Labour Delays Key Details on Capital Gains Tax Valuation Until After Election

The Labour Party has announced that the public will not receive critical details regarding the property valuations for its proposed capital gains tax (CGT) until after the upcoming election. The policy, unveiled on March 12, 2024, outlines a tax rate of 28 percent on profits from the sale of commercial and residential properties, though exemptions will apply to family homes, farms, and other assets. Gains will only be taxed on values increased since 1 July 2027, and homeowners will have a five-year window to obtain property valuations.

Despite the release of the CGT policy, many specifics remain unaddressed. The Tax Working Group (TWG) has recommended that the Inland Revenue Department provide guidance on acceptable valuation methods. In a statement, Labour’s finance spokesperson Barbara Edmonds confirmed that the party intends to follow these recommendations to balance accuracy and simplicity for taxpayers. She emphasized that further details will be finalized post-election, should Labour secure a victory.

“Inland Revenue will provide guidance, and as with any tax policy, there will be a thorough policy process to ensure the rules are workable and effective once in government,” Edmonds stated, declining further comment on the matter.

Inland Revenue, when approached for insights on potential guidance, indicated it would be inappropriate to analyze an opposition party’s policy. A spokesperson pointed out that existing methods, such as those used for the bright-line test, do not apply since that test does not incorporate a designated valuation day.

Valuation Options Under Scrutiny

The TWG report suggests various options for property valuation but does not specify which should be adopted. One possibility is the use of Rateable Value (RV), which is updated every three years for council rates. While RV is easily obtainable, its accuracy can vary based on the timing of the last update. Alternatively, the report mentions the potential for valuations based on comparisons with similar properties. This could be executed on a case-by-case basis or through readily available algorithms.

Kelvin Davidson, chief property economist at Cotality, shared insights on their valuation methods, which provide computer-based assessments for banks and are updated roughly every week. “The Automated Valuation Models (AVMs) consider comparable sales and various factors, such as bedroom count and land size, to estimate property values accurately,” he explained. While he acknowledged that physical inspections represent the “gold standard” for valuations, he noted the impracticality of assessing every relevant property.

Davidson advocated for the AVM approach as a cost-effective solution, although it could involve significant expenses for mass valuations. “The question remains as to who bears these costs: the government or individual property owners?” he queried.

The five-year grace period could incentivize property owners to seek higher valuations to reduce their taxable capital gains. However, the TWG report also addresses scenarios where an owner fails to obtain a valuation within the designated timeframe, recommending a “default” valuation method. One suggested approach involves calculating a straightforward “straight line” valuation based on the last sale price, which might yield significantly different results compared to other methods.

With many uncertainties surrounding the CGT policy, taxpayers may find themselves voting on a plan without full knowledge of its implications. The Labour Party’s approach to these tax measures could have far-reaching effects on property owners and the broader economy, making the forthcoming election a critical juncture.

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