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English reveals tax game plan
Alignment of tax rates and closing property investment tax loopholes appear to be the government's main priorities for tax reform. In a speech to the New Zealand Institute of Chartered Accountants' annual tax conference, Finance Minister Bill English gave the clearest steer yet on where the government might take the tax debate once the Tax Working Group reports in December. The complexity which returned to the system since 1999, plus the gaps which opened up for minimisation because of the complexity, was a key theme of English's address. "It's quite telling that there has been virtually no growth in the number of people paying tax on $1 million of annual income since the 39% top personal tax rate was introduced 10 years ago," English told the conference. He also cited the 9,700 high-income families with rental properties who, last financial year, claimed tax losses to enhance their eligibility for Working for Families and receive further tax relief by doing so. "A key issue here is the overall credibility of the system. Large scale legitimate avoidance behaviour by higher income earners undermines the goodwill of lower income earners." He also told the conference the losses claimed by people with rental properties were $575 million more than the income declared from residential rentals. "The net reduction in government revenue was approximately $150 million, while the capital value of this asset class roughly doubled. "This is a recent trend. In 1999 rental properties generated over $600 million in taxable income." English also commended the institute's proposals on tax simplification for small businesses, unveiled just before the conference. The two proposals are that "micro" businesses earning under $60,000 a year and not registered for GST to pay a final tax of 15% based on turnover. The other is for firms with annual turnover of less than $1.2 million to have their income tax calculated on a cash basis, based on their GST return. He has told tax officials to engage with the institute on the issue. "I believe these proposals have merit and they will not be dismissed out of hand." First visit? Then sign up to our free Weekly Newsletter or subscribe to the NetProphet RSS feed. Thanks for visiting! Comments from our readersOn 20 October 2009 at 8:50 pm Mark Scott said:
All the commentary I see about the "rort" represented by the tax losses arising on rentals seems to overlook the fact that they are a consequence of government policy - with Housing Corp as the country's biggest landlord, their "income related rents" policy sets the (non) market rate of rents. It is no wonder landlords struggle to make a profit - how can it be a tax rort if it is a direct consequence of this? In this tax review, Government better not forget to look at itself! On 20 October 2009 at 9:30 pm Bob Smith said:
The enormous increase in the cost of property in the last decade and the ability to fund this through low equity borrowings must be a significant factor in the "loss" situation for many residential rentals. No need to change the current rules, just enforce them. Unless the Govt wants to use tax payer funds directly to provide rental housing for low income earners. On 20 October 2009 at 9:45 pm Man Yin Ng said:
All the current talks is centred on a few who make good monies out of property investments. What about the hundreds or thousands who suffered hurrendous loss - blue-chit investors? Investor Forum investors? The recent record number of mortgagee sales tell a different stories! If landlords do not provided the required accomodation, then the Government will end up footing tens of billion dollars to provide that necessity. There is delicate social balance at work, disturbing that balance will rake havoc to the NZ's tiny economy!!!
On 20 October 2009 at 10:26 pm Arthur Murray said:
Home owners pay OPEX and interest cost's out of tax paid income, so called investor/ landlords pay these charges from pre tax income, that is a distortion. Owning a non profitable loss making rental is common across many income ranges. I know people who own loss making rentals and then rent themselves to maximise the tax advantage.
The purchases are debt funded, affecting the prices upward, as the wider community in effect pays towards the investments OPEX and interest costs via depreciation and tax allowances.
Good on the Government for acknowledging the issue and doing some work to re balance this.
It was after all, property loans debt and lending (on the assumption ratcheting prices could not end) that triggered this current upheaval.
On 20 October 2009 at 11:06 pm Peter said:
One thing that no-one seems to be mentioning in connection with the must discussed "love of property for investment" is that as a small business owner the only way I can raise money to fund my business is by leveraging my investment in property. I suspect that most small businesses, of which there are many, are funded in exactly the same way. If someone bothered to investigate, I suspect we would find that a very significant part of the bank loans that appear to be for residential property are in fact funding the majority of New Zealands small businesses. On 21 October 2009 at 12:57 am ray clarke said:
When Labour introduced thier new 39 cent income tax rate they were wrong to do so. All that did was to encourage negative gearing while those people with POSITIVE CASH FLOW PROPERTY were duly punished by a Labour Government. New Zealand never learns or makes good decisions at Central Govt. On 21 October 2009 at 5:35 am anita said:
Peter his the nail on the head and why do we do it that way, as its the cheapest money available and banks will not lend money for small business's. Besides, if you do have a independant rental property that you can't lean onto your home, you are penalized with a higher interest rate. Banks are very answerable to how much money is made with a rental property.
The government best be very careful when critisizing rental investors, when compared to all the money they have invested in the big SOE's, by comparison how much money are they returning to the government at the moment in dividends...I suspect no better return on their money either...I say down size all government departments, get rid of all govt beaurocrats and the shortfall will soon disappear. On 21 October 2009 at 7:54 am Martin said:
Is that the same Bill English who was investigated for his own property rental transactions and has been ordered to pay money back? What is his motivation now? He should surely be excluded from being involved in this matter. On 24 October 2009 at 12:55 am Peter said:
One of the proposed changes is a tax on the equity in your rental property. I don't know about anyone else but an obvious way to reduce that tax burden would be to reduce the equity and how would I go about that.... by buying more property! The fact that most banks will only lend to 60% on apartments and 80% on other property is irrelevant as the additional security is in my mortgage free family home. Not quite what they were intending with this proposal but then the dramatic increase in mortgage rates in 2008 forced me to stop investing in the stock market and put most of my disposable income into my rental properties which wasn't the idea then either. Add your comment:Other Ways to Access News
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