We have pretty good news fresh to hand with the keenly awaited comments from Prime Minister John Key in response to the Tax Working Group, in the opening of NZ Parliament this afternoon for 2010. In Key’s opening address there is reason to celebrate for many commercial and residential property investors alike.
John Key stated:
we will not be developing any proposals for a land tax, a comprehensive capital gains tax, or a risk-free return method (RFRM) for taxing residential investment properties,”
Therefore our pockets aren’t going to be to heavily upset and the market will not be significantly impacted as there will be no Land Tax, no Capital Gains Tax, no Risk-free Return Method on equity or any new tax imposed on property investors.
However John Key raised concerns with the tax treatment on property investment as an asset class:
The government does believe there is a gap in the current tax system around property investments where income is being derived but, in aggregate, no tax is being paid – in fact the government is actually losing revenue in this sector,”
We will therefore be making changes to the way property is taxed, which will result in increased Government revenue and more fairness for the taxpayers. These changes will be announced in the budget.”
So it’s good news for now, with no Capital Gains Tax introduced, no re-introduction of a Land Tax and no tax on equity in property (the Risk-free Rate of Return Method). Key and Minister of Finance Bill English had already ruled out imposing a Capital Gains Tax last year, and no-one in their right mind would impose the “risk-free rate of return method” on property investments as deductions would have been disallowed and equity would be taxed, not income/expenses. The carnage in the market the risk-free rate of return method could only be caused by having economic pygmies in charge, and New Zealand is too smart to vote these socialist leaning parties into power. Tenants can breathe easier too in that their rents will not be going up, to pay for our increased costs of a land tax. Councils will be happy that their rates revenue will not be cut from land values reducing (a 0.5% land tax had been costed at around 17% reduction in land values by Westpac’s Chief Economist).
However there is the very real risk still open of depreciation changes and potentially more and different legislation put forward in the May budget with relevance to property investors. It is likely that GST will be raised to 15% will compensation which will impact residential property investors a little bit, since residential rent is exempt from GST.
I personally predict in the May budget that there will be the following changes:
- trimming of depreciation to all buildings (residential and commercial) to 1%,
- lowering the chattels depreciation rate reductions,
- a line drawn in the sand to state that if you own an investment property for a period of time (eg. less than 10 years) and then resell it and make a profit, then that ‘capital’ gain is taxable.
We have to wait and see what happens in May next. However now is clearly not the time for making rash decisions like selling your long term buy & hold properties.