A dog’s breakfast of tax policy

Last month, Chris Hipkins said Labour would keep its capital gains tax proposal and leave full interest deductibility alone – a position likely to give the industry more confidence.

But Labour’s manifesto is only half the menu. Four of the five most recent poll-based seat projections show that a Labour-led government would need the Greens, Opportunity and Te Pāti Māori to reach a majority. The Greens still want to remove interest deductibility; Opportunity wants an annual tax on land.

What Labour is proposing

Labour’s capital gains tax would take 28% of the profit made when residential investment or commercial property is sold. It would apply only to gains made after 1 July 2027. Capital improvements would be added to the cost, unless depreciation has been claimed on them. The family home, farms, shares, KiwiSaver and inheritances would be exempt.

Labour expects the tax to raise about $700 million a year on average, ring-fenced for health spending, starting with three free GP visits a year. Some of the machinery, including how valuation disputes would work, has been left for Inland Revenue to settle after the election.

A small bill with a big bite

Goodwins’ lead story this month makes the case that New Zealand house prices are heading for growth of about 4% a year, not the 6% investors are used to. Labour’s tax policy won’t run up a huge bill based on current growth numbers, but it will bite into real returns.

Take a rental valued at $800,000 on 1 July 2027 and held for ten years. At a 4% annual growth rate, it would be worth about $1.18 million at the end, and the tax on the gain would come to roughly $108,000. Annualised growth after tax falls from 4% a year to about 3%. That sounds manageable until inflation is taken into account. The tax isn’t indexed to inflation, so it falls on the inflation component of the gain as well. With inflation at 2%, the real gain drops from about 2% a year to about 1%.

At 6% growth, tax takes about a third of the real gain; at 4% it takes half

$800,000 rental held 10 years	6% a year	4% a year
Value after 10 years	$1.43m	$1.18m
Taxable gain	$633,000	$384,000
Tax at 28%	$177,000	$108,000
Annual growth after tax	4.6%	3.0%
Real growth before tax	3.9%	2.0%
Real growth after tax	2.6%	1.0%

Goodwins calculations. Assumptions: 2% inflation, no capital improvements and a sale after exactly ten years. Figures are illustrative only.

Tax is paid only on sale, so long-term holders can defer it for years, and a landlord who never sells would never pay it. That is why the capital gains tax, for all the attention it gets, is probably not the most expensive policy on the table.

The partners’ list

The Greens’ tax plan would remove interest deductibility for residential investment property and return the bright-line test to ten years. Their housing policy would cap rent increases at 2% a year, end no-cause terminations, set up a national register of landlords and property managers, and introduce a rental warrant of fitness. A 2.5% annual wealth tax on net assets above $10 million would affect only the largest portfolios.

Opportunity proposes a 1.75% annual land value tax on urban land (0.5% on rural land) to fund a citizen’s income. Te Pāti Māori’s tax plan targets the wealthiest 3% and says less about property specifically.

September’s projections give a Labour-led bloc between 61 and 64 seats, and Opportunity’s projected vote share swings between 4.5% and 9.5%, depending on the pollster. If it falls below the 5% threshold, the balance of power changes. The Taxpayers’ Union–Curia projection has National, ACT and NZ First back in office with 64 seats.

Ranking the risks

On an $800,000 rental with a $560,000 mortgage at 5.5%, interest comes to about $30,800 a year. Losing the deduction would cost around $10,200 a year for a landlord on the 33% tax rate, and $12,000 for one on the 39% rate. That comes out of cashflow every year, regardless of whether the property rises in value. Over a decade, it roughly matches the capital gains tax bill, but it is paid years earlier.

A land tax would be similar in kind: on $500,000 of urban land value, 1.75% is $8,750 a year. A 2% rent cap barely bites today, because national rents rose by $5 a week in the year to August. Over time, though, the difference compounds – a $625 weekly rent growing at 2% instead of 4% would be about $70 a week lower after five years.

So, the policy getting the most attention costs the least each year, and the costliest ones belong to the parties Labour would need to form a government. Hipkins’s promise on deductibility is a Labour position.

If National is returned

The current settings would remain in place: a two-year bright-line test, full interest deductibility and no capital gains tax. That would remove the immediate risk of these proposed tax changes for three years. Labour has now made a capital gains tax its policy, and it could be back on the ballot in 2029. Brokers report that investors are already holding off until the result is known, which suggests some of the uncertainty is priced in, regardless of which way the vote goes.

What landlords can do now

Keep a proper record of capital improvements, because under Labour’s proposed design, they would reduce the taxable gain. Check your rateable value. If it sits well below market value, a registered valuation as at 1 July 2027 could increase the starting value used to calculate a future taxable gain, reducing any future tax bill.

Most importantly, run your cashflow without interest deductibility. Of everything on the table, it is the one Labour can’t fully rule out on its partners’ behalf.

See how your portfolio holds up under each election outcome. Talk to the Goodwins team on 0800 GOODWINS.