I Dream of Jeannie: Why Capital Gains Tax Did Not Work in Australia

Thakur Ranjit Singh

Auckland, September 13, 2017

While dosing off for a catnap, I dreamt of the final Leaders’ debate between Bill English and Jacinda Ardern.

A major issue emerging out in Election 2017 is tax in general and Capital Gains Tax (CGT) in particular.

Mike Hosking is the moderator, and his right leaning is very subtle, he has asked a difficult “Sudden Death” question towards end of the debate, and needs a do or die response.

Mike Hosking: Jacinda Ardern, we come to the final segment of this final debate. Your voters need the answer. Labour wishes to introduce CGT in New Zealand. Why should it make a difference here when it failed to arrest house price rise in Australia? CGT was introduced in Australia in September 1985 by the Labour government of Bob Hawke.

Then, the median Sydney house price was just A$92,000 ($102,000), compared with A$1.1 million in 2016. Please tell us, if it did not work there, how it will make a difference here?

Jacinda Ardern: Since you have asked this complex question, I hope you will listen to my explanation without interruption.

Mike: Agreed, and hope Bill English will also maintain his silence, as his government maintained inaction in this matter. (Love you, Mike)

Jacinda: Thanks. Now listen. Before you jump to the conclusion that CGT is ineffective in limiting property prices, you need to know the reasons why it failed in Australia.

Reasons for failure

The first reason is that it was never intended to limit house price growth. In Australia, CGT was intended to raise money for the Government and to ensure that those people who were lucky enough to have investable assets paid tax on those gains, in the same way others pay tax on their wages.

Since the aim was to maximise revenue, GST was applied to all investments, be they for houses, other property, shares, bonds, works of art, or whatever. Thus, the intention in Australia was NOT to shift investment away from housing in other areas. To illustrate, the Australian example is shooting with a scatter-gun, M16, for wide tax coverage.

Labour Party’s policy here can be likened to a sniper gun, with telescopic lens, homing on, (excuse the pun) addressing booming house prices and property speculations.

Our CGT will target housing. Investors here will now think twice before rushing headlong into housing. Australians did not target housing; hence it did not deter people from house investment. That is why their form of CGT failed to address booming house prices.

Howard’s doing

To make matters worse, when Liberal Government of John Howard came into power in 1999, they reduced CGT by half and removed inflation adjustment provision. My tax advisory team would learn from pitfalls of Australia. This was one of many generous financial benefits that Howard handed to his core constituency of middle class voters.

The result is many of those voters’ adult children now can’t afford their own homes. That is exactly what National Government did here, by not doing anything to arrest the situation. And my generation is paying the price for a lackadaisical attitude of National Government for the last 9 years. For the sake of new generation, we need a change.

Subsequent to an enquiry, the Reserve Bank of Australia explained how the capital gains tax interacted with other tax concessions for property to actually encourage investors to buy up houses. One of such incentives is negative gearing. We have already announced that we will scrap it.

“Negative Gearing”

Mike Hosking: Perhaps you will explain to your voters what this monster, “negative gearing” is.

Jacinda: This is where losses made on investments can be deducted from taxable income derived from other sources. Negative gearing and the lowered CGT discount combined together to encourage Australian investors to invest in residential property which was having the effect of pushing up house prices and lowering rates of home ownership. Same as our situation.

These tax perks encourage investors to make a loss and to focus not on rental returns but on capital gains. They are able to get refund on their high salaries or other income by claiming house interest and other losses on the house, while gaining handsomely on capital gain of the house.

Apart from Australia only two other OECD nations allow full tax deductibility on this negative gearing – New Zealand and Japan.

Deliberate loss-making

It is ironical, we invest money to make money. Under the system in New Zealand, people invest to lose money, but gain twice – through tax deduction and capital gain.

As a result, many residential investment properties are designed to make a loss to take advantage of the tax deduction.

We have learnt from the Australia experience. We will introduce CGT, and also remove negative gearing that fuelled higher price rises in Australia.

As the next Prime Minister, I will put a stop to this and allow my generation to once again fulfil the dream of owning a house in Auckland…….”

My alarm went off, and I woke up.

Hope somebody can brief Jacinda Ardern about my dream, as I believe that Mike Hosking will ask this question.

I am sure that the Labour management has more qualified people than my dream, to brief Jacinda on this subject.

Thakur Ranjit Singh is an Auckland based political observer, media commentator and journalist. He runs his blog, ‘Fiji Pundit.’

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