The CGT Alternative: A Title Bond
What Capital Gains Tax?
The New Zealand coalition Government, led by Labour, just spent $2M on a Tax Working Group to find a way to introduce a Capital Gains Tax (CGT) to help curb the soaring house prices. They failed to find consensus and scrapped the idea. It was unpopular and affected too many areas of contention including KiwiSaver portfolios, existing farms and small businesses.
Where's the problem?
We have to ask some fundamental questions: Is there a way to only target property? Can we help first home buyers? How can we generate revenue for the government? How do we not penalise families trying to get ahead?
What's the solution?
A discussion with my wife led to a lightbulb moment... what if we introduced a bond tied to a property's title? Here is how we think a Title Bond (the Bond) should work:
- Any properties purchased prior to an implementation date will be exempt from the Bond.
- The Bond applies to all freehold (fee simple), unit title and cross lease titles. It will not apply to property purchased as leasehold.
- Any amendments to the original title that affect the usage of the land would forfeit the Bond associated with the purchased title. For example, subdivision or amalgamation.
- The Bond is lodged at the time of settlement.
- The Bond will be a percentage of the purchase price: 0% for qualified first home buyers, 5% for NZ citizens, 10% for Non-NZ citizens
- For New Zealand Citizens, sellers are required to apply for a refund of the Bond after the successful sale of their property. 100% of the Bond is refundable if the settlement is after five years of the initial purchase. The Bond refund is subject to a graduated scale if selling within five years of the initial purchase. For each settlement anniversary, the seller will be entitled to receive an additional 20% refund of the Bond up to 100% i.e. selling after five years.
- For non-New Zealand Citizens, the Bond is non-refundable unless becoming a New Zealand Citizen by the time of the sale of the property.
How this helps
This would help the government (and by extension, all of NZ) in the following ways:
- Government earns interest on the balance of Bonds held
- Bond forfeiture through foreign sales
- Partial/Full Bond forfeiture through early sales and speculation
- Bond forfeiture through title amendments (i.e subdivision)
- The Bond is held for the length of ownership
- Refunded Bonds are of less value due to inflation
What else?
Some other points of note:
- This is not a tax
- It does not affect existing property owners
- It gives first home buyers an advantage
- It's simple and easy to implement
- It includes farms, family homes, commercial property
- Transactions are managed by property lawyers during sale/purchase
- It does NOT involve IRD
- Could include a provision for hardship claims under extenuating circumstances
Let's discuss this further...
At the moment, this is just an idea. I invite you to discuss this with your friends, neighbours, local politicians and the media.
This was first published on https://www.paye.net.nz/title-bond.html
Insight | Growth & Strategy
4yInteresting idea. My first thoughts would be: Intent. Ie the family home vs pure economic reasons. If circumstances change and a family has to sell/move within 5 years then I believe that would be unfair for them to lose their bond (& interest paid on it). I’m sure a ‘reasonable grounds’ could apply here however. How many investors/speculators turn their houses around within 5 years? Im not sure of the data breakdown but that may be interesting to look at the timeline. It’s a pretty cool idea. I guess in the current market with the average house going up considerably more than $25k per year, it would be interesting to know if this would defer enough people - or we’d just get smarter at the ‘flick’ game. Great post - thanks!