A tax on your baches

One of the main troubles with trying to close loopholes in the tax system is that not many people believe that they are the problem. Many Kiwis seem to believe that the lack of a comprehensive capital gains tax represents a burden on people who work for a living, while at the same time they are adamant that their particular nest egg, be it their KiwiSaver or their rental property – and certainly their home – deserves to be excluded.

This week Wellington investor Troy Bowker appeared to strike a nerve by outlining the natural implications in the Tax Working Group’s (TWG) proposals on second homes.

In suggesting a system which takes a deemed value of a property and charges an annual fee linked to interest rates, the TWG appears to have arrived at a system which could put punitive costs on baches.

Punitive not because families will be hammered by rising values when they sell, but because they could be charged even if the value of the property is falling and they plan to hold it indefinitely.

It has the hallmarks of a wealth tax, which would certainly result in a large number of properties being sold to avoid it.

Labour’s tax policy does aim to improve the balance of taxation of income and assets, but a sell-off of holiday homes does not feel like a solution.

The system suggested does not target baches in particular, but all houses which are not the family home, as a means of capturing investment properties, long seen as a free ride for the wealthy.

It gets around a nagging problem which would hit a more straightforward capital gains tax, which has a pragmatic problem: the surge in house prices over the past five years means capital gains are likely to be lean over the next decade.

The added benefit is that under such a system, the amount of tax coming in each year would not fluctuate with the economy, meaning Treasury could count on consistent revenue.

But if it is pursued it could put the Government on a collision course with thousands of families who believed that even if the tax system was changed, they would only be caught when they sold. And who sells the family bach?

For Labour, which has staked considerable political capital in changing the tax system in the interests of ‘‘fairness’’, this could be more of a headache than it was expecting.

During the election campaign National successfully cornered Labour over its tax plans, forcing new leader Jacinda Ardern to rule out a number of revenue-gathering areas.

It looks likely, if not inevitable, that Labour will rule out a system which charges an annual fee on all second properties when the heat inevitably comes on.

The risk is greater than being seen to be against aspiration.

Families saying they are being forced to sell assets which generate little income, but have been held for generations, would appear to be the kind of headline no Government would want to be tied to, especially in election year.

The problem then becomes a decision between creating yet another loophole for a type of property which is very difficult to define, or abandoning charging a deemed value on properties entirely, reverting to a capital gains tax.

Labour cannot simply abandon the process after making tax fairness a major issue of its first term.

It now may face a choice between a system which may not raise it much revenue over the period it can reasonably hope to govern, or one which seems likely to be rejected by thousands of voters who do not see themselves as the problem.