Following the release of the Tax Working Group’s (TWG) sweeping recommendations earlier this year, many investors feared a capital gains tax in some form was a given.

But when the Government finally released its response to the TWG’s report it shocked everyone by ditching the controversial capital gains tax proposal entirely. According to Prime Minister Jacinda Ardern, after significant discussion the parties in the Coalition Government were unable to reach a consensus.

She still believes there are inequities in our tax system that a capital gains tax in some form could have helped to resolve. “But while I have believed in a capital gains tax, it’s clear many New Zealanders do not. That is why I am also ruling out a capital gains tax under my leadership in the future.”

However, while a capital gains tax might be out, the Government has confirmed that options for targeting land speculation and land banking will be explored further.

Nonetheless, investors greeted the Government’s decision with surprise and delight. NZ Property Investors’ Federation executive officer Andrew King says the Government’s decision was the right decision.

“Good on them for realising that a capital gains tax was not wanted by most people, was unlikely to do what they wanted it to do and for making the announcement they have today.”

But he does note the Government’s plan to target speculation and land banking and says he is concerned that there will continue to be confusion between rental property owners and speculators. “We hope the Government realises that they need private landlords, who provide about 85% of rental properties, and that hurting landlords will also hurt tenants at a time when we have a rental crisis.”

Veteran landlord Peter Lewis, who is vice-president of the Auckland Property Investors’ Association, agrees, but says there’s now likely to be a further tightening of tax rules for rental property owners.

“I suspect that alongside new rules around the ringfencing of rental losses, we will see an extension of the bright line test from five years to 10 years.

“That will mollify the hardcore group which wants to punish residential landlords. But rather than impacting on established investors, it will actually penalise newer or less established investors.”

Such tax rules are also likely to have a detrimental effect on the rental market, he says. But for the property industry overall, the Government’s decision on capital gains will bring a greater level of certainty to the market going forward.

The Government is now planning to release a refreshed tax policy work programme mid-year.