In one form or another, the spectre of Capital Gains Tax (CGT) has been hanging over New Zealand since the result of the last General Election in October 2017 which returned, after a period of negotiation, a coalition Government comprised of Labour and New Zealand First parties with additional confidence and supply provided by the Green Party.

While it is fair to say that the three key parties in the Coalition have differing views on CGT, Labour Prime Minister Jacinda Ardern has publicly supported and appointed the Government’s Tax Working Group with the intention of seeking a consensus within Parliament so as to adopt many of their recommendations by 2021.This was particularly relevant to our residential and commercial property markets with reference to the inaugural introduction of a specific CGT in New Zealand.

Despite this, on April 17 this year, Prime Minister Ardern announced that differing perspectives in the debate and a non-consensus had resulted on holding back the introduction of CGT.

Tax is always a controversial topic in politics and it is perhaps no surprise that a consensus could not be reached across such diverse political parties. Importantly though, it was made clear that any Labour Government under the current Prime Minister’s leadership would not be introducing a CGT due to the lack of a political mandate to do so.

So what does this mean for the market now that this pressure is lifted?

It’s certainly great news in many ways for existing and prospective property owners. However, like anything in life, we feel it is important for all parties to keep calm, be realistic, and be prepared to negotiate and share any potential uplift to achieve a win-win where possible. The value to all concerned of a deal being concluded expediently, effectively, and where common sense prevails is certainly the goal of proactive agents.

It is no secret that business confidence has been consistently low since the present Government has been in office. According to the ANZ Business Confidence Index, it has been negative since the last election with a low point of -50.3 in August 2018, with only marginal improvement since then to -37.5 in April 2019.  Part of the reason for such pessimism from businesses is almost certainly the potential downside of taxation policy on returns. It will be interesting to watch this index closely in the coming months to see if there is any rebound in confidence with more certainty now that CGT will not be a feature of New Zealand property investment for the foreseeable future.

Although it is too soon to be able to quantify the impact of the April CGT announcement on investment properties, we expect that we will see some more enthusiastic bids for added value opportunities that we bring to market. Our view is based on the logic that factoring in the potential cost of tax on investments where there was a clear strategy for property transformation was certainly a concern for buyers that we’ve negotiated with on behalf of clients throughout 2018 and into 2019.

In a non-CGT world, there is obviously more room to generate untaxed investment gain from purchases where there is a clear vision and strategic plan to maximise an asset’s potential.  All things being equal, this uplift will likely be proportionally split (depending on the strength of negotiating position) between the two parties.

Yet, like everything in life where a dollar of profit is there to be made, effective tax planning and solid professional advice across the board is essential. Although we are certainly not tax experts, when advising our clients, we are aware at an overview level that intention (as it always has been) remains a vital watchword when it comes to property investment and the role that potential taxation could play.

While the shadow of CGT no longer hangs over the market and will likely be less of a potential risk calculation in investors’ bid levels, getting the right advice and knowing all the rules of the game are as important as they ever were.

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