Labour’s Capital Gains Tax ‘Valuation Day’ Details Not To Be Revealed Until After Election

Russell
Palmer, Political Reporter

The public
will not find out until after the election how Labour would
handle the thousands of property valuations needed for its
capital gains tax (CGT) policy.

Under the CGT policy
released early
on Tuesday – in the wake of leaks to RNZ over the
weekend – profits from selling commercial and residential
properties would face a 28 percent tax.

The family
home, farms, and other assets would be exempt.

The
policy would only apply to gains in the property’s value
since 1 July 2027, and the party has made clear homeowners
would have five years to seek a valuation of the property as
it was at that date – in line with the Tax Working Group’s
report.

But many of the other details remain unclear,
including:

• What kinds of valuation could be used
  or how many methods would be available
• Who pays for
  the valuations
• Whether property owners could contest
  valuations
• What happens if a property does not get a
  valuation within the five-year period

The Tax
Working Group (TWG) report recommended Inland Revenue be
tasked with providing guidance on what valuation methods
would be acceptable.

In a statement, Labour’s finance
spokesperson Barbara Edmonds said the party would follow the
tax working group’s recommendations to “get the right
balance between accuracy and simplicity for
taxpayers”.

She confirmed many of the details would be
ironed out after the election, should Labour
win.

“Inland Revenue will provide guidance, and as
with any tax policy there will be a thorough policy process
to make sure the rules are workable and effective once in
government.”

Edmonds declined to be interviewed about
the matter.

RNZ sought comment from Inland Revenue
about whether such guidance might already have been produced
for similar legislation.

A spokesperson for Inland
Revenue said it would be inappropriate to provide policy
analysis for an opposition party’s policy, and the
approaches used for the bright
line test, for example, were “not relevant as that test
does not use a Valuation Day”.

What would the options
be?

The TWG report discussed some options for
valuation, but did not make clear which should be
selected.

For instance, Rateable Value or RV – which
gets updated once every three years and is used to calculate
council rates bills – was “easily obtainable, but may be
inaccurate depending on when it was last updated”.

The
other option discussed in relation to land property was a
comparison with similar properties in the area which “could
be done on a case-by-case basis or using an algorithm
already commonly available”.

This would make use of
the kinds of data produced by companies like Cotality or QV
using an “Automated Valuation Model” or
AVM.

Cotality’s chief property economist Kelvin
Davidson told RNZ their method produced computer-based
valuations for banks for lending purposes and was able to
value every property in the country roughly every week or
so.

“The AVMS or the computer-based valuations look at
comparable sales for the similar properties in the area –
factors in what they might have sold for, looks at bedroom
count, land size, all of these different variables – to try
and come up with a really fact based estimate of what the
value would be on any given date.

“There’s a lot of
back testing done to verify that and also close to what a
physical valuer would do.”

Davidson said physical
inspection of the property – which was not discussed in the
TWG paper – was the “gold standard” of valuations, but it
was “certainly not going to be practical to have a valuer
visiting every single property that could be
relevant”.

The “tidiest” solution – and certainly
cheaper than a physical inspection – would be to get an AVM
valuation for everything on the day, he said.

“But of
course, that could be a mass valuation exercise which will
come with extra cost and there’s a question here about who
the cost falls on for these valuations: does it fall on the
government of the day to pay that, does it fall on the
individual property owners?”

He said alternatively the
five-year grace period could work if that cost was expected
to fall on property owners, who would be incentivised to try
to get their valuations as high as possible.

“You
reduce the amount of capital gains that could be subject to
tax, so yes depending on what the valuations are as of 1
July 2027 there may well be some objections.”

The TWG
report also looked into what happens if the owner doesn’t
get a valuation within the five-year period, recommending a
“default” valuation method be used in that case.

It
set out a rather blunt “straight line” method as one
possibility: looking at the price the last time the property
was sold and drawing a straight line to the price at sale –
and seeing what the price would have been on the 1 July
date.

That approach could, however, produce wildly
different values to the other valuation methods – and it
remains unclear whether owners would have a choice about
which method is used at that point.

Taxpayers may not
know what solutions to all these questions they might be
voting on until after the
fact.

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