Crackdown on rental property loopholes tempt Key

businesswire.co.nz,  Tuesday, 19 January 2010 19:59

Prime Minister John Key has given his strongest signal yet that the massive tax loophole around residential rental property investment is a prime target for reform, a day before the Victoria University Tax Working Group releases its final report.

Speaking at the first post-Cabinet press conference of 2010, Key singled out the fact that not only are rental property investors, as a group, paying no tax on their $200 billion of assets, they are actually costing the taxpayer around $500 million a year in refunds created by write-offs against other income that are currently legitimate.

"In terms of the area of property, it's certainly identified, but you wouldn't to jump to conclusions about possible responses," Key said, citing as options capital gains taxes, land taxes, and an end to depreciation on housing assets because they historically rise rather than fall in value.  The only action definitively ruled out is a capital gains tax on the sale of the family home.

Key was also more definite than in the past about the potential for a higher rate of GST to be part of the tax reform mix, which is expected to be a centrepiece of the 2010 Budget.

Asked whether he would rule out an increase from the current 12.5%, Key said: "No", and ended the press conference.

A major complicating issue is the Australian review of the federal tax system, known as the Henry Review, which may recommend a lower Australian corporate tax rate, and is also considering whether to retain the dividend imputation system which New Zealand also operates.  Changes to either would almost certainly have impacts on the relative attraction of Australia versus New Zealand as a place to invest.

However, whether the Henry Review will be completed early enough in 2010 to inform a May Budget in New Zealand remains unclear.

"Competitiveness with Australia is important, especially the company rate," said Key.  "Hypothetically, if New Zealand moved before Australia, it would give us some competitive advantage."

The main thrust of tax reform was to make the system fairer, more robust, and sustainable than it is at present, he said.  The Government has previously acknowledged that changes to the rate of GST would require offsetting tax adjustments to ensure it was fair to people on low and average incomes, who spend a greater proportion of their income on consumption than high income earners.

written by Andrew Bydder, 20 January 2010

Depreciation for most companies is a mere accounting trick - a 20 year-old office desk is still a desk. Depreciation on houses is real - a 20 year-old roof will leak! Property maintenance is a real business cost, not a tax dodge.

written by B Brown, 20 January 2010

I don't think Mr Bydder understands the difference between depreciation and maintenance.

written by goldenfox, 20 January 2010

Go John! Stop the crazy people investing in rentals returning 2-3% just for the personal tax refunds. We need to invest in our people our companies and exports. Not used japanese debt to swap bedrooms back and forth.

written by Simon, 20 January 2010

Well Andrew Bydde, although a 20 year-old roof will leak you will find that a 20 year-old leaking roof is still worth more than it did 15 years ago.

The fact that it leaks does not mean it should be depreciated. Over those 20 years the person renting it should have paid for the cost of fixing the roof.

If you are worried about your roof leaking and depreciating, I will gladly buy the roof of your house off you and rent it back to you (yes just the roof).

Oh and when you say "Property maintenance is a real business cost, not a tax dodge." Another real business costs is staff. Should we depreciate all business costs? cause lets face it... Staff get old and stop working so therefore we should depreciate them.

written by Alistair, 20 January 2010

If the government gave a flat tax system to the employees of New Zealand like company tax at 30% then maybe higher income earners would look to invest in other ways and not just property for thier future retirement. The banking system has alot to answer for here as if you want to buy a business you need security and banks will only give security over a house, so you need a house for working capital.

written by Geoff Durham, 20 January 2010

I agree the rules on tax refunds should be dropped as that is what got us into this mess. But don't make it retrospective as that is unfair and could bankrupt many people who were behaving legally and using incentives provided by the government in the first place! Plus it could negatively affect house values for ALL existing owners.

written by Darryl, 20 January 2010

I am a property investor. An option I choose because it meant I could control an increase in personal wealth, through capital gain, and reducing my personal tax costs. Plus it was, and remains a relatively safe investment. Removing the benefits of this investment will mean I will need to look for an alternative that provides a similar return. Admittedly the return is an estimated figure based on historical fact. But changing the depreciation rules removes the 'Average Joe' from trying to better themselves, or at least provide for their own future without relying on the Government. If the benefit of rental property is removed, I would hope that perhaps tax credits remain through increased investment in personal superannuation or something of the like. This would maybe 'balance' what investment opportunities there are out there. As no matter what rules are in place, the rich will still do what they do. It is the conscientious middle class investor here that will suffer.

written by Nick, 20 January 2010

So do you only invest because there are tax advantages? I invest because I want to better myself and it is the only way to do it. And despite the tax advantages of property, I made a 49% gain on my portfolio of NZ and Australian shares in 2009. No tax advantages but at least I'm investing in productive assets (providing employment for the people I live with). Who can be bothered with the sucky returns on property if it wasn't for the uneven tax treatment? In fact, even with the tax, I do better than you do with property most years. Stop belly aching about the Government not encouraging you and stick your money where it will do you the most good for the least effort. Hint: it's not residential property.

written by Darryl, 21 January 2010

Nick, thanks for your view. I invest in property because that is something I am comfortable with. The tax benefit is an advantage but not the reason I chose this option. I don't profess to know all the answers and in the last year have been reconsidering if rental property investment is the best strategy for me. As you say better returns are possible elsewhere. Rental property is a 'all or nothing' investment generally, as it is difficult for the average person to have both rental property and a share (or other) portfolio. My comments weren't meant to be a 'bellyache' as you suggest, just a view on how the changes may be seen. Congratulations on your successes.

written by Gary, 21 January 2010

Nick is very naiive. The NZ economy needs us both. Take all the private property investors out of the NZ economy and what would happen. Be honest. Think about it.
The tax assistance is the only way I can be in property investment. I need something that is more secure than speculation in the sharemarket. I have a family who rely on me providing secure life. The projected changes will be enough to put us out of property investment. I have friends who are heavily into the sharemarket. They do not have kids and can afford the risk.
Incidentally I still pay a lot tax because there is a GST component in everything I do with property including Management fees. I provide work for maintenance people who are often desperate for work. I help provide housing for people who obviously cannot buy their own. I take the risk and pay all the costs. They only pay market rent not set by me but by their fellow renters. Share investors pay nothing and reap the rewards of the efforts of employees and generally extremely well paid managers. Share investors I know don't pay tax on their growing portfolios. How wrong is that.

written by Gary, 21 January 2010

Simon not realise that depreciation causes the property to be worth less on the books if and when selling. The difference between the book value and the sale price is still exposed to be taxed as income. NZIA (Institute of Accountants) support tax being paid on this income. I am afraid some anti property investor pundits just get carried away by what they hear about a minority. Get your facts right and learn about legitimate property investment.

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