15 May 2019
No capital gains tax

We explore the pros and cons of a CGT-free future

On April 17, the Government announced it will not go through with its proposed capital gains tax (CGT). For over a decade, Labour has campaigned for a tax on the capital gains on rental properties, second homes, land and shares, and business assets.

For many rural property owners, the Government’s announcement is welcome news. Ever since the possibility of the CGT was first announced, the rural market has been under a cloud of caution. Rural investors have been careful when it comes to investment, resulting in relatively static farm prices.

In fact, between January and March of this year, farm sales were down 14.7% compared to the previous year, as reported by the Real Estate Institute of New Zealand (REINZ).

The New Zealand rural sector is large, and one that encompasses a variety of industries – from viticulture and horticulture, to dairy and cattle, to forestry and lifestyle properties. As a diverse sector, there are many things that influence the market, such as increasing costs, demand for labour and compliance issues.

But among all these influences, the CGT has been a large question looming over the heads of many investors throughout the sector.

So does the announcement of the CGT rejection mean farmers can feel confident in the future of their investment? There are both new opportunities and important factors that rural investors should be aware of when making their investment decisions.

Farmers support the Government’s decision on the CGT

Overall, farmers have reacted positively to the withdrawl of the CGT.

A Federated Farmers spokesperson has said “it’s clear the coalition partners have listened to widespread concerns that a capital gains tax has too many downsides...including the potential to put the handbrake on the progress of small and medium businesses vital to our economy.”

In many ways, the announcement frees farmers from the burden of a tax on the sale of their property, leaving them to explore investment opportunities that they may have been cautious to make before. Alongside it, the Government has also shut down the proposed idea of a water and fertiliser tax, which both DairyNZ and Federated Farmers are happy about.

Outside of the CGT, many industries in the sector have positive outlooks.

Interest rates and the exchange rate remain encouraging across many rural industries. While the dairy industry is down in both value levels and farm sale volumes, the horticulture industry is experiencing strong income levels, with regions like the Bay of Plenty and Gisborne doing particularly well.

So with the weight of the CGT off farmers’ shoulders, what is it that they should be aware of as they look forward?

Factors still affecting the rural sector

For many rural property owners, things will carry on ‘business as usual.’ The CGT announcement isn’t expected to change the current market significantly, but rather, take away some of the feelings of uncertainty that have been circulating within the sector.

While the uncertainty may be partially lifted, it is important for all rural property owners to be aware of the other factors affecting the marketplace:

  • Mycoplasma Bovis is still a serious threat to the dairy and beef sector. As of this month, 54 properties remain ‘active’ and a backlog of farmers that need to be contacted has put added pressure on farmers, especially at this time in the farming calendar.
  • Commodity prices remain high, with global trade uncertainty being a major factor in this. Major political and environmental changes have and will continue to affect the state of global trade.
  • A lack of overseas buyers, due to the passing of last year’s Overseas Investment Amendment Bill having decreased the buyers’ pool in the farm market.
  • An increasing demand for compliance issues, such as Freshwater Management, has put added pressure on farmers throughout the country.

Opportunities for the future

It is clear that there remain many factors affecting the rural sector, and the feelings of uncertainty have not completely dissipated since the Government’s CGT announcement.

But new changes bring new opportunities for investment and growth. So what are some opportunities for those invested or looking to invest in the rural market?

The CGT announcement puts many generational farms in a better position to make decisions about increasing their farm size and capacity by buying nearby farms. Over long periods, investment in rural land has historically proven to be worthwhile.

Changes in zoning also present new opportunities for land use. In the Nelson region for example, the local council announced a change in zoning for land which was traditionally used for apple growing. This change has given rural property owners the freedom to subdivide, sell to a developer, or simply hold on to the land for future investments.

Alongside zoning changes, the growth of new markets opens up new avenues for how investors use their land. Take the hops industry, for example. Growth in the New Zealand beer industry over the past few years has resulted in a positive growth for hops farmers. As most hops are integrated into orchard operations, this gives farmers new choices to diversify their investment.

Judging an investment on all its merits: a lifestyle approach

Whether selling or buying, the most important thing property owners can do when making an investment decision is to look at every opportunity on its merits.

Every investment should be compared with the opportunity cost. A better price doesn’t always mean a better opportunity. With the rural property being a traditionally family-oriented market, many land values are underpinned by the lifestyle value.

For those investing in shares, be sure to factor in the true returns on the property. You may choose to accept a lower return in favour of better lifestyle opportunities, or you may choose to keep your options open by diversifying your investment.

When weighing up your options, getting expert and qualified advice on the rural property market from an experienced local valuer is a must. With global and local factors affecting the industry, it’s vital that you’re getting the right information to make a sound and informed decision.

If you are thinking of buying, selling or just want to explore your rural investment opportunities, talk to your local TelferYoung valuer today.