A change of government means a capital gains tax is back on the agenda. This should worry property owners more than share investors, as they probably have more to lose.
Over the past 20 years’ NZ shares have delivered a return of 8.5% per annum. However, 71% of that return is from dividends rather than capital gains.
That’s important, because it means a capital gains tax would only impact the other bit. The vast bulk of the return already attracts income tax at the investors’ marginal rate. In short, share investors are already paying tax on more than two thirds of their return, which is probably a lot more than many property investors.
It’s harder to quantify how the returns for property are split between rental income and capital gain, but possibly they are skewed much more toward the latter.
The gross dividend yield for the NZX 50 index is 5.5%, whereas the average rental yield across New Zealand is just 3.8%. In Auckland, it’s even lower at only 2.8%, according to QV.
It seems shares are often the asset class of choice for investors looking for steady income. Property arguably holds more appeal to those after a quick capital gain and looking to make use of easy leverage.
Share investors are investing for income, rather than chasing big capital gains. They want a passive earnings stream that will grow steadily and keep pace with the cost of living.
Fortuitously, the local market is quite useful in this regard. It is dominated by predictable businesses that generate strong cash flows and pay a good portion of these out as dividends.
These companies have already paid tax on their profits so rather than be taxed a second time, investors get something called an imputation credit. This means the cash dividend they receive is, for the most part, tax paid. It’s actually a very good system, and we are one of the few countries to do things this way.
A capital gains tax might have some merit. It would certainly force people to focus more on the cash flows an asset generates, which theoretically should mean things are valued more appropriately.
It would need to be implemented sensibly though. That means making it free from exclusions (including the family home), otherwise such loopholes leave it open to exploitation and accounting trickery.
Labour leader Jacinda Arden, however, has ruled out including the family home in any capital gains tax policy.
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