Labour’s CGT push signals a major shift in New Zealand’s tax direction
The Labour party have recently announced a major tax policy ahead
of the General Election in 2026. An introduction of a Capital Gains Tax (CGT).
Firstly, there is no guarantee that there will be a Labour led Government at
the next election, but, for the purpose of this article, let's work under the
assumption that they will.
The CGT will apply to residential properties, excluding the family
home and to commercial properties. The tax would apply to capital gains made
after the 1st of July 2027 which has been named as Valuation Day. On
this date, all properties would have to be assigned a market value, forming the
baseline for calculating future gains. What is important is the tax is not
retrospective. Any gains made before the 1st of July 2027 are not
subject to CGT. The CGT rate has been set at 28%, the same rate that most companies
pay.
Let’s say you buy an investment property today for $500,000. You
hold it until after Valuation Day and then sell it in 2028 for $600,000. If the
property is valued at $500,000 on the 1st of July 2027, your taxable
gain is $100,000, and you’d pay $28,000 in CGT.
But what if you renovate the property after Valuation Day? Suppose
you spend $50,000 on improvements in 2027–2028. Can you deduct that from your
gain?
Under the current Two-Year Bright Line tax rules, capital
improvements, such as upgrading a kitchen, can be added to the cost base of the
property, reducing the taxable gain. Reading the policy release, you will still
be able to do this.
However, the possibilities of Labour being able to govern
alone are highly unlikely and they will probably need to form a coalition. The Greens
and Te Pati Māori take a much more regressive stance on taxation around property,
and both want to introduce a wealth tax. Both parties are much more likely to
have a more punitive stance on taxation. The Greens have called the CGT
‘watered down and falls far short of meeting the needs of New Zealanders’.
If investors cannot deduct improvements, then it would be wise to
ensure that improvements are made to their investment portfolio prior to the
valuation day.
At Property Brokers, the average age of properties under management
is 58 years old. Some of the towns that we work, the average age is more than
70 years. There is a clear need to retrofit.
Let's look at the same scenario but the investor cannot offset
improvements. On this occasion the investor decides to renovate post Valuation
Day by investing $50,000 on a new kitchen and bathroom. The property now sells
for $650,000 in 2028. The investor will pay a tax bill of $42,000, based on a
capital gain of $150,000, not $100,000. This is an increase of $14,000.
Under such circumstances, investors will not be motivated to make
improvements.
As we have said, a lot must change in 2026. There is absolutely no
guarantee that Labour will lead the Government post-election 2026 and one must
assume there will be negotiations with potential coalition partners.
Our advice to investors is:
1.
Review your portfolio:
Identify properties that would benefit from renovations.
2.
Plan ahead: Schedule
improvements to be completed before the 1st of July 2027.
3.
Get valuations:
Valuers will be rubbing their hands on the announcement of Valuation Day.
Ensure that you consider getting your portfolio valued post renovation in
preparation for Valuation Day.
4.
Talk to your accountant: Keep
informed and monitor updates on CGT and seek professional advice from your accountant.
Regardless as to what a final CGT looks like, prudent investors
with older stock should plan ahead for improvements, particularly as interest
rates drop, making it more affordable to add value to your investments.
At Property Brokers, we’re committed to helping our clients
navigate these changes with confidence. If you’d like to discuss your portfolio
strategy or renovation plans, reach out to your local Property Manager or
Investment Specialist today.
