Cunliffe David: Taxation (Bright-line Test for Residential Land) Bill — In CommitteeText is incorporated into the Bound VolumeCunliffe David: Taxation (Bright-line Test for Residential Land) Bill — In Committee[Sitting date: 10 November 2015. Volume:710;Page:7839. Text is incorporated into the Bound Volume.]Hon DAVID CUNLIFFE (Labour—New Lynn): We are supporting this bill but only because it is the tiniest—tiniest—conceivable step in a very important direction. It is hard to imagine an issue more central to New Zealand’s economic and social future than the way we are dealing with the rampant house price inflation - property crisis. Labour colleagues are going to be taking a large number of calls on this bill because it is so important to New Zealand that we expose the “why?” the “what is wrong?” the “what does this bill do?” the “will it work?” the “is it sufficient?” and the “what else needs to be done?”. We are going to dive down at considerable length to the clauses that are contained in the various parts of this bill. This is an introductory set of comments because we are on Part 1—the first clauses—in the Committee stage.Why is this a crucial issue? It is simply because there is nothing much more important to New Zealanders and our Kiwi families than achieving the Kiwi dream of homeownership. People pay their mortgages for years and years and years and that dream is slipping away. How we do know? Because homeownership rates are lower today than they have been at any time since—would you believe—the 1951 waterfront strike.Hon Ruth Dyson: Lockout.Hon DAVID CUNLIFFE: Lockout—exactly. The year 1951 was the last time New Zealanders had as little homeownership as we do today. That is a tremendously awful statistic. Why is it? In Auckland alone there has been a 27 percent increase this year in the cost of an average house in my area of Waitakere City. Why do I know? Because I am trying to buy one at the moment. There has been a 27 percent increase in 1 year. A house earned more than almost every worker in the country. Can an average Kiwi family afford an average home on an average income in Auckland? Are you kidding? Are we kidding? Of course an average family is locked out of the property market.The second key thing is that when Kiwis do get a home of their own under the current tax laws which help inflate house prices they are going to stay poor for longer. According to Shamubeel Eaqub’s book Generation Rent whereas a few years ago we were paying on average 30-year mortgages housing is now so expensive that families are paying for 50 years to pay off a home—50 years. New Zealand families are poorer because our property tax system is so so broken.Why else does this matter? New Zealand as a country will stay poor until we put more capital into productive investment and less capital into bidding up each other’s ridiculously overinflated housing prices. Why is the Government not doing more to solve the most important economic problem in New Zealand? I can only see and we will work through the analysis—Sitting suspended from 6 p.m. to 7.30 p.m.Hon DAVID CUNLIFFE: Good evening to colleagues and to viewers. Before the break we were reflecting upon the context for this actually very important and significant tax bill. This is the brightline test that says that if you sell a property that you are not living in minus a few exceptions within 2 years of buying it you pay tax on it as a trader—or at least that is the high-level plan. Before the dinner break we were noting that that is one way into a very very important issue for New Zealand.That very important issue is the twin catastrophe of the housing crisis which is locking young families out of the Kiwi dream and the misallocation of investment capital which means that basically we are spending all our money bidding up each other’s house prices often through speculative investment enslaving ourselves to the mortgage for longer and not investing in the productive investments that will create jobs and incomes for the future. That is an absolutely central issue to the problems of the New Zealand economy and unless we fix it we will quite simply be poorer in years to come and our children will have fewer opportunities.So now the question is whether this bill helpsmaterially. My colleagues and I will answer that by taking quite an extensive range of calls. This is a really important and detailed bill. Let us begin by asking: “What does the bill actually require?”. Well it has got a 2-year brightline test from the date that a person takes title. That brightline test will apply only to residential land—that is to residential real estate. It does not apply to business property and it does not apply to farmland. That is a very very important distinction because residential mortgages are about 53 percent of the total bank mortgage stock farm mortgages are a little over 20 percent and business working capital and business mortgages are about 16 percent. So the definition excludes around about half of the mortgage stock.The brightline testdoes not apply of course to a person’s main home. That is important and we agree with that. We have never thought that there should be any form of capital taxation on a person’s home because it is not just an investment. The brightline test will not apply to property acquired through an inheritance. We also concur with that. When we were working on capital taxes earlier we did not have a disguised inheritance tax there either. Losses arising from the brightline test will be ring-fenced so that they may be used only to offset taxable gains from other land sales. That sounds good but it is actually as we will show later in the debate a very broad ring-fencing provision which reduces the coverage of the bill.At a high level what are the issues with this bill? Let us start with how much it is going to achieve. According to the Government’s advisers—Treasury and the Inland Revenue Department—this bill when fully implemented will take how much tax in a year? Five million dollars. Five million dollars for a property tax across New Zealand in a whole year? Are we kidding? What is that? Two houses in Auckland? It is almost impossible to imagine how a number so small could have even been estimated or calculated. Upon what possible basis could $5 million have been the result? So that is the first clue ladies and gentlemen that there is something deeply wrong with the design of this tax. Five million dollars a year—it is a tax you have when you have not got a tax.OK so why is that? Well the first thing is that of course if it is a 2-year test speculators will hold for 2 years and 1 day and then sell on. At the moment 17 percent of property sales occur within the first 2 years but we would expect that to change drastically with this bill becoming law because people who are holding for a year and a half will simply hold for 2 years and 1 day. It is highly ineffective because it is very easy to game—very easy. It is a massive loophole. It just invites speculators to hold on to their properties and then flick them 2 years later.A tax that applies only to sales in that arbitrary period will not deter land bankers. That is really important because as Mr Twyford has often exclaimed for the last couple of years there has been only a handful of homes built on the Government’s special housing areas. One of the reasons for that in Auckland is that people are land banking even in special housing areas because with Auckland’s rampant price inflation they can be pretty sure that their investment is going to be worth more a couple of years down the track. Again this bill will do absolutely nothing to fix that.The brightline test has been made even weaker by Cabinet agreeing to exempt New Zealand residents from providing their IRD number when buying or selling a house. Well that is kind of odd because you have to provide an IRD number if you are transacting assets in or out of a trust. You need an IRD number if you are transacting assets in or out of a company but you do not need an IRD number here if you are a resident which means that that applies to people who are not even citizens.That is a very very odd exception for Cabinet to have agreed to and the Minister in the chair the Hon Paula Bennett who is the understudy finance Ministerwill be able I am sure to leap to her feet with alacrity and a lot of enthusiasm and explain to us why on earth they have that mile-wide exemption. The Government ruled out a more comprehensive 3-year test or a 5-year period despite Treasury earlier recommending it because it could be interpreted as a capital gains tax. Well although we do not want to use those three words in the same sentence the whole point of this is to tax speculation so if it does not do that effectively then it is probably not worth having.Let us ask ourselves: if in the broad design this tax is so flawed from the outset that it merely nods at the problem but does nothing to solve it then why have we got it here on the House floor? As a colleague said before the dinner break—I think it was Mr Twyford—that is because this is National’s stock and trade: the Government resists pressure for change to the point where the focus groups tell it that it is intolerable to do nothing. Faced with that pressure it does something usually almost nothing and that is what we have here.The only reason we are supporting this is that almost nothing is about $5 million better than absolutely nothing which is what we had before. But almost is only almost. That is the unsolved mystery of the bill and the Minister may be able to explain Cabinet’s rationale. Why would this Government design a tax that is so useless? Who benefits? One thing you have got to say about the current Government is that you know it may be doing the wrong things but usually there is method in its madness.So who are the beneficiaries? Well I can think of some. It certainly is not Kiwi mums and dads because they are going to be paying more for their mortgages and slave for 50 years not 30. It sure as heck is not Kiwi kids because most of them will be growing up in rented homes that they can be kicked out of on a whim on a month’s notice by their landlords—and they will swap around schools and so on and so forth and the effects will be felt throughout their lives.So it is not Kiwi kids. Is it real estate agents? Well yes it probably is because this tax does not quell the property market so they will be riding that bubble as they always were. They certainly are not losers here. Is it the banks? Ah! Maybe here we are a little closer to the heart of the onion because the banks are experiencing record profitability off the housing and property boom. If you think about it if your family is taking out a mortgage for 50 years instead of 30 and you are paying interest for the extra 20 then it is the bank’s profitability that will be lifted particularly in a low interest rate environment as we have at the moment. So it is not Kiwi kids and it is not mums and dads. It is probably the banking system and of course it is the property speculators.I would invite the Minister to reassure the Committee that this bill was badly designed by accident rather than design. There is a rebuttable suggestion that this is a deliberate sham that has been designed to look like the Government is doing something when it knows full well it is not. And the reason it is not is that the powerful interests in the financial system and the property sector have made damn sure it will not even though it knows it would be in the interests of every Kiwi family to have a more effective piece of legislation than the one we are called upon to pass into law through this bill.So Labour MPs and our colleagues on this side of the Chamber will be drilling into this piece of legislation over this evening as we go through the Committee stage. We will go through it part by part clause by clause comma by comma and we will expose for New Zealand why it is not effective why it cannot be as effective as it needs to be and why that $5 million a year for the whole country is really just the cost of a public relations stunt. This is a public relations stunt not real tax law. The members opposite know in their heart of hearts that this is really a tax joke. They know this is not going to make a blind damn of difference to the Auckland property bubble or anything else. All it does is let the National Government off the public relations hook in terms of a rising tide of angry parents and angry householders who are worried sick about meeting their mortgages or being tossed out of their rental accommodation.This bill is a political bill. It is not a substantive tax bill despite the fact that it has taken the time of officials the select committee and this House—and we will do justice to that process. There is no doubting that this bill is not an effective piece of legislation. Labour is supporting it only for the reason that we wish to send a signal that the problem to which this bill supposedly addresses itself is one of the utmost importance to the New Zealand economy and our society.