New rate deemed ‘pretty harsh’
People making capital gains on some investment properties can now be taxed up to 39 per cent on their profits, a rate that tax experts say is high by international standards.
The Government has introduced a 39 per cent tax rate, from this tax year, for income over $180,000.
Profits from residential investment property sales are taxable when a property bought between March 2018 and March 2021 is sold within five years, and when a property bought since March 27 is sold within 10 years.
The gains are added to a person’s annual income to calculate the tax applicable.
With median gains of about $280,000 on every profitable investment property sale, according to CoreLogic, that means a significant portion of investors’ gains are likely to have a 39 per cent rate applied, if they are captured by the bright-line test.
PwC tax partner Geof Nightingale said 39 per cent was a higher rate than would be applied to capital gains made in Australia or the United States.
‘‘In Australia, the top tax rate is 45 per cent plus 3.5 per cent Medicare so 48.5 per cent. Capital gains are treated as ordinary income. But, for an individual, only 50 per cent of the gain is included in ordinary income, so in effect the tax rate is 24.25 per cent. For companies, the full gain is included but the company tax rate is 30 per cent.
‘‘In the US, the capital gains tax rules are extremely complex . . . But, at the risk of grossly oversimplifying, if a US individual has held the capital asset for at least 12 months, then the capital gain tax rate is limited to 20 per cent.’’
In the United Kingdom, capital gains on residential property are taxed at a maximum 28 per cent.
Robyn Walker, a national technical director in Deloitte’s tax team, said it could be argued that taxing at the new 39 per cent rate was unfair when gains had been made in previous years during which that rate did not exist.
‘‘That will come as an unpleasant surprise to some people . . . It’s pretty harsh.’’
She said it was a simple way of applying tax that would avoid people trying to find ways around it, but it was a blunt instrument.
Other countries sometimes included provision for inflation gains to be excluded from the tax calculation, because price rises that kept pace with inflation did not leave the owner of the asset better off. New Zealand’s system does not do that.
Mike Rudd, a director at Baker Tilly Staples Rodway, said most countries would have a fuller capital gains tax but would apply it at a reduced rate, rather than combining capital gains with someone’s other income.
He said the fact the Tax Working Group had not been able to complete its work towards a standalone capital gains tax meant that those who were affected were most likely to be paying the top tax rates.
Nightingale said a trust with a rental property would still only pay 33 per cent and a company only 28 per cent.
‘‘If that company distributes the gain at some point to a trust shareholder, the tax rate gets topped up. But many companies will never distribute that gain, so the tax rate that sticks is 28 per cent. This policy problem is a lack of horizontal equity where the same income has three different tax rates – exacerbated by the 39 per cent rate.’’