

[elguapo]

My family farms dry stock, so no Fonterra pushing things along. Mediocre lamb wool and beef prices, well actually quite poor prices by long-term standards, yet the land has still been going up. More modestly than dairy land...but still more than the cashflow it produces.

In the expectation someone will work out how to run dairy on it perhaps Farms are not always run on rational economic grounds either, no one in there right mind should run a dairy farm in the UK, but they still do (the supermarket price for milk there is lower than the farm gate cost of production).

I see a few parallels in the long term business model of both the farmer and the buy and hold investor.

1. Buy property
2. Maximise income production capacity
3. Increased servicibility enables one to buy more property
4. Maximise income production capacity
5. Repeat step 3 and so on....
6. Primarily - Provide income in retirement and legacy for offspring to inherit. Secondary - Capital Gain.

But we all know who is more likely to be at the receiving end of government policy.

I'd agree there are a lot of parallels, it's very land intensive after all. The biggest problem with that idea these days is 'starter' farms are much rarer, it's a large scale business these days, except at the margins.