Posts Tagged ‘capital gains tax’

Taking the Mickey Out of Property Investment

I was interested to read an article on Interest.co.nz today with Bernard Hickey’s article entitled All Aboard the Property Rort by Devil S. Advocate. It starts off with:

There’s never been a better time to borrow up to the hilt and buy property.”

Whilst it is not a bad time to buy good property at present, there is little pressure for a house price boom in at least the next two years. Therefore a return towards the fundamentals and investing for positive cashflow is prudent, which may mean keeping realistic loan to value ratios when borrowing and look at ways to create positive cashflow.  I think buying property in 2000 – 2002 would arguably have been a better time to buy property, as this was just before the largest property boom in NZ’s history which lasted until late 2007, before a large reduction in house prices over 2008 and then the Global Financial Crisis hit and there has been a recession followed by a slow and stalling economy recovery with some extremely expensive earthquakes that have devastated the beautiful city of Christchurch and left our Government’s finances in poor condition with not much room to move.

The article went on to state reasons why property is a great asset:

Interest rates are at record lows and they’re about to go lower. Europe’s turmoil is brilliant because it will force central banks to cut interest rates. This means we can all afford to borrow more and pay higher prices. Banks are also desperate to lend again, even offering 95 per cent loans.

National has just won a second term and Prime Minister John Key will never do anything to hurt property-owners. During the past three years, he has argued against anything that would have a drastic effect on land or property prices. He is particularly reluctant to force the banks into fire sales of houses and farms in case it drives prices down.

He’s also doing very little to improve the supply of land. This has the effect of pushing up prices and creating tax-free capital gains.”

That of course is mainly correct as National unlike Labour this election appreciate the fact that home-owners, property investors and businesses using their homes as collateral or direct security for their businesses need to feel safe that their property prices will not collapse. That is part of the reason why National got a strong vote and Labour got one of their worst results in their proud 95 year history. Proposing a CGT was proven to be political suicide. We need to point out the factually incorrect part of Hickey’s assertion that John Key will never do anything to hurt property owners.  National slashed our depreciation expense claims by over $40/week per property according to the New Zealand Property Investors’ Federation studies that took effect on 1 April 2011 as announced on the 20 May 2010 budget by Bill English.

Safe as houses

The statement property is a great asset is of course correct.  This is not because of European turmoil, banks or the National party winning another election to confirm its place in Government for at least 3 years. It is because having a roof over your head is a basic human need. Even in the poorest countries in the world most people still have a roof over their head.

But do people in the poorest countries in the world own their own shares in listed companies, have mutual funds, have managed funds, bonds, have bank accounts let alone term deposits – NO, is of course the answer. They do not have insurance annuities, or simple term life insurance, critical trauma policies, health insurance or income protection insurance. They will not own silver, gold, platinum, or derivative products like weather bonds with the compensation linked to a certain pre-determined weather crisis happening! The have a shelter, nothing glamorous but shelter nonetheless. Food and water are there two other basic needs and they usually get just enough of this – but certainly not always sadly.

Everyone needs a home

So everyone needs shelter – a property that gives them a roof over their and their family’s heads. Shares, bonds, commodities, term deposits, managed funds, Kiwisaver, insurance annuities and policies and derivatives are nice – but you do not absolutely have to have them to survive. Yet you will most likely die in the heat of the Saharan summer without shelter or the cold and wet of a Laotian winter in the hills without shelter. You need a property to live.

The property market is insulated by the fact that:

• home-owners dominate it (around 65% of the market – and they don’t care about return on investment, discount to valuation etc)
• it takes a long time to market and then settle a property transaction (so losses take a while to come through, yet you can lose $100,000 in milli-seconds on the FX market for example)

There is money to be made in being an accommodation service provider. That is not a bad thing. If you are borrowing well over $200 million per week this financial year and have had a sovereign credit rating downgrade, then the last thing you want to do is borrow more money.  This is exactly what you would have to do to pay for more state houses.

History is on the side of property investors

I am not saying property investment is risk-free.  There are risks and some properties have gone down in value in the short and medium terms.  There are some rare example where people have lost a lot of money in property, but when they look back they made mistakes, eg. buying houses in areas suffering massive population decline, or buying a leasehold apartment towards the peak of the boom off the plan with a really high valuation figure attached to it.

However lets look at New Zealand property investment over history. My great-grandfather bought around 40 acres of beachfront land and rolling hills 98 years ago in Eastern Waiheke Island, Auckland for £13. Unfortunately the vast majority of it has been sold over generations, however it would have been worth around $13 million in today’s money. That is the power of long-term property investment. An older member of the Auckland Property Investors’ Association bought their first rental in Auckland’s North Shore 1968 and got $45/week in rents. 43 years later it rents out at over $530/week. The property market is cyclical.  But over longer terms (a great number of years) the property market grows, and over the longer term it grows extremely handsomely.

They slowly but surely bought a property every 3 – 5 years Investment in real estate has proven itself to be time and time again an amazing performer. Even after two world wars, the Great Depression of 1929, the Global Financial Crisis at its 2008 peak, the Napier Earthquake of 1931, the Christchurch earthquakes of 2010 and 2011 the property market has stood up well.  There are too many days to count on the sharemarket where falls in price were far greater than those of the Napier earthquake, and Christchurch earthquakes. Bernard Hickey suggested that John Key would do nothing to harm property-owners.

All Governments are good for property investors

However it is not just the National party that does well for property investors. The Labour party were at the helm in the years preceding and during the greatest property boom in our nations history from 2003 – 2007.  The policies Labour had with accommodation supplements, taking people off the domestic purposes benefit onto invalid’s benefits with a recategorisation and all the transfer payments from the Government to low income earners really helped solidify the rental payments and underpin cashflow returns for property investors. So there is no point in only blaming the National party.

My conclusion

You really can Invest and Prosper with Property in New Zealand if you focus on the smart and savvy strategies in today’s market.  You should not have all your eggs in one basket, but I firmly believe and in fact am living proof that in New Zealand, property investment really is the best basket.  I would dearly love our equity markets to get bigger and better, and to have a fraction of the success of Australia’s sharemarket.  I would love commodity trading, FX trading, derivatives to be less risky, and bonds and term deposits to give a better return. However the insulation that home-owners give to the property market combined with a lack of liquidity from much slower transaction times are what makes it a far safer place in the perception of the majority of New Zealanders.

We have a general election in a week and half’s time and I want to do into further depth than my contribution to the Herald on Sunday article.  The major policies are the introduction of Capital Gains Tax (CGT) and amending the income tax laws to ring-fence tax losses (ie. prevent losses from rental properties being offset against personally derived income).

Basically the parties and their policies with likely impacts on rents and house prices are:

National Party

• Not going to implement a CGT
• No plans to implement ring-fencing of tax losses
• Minister of Housing the Honourable Phil Heatley is on record as saying Government analysis is that rents will rise if a CGT is introduced.

National party’s likely impact on the Property market if re-elected

• No impact to mildly positive.

Labour Party

• Will implement a CGT at 15% on all rental properties, holiday homes and also owner-occupied homes to the proportion it is used as a home-office
• Will introduce legislation to ring-fence tax losses on rental properties

Labour party’s likely impact on the Property market if elected

• Significant impact to rents rising, house prices will go down a bit (not a lot as home-owners are approximately 2/3 of the market in number and even higher by value).

ACT Party

• Not going to implement a CGT
• No plans to implement ring-fencing of tax losses

ACT party’s likely impact on the Property market if in a position of power

• No impact or mildly positive

Green Party

• Will implement a CGT at 15% on all rental properties, holiday homes and also owner-occupied homes to the proportion it is used as a home-office
• Will introduce legislation to ring-fence tax losses on rental properties
• Will introduce compulsory rating of home’s energy performance (HERS scheme) so older homes like many rental properties will get hit with low ratings that must be advertised to tenants and home-owners alike, creating a new industry of assessors, and an eco-insulation obsession.

Green party’s likely impact on the Property market if in a position of power

• Rents will go-up, house prices down.

NZ First

A bit sketchy on policy details from my review of their website: www.nzfirst.org.nz.  I could see nothing on CGT or ring-fencing, so have assumed the status quo.  They are however not immigrant friendly and in the research I did on my book Invest and Prosper with Property net migration figures are very well correlated the house price growth.  With Auckland being a large city of nearly 1.5 million people that is built on migration, this would harm Auckland house prices the most.

• No plans to introduce a CGT
• No plans to introduce legislation to ring-fence tax losses on rental properties
• Anti-immigration stance will hurt rental and house-price growth

NZ First party’s likely impact on the Property market if in a position of power

• Slightly negative owing to their immigration policies

Maori Party

• No plans to introduce a CGT
• No plans to introduce legislation to ring-fence tax losses on rental properties

The Maori party’s likely impact on the Property market if in a position of power

• None to slightly positive

Other Parties

I am going to New Plymouth shortly to speak to the Taranaki Property Investors’ Association tonight. I will be discussing the Labour party’s tax proposals, particularly their attempt at political suicide with the introduction of a CGT, as well as what I am investing in currently and my take on the New Zealand market and when the boom is likely to occur.

We have such a beautiful country and the Taranaki region is stunning.  I only wish I had a bit more time to go skiing there!

Labour have slumped in the latest TVNZ Colmar Brunton poll to just 27% support, a ten year low and a fall of 7% since the previous poll.  With their intentional leaks to the media, the introduction of a capital gains tax (“CGT”) was the biggest move.  This has long been thought to be political suicide and I didn’t think a Labour party struggling in the polls around 20% below National would try to introduce it.  They did and the voter backlash has been significant.

Labour Leadership Challenge Imminent?

Current Labour leader Phil Goff tried to brush it off saying “its too early” in the piece to introduce this.  I think this could be the nail in the coffin for Phil Goff with a whipping only 4 months away.  Some Labour party members think it is time for a new leader – someone hungry like Grant Robertson could put up his hand.  I don’t think that David Cunliffe will want to go into this election as Labour leader as the result is looking most damaging. No matter what left wing journalists write those that oppose CGT, they cannot change the fact that Labour is going to be decimated in the elections.  They are leaking votes to both the centre and the left (ie. Greens).

Most New Zealanders like being in a country where they can aspire to not be beneficiaries of the state, to be able to provide for their own retirements and not to be poor.  So having policies that act as a punishment for individual success and asset ownership, is not wanted by the electorate.  The true judgment day on this is Saturday 26 November 2011 in the NZ General Election.  Sadly the result will be masked somewhat by the Mixed Member Proportional (MMP) voting system we have.

Source: One News - TVNZ / Colmar Brunton Poll, 29 May 2011

Labour are struggling in the polls and are staring down the barrel at a good old fashioned whipping on 26 November this year, similar to what they dished out to a Bill English led National Party in the 2002 General Election. So they need to be a bit more radical to appear relevant. The truth is National has moved further left to become a centre to centre-right party and Act to the right of the political spectrum to National have weakened with a bit of in fighting and are only rebuilding now.  National can govern alone on current polling – a first in this MMP era.

This blog talks about Labour’s new policies and gives me take on them.  I have been interviewed by the NZ Herald and also Radio Live on this today, and suspect with NZ Property Investors’ Federation President Andrew King away that I will get more media attention to cover off the all important property investors’ perspective.

Own Your Future – Labour’s New Financial Policies

So this is the backdrop to the Labour Party’s Own Your Future electioneering.  They need to do something radical to appear relevant and to get noticed by the media.  So this afternoon David Cunliffe stated the Labour Party’s financial policies in this video below:

Labour Leader Phil Goff said that the NZ Government is borrowing $16.7 billion this year on Campbell Live (TV3) this evening, and criticised National of simply borrowing and hoping.  He then talked about Labour’s tax plans to raise Government income.  Lets have a look at what they are:

• Increase tax on higher income earners – introducing a ‘special’ tax rate of 39% for those on incomes over $150,000
• Ensure the first $5,000 of earnings taxed at 0% (ie. tax free, and this includes increasing benefits by $10 a week)
• Introduce a Capital Gain Tax (“CGT”) of 15%
• Boats will be exempt from the CGT
• A farm house will be exempt CGT, but not the farm itself
• Jewellery will be exempt from CGT
• If you are over 55 years of age and have owned a small business for at least 15 years then the first $250,000 of capital gain is tax free
• Fresh fruit and vegetables will be exempt GST

My take

Read my lips – “no more new taxes”. We do not need capital gains tax.  It is not aspirational, not necessary and surely the wrong question is being asked.  I believe that the quality of one’s life is determined by the quality of the questions we ask.  If we are asking how we (the Government) can afford to keep over-spending and borrowing $16,700,000,000 this year?  Then the answer would be increase taxes and keep all state owned enterprises, if you were in the Labour party.  Might as well bring in some refugees with no English language skills and poor health while we are there too!

Phil Goff confirmed to John Campbell that the own home is sacred and will not be taxed.  This will lead to “castle building” since own homes will be sheltered from this tax, you may as well add tremendous value to it and get a larger capital gain.

Exemptions

Exemptions are not a smart feature of a tax system.  If I invest in a start up company WXYZ Manufacturing Ltd with no capital initially, employ lots of unskilled people that would otherwise be dependent on the Government as beneficiaries and then sell it say 15 years later for $200,000, I would have to pay $30,000 CGT on this under Labour’s proposal.  Yet if I buy my wife jewellery like an expensive diamond ring for $400,000 which I sell for $600,000 giving me a $200,000 profit, then I would not have an CGT to pay.

Does this exemption make sense or sound fair to you?

Defining the farm house as opposed to the farm itself is going to fun, particularly for tax accountants and lawyers.  Boats being exempt CGT is interesting too – perhaps this is because too many boats depreciate in value, meaning refunding CGT.   With beach houses and secondary homes subject to CGT, could we see a positive for the luxury boat industry if CGT comes in!

No GST on fresh fruit and veges is a strange exemption too.  Australia does silly things like tampering with exemptions and as a result have a massively larger GST Act than we do.  Are dried apricots fresh fruit?  Are exported coconuts fresh?  Is coconut ice fresh?  Are bounty bars covered?  How do frozen peas and veges fit into this exemption?  Will retailers have to spend a lot of money complying with the act, changing their accounting and IT systems to cope with this awkward change?  I think Labour should stop thinking about tampering with a good piece of legislation and instead focus on raising the quality of life and incomes for all New Zealanders.

Envy Tax – a smile back to tax accountants and lawyers faces

So that leaves the 39% tax rate on those who have personally succeeded and earn incomes over $150,000.  This is an increase of 6%, and hardly rewards our nations most valuable taxpayers.  I think that it is unnecessary and very disappointing when many of these earners have the ability to go 3 hours west to Australia and earn more.  The lower tax rate here helps keep some of our country’s largest taxpaying citizens who we need to maintain the tax base and welfare state we have developed.  Why punish high income earners?  I think those that pay tens of thousands in tax per year, as opposed to consuming tens of thousands per year should be rewarded.  With all the healthcare, medical, pharmaceutical, diet advances and lifestyle changes we are living a lot longer, which places a great burden on the taxpayers.  With the pension age of eligibility only at 65 years of age, we just cannot afford to lose high income earners.  Also this tax will mean a lot of people become companies, partnerships and trusts and be contractors not employees, and perhaps billing their would be employer’s subsidiary companies to get around the inevitable restrictions that would be imposed.  Again tax accountants and lawyers will win.

Then again they always do under Labour.  Remember the 25% superannuitant surcharge, and differential tax rates under Labour from 1999 – 2008.  National is shortly going to strip lawyers and accountants gravy train of annual gifting $250 – $550 fees for signing a template document and IRD form to forgive $27,000 of debt off your own home (and other assets) each year in favour of your Trust.

Labour’s Policy Rating

I will be generous and give them a solid 1/10 for making an effort.”

 

Earlier this week I got back from holiday at the idyllic Otama Beach in the Coromandels.  I had a very relaxing time, but something disturbed me in the papers.  It wasn’t the article about the dangers of swimming in the ocean for fear of a shark attack.

Life was particularly stressless on Otama Beach in the Coromandels with limited cellphone coverage

Seriously there are millions of sharks in New Zealand territorial waters and there have been millions of swims and swim hours without a shark attack.  I know a bit more than this than most having my second degree at a Bachelor of Science majoring in biology, where I did a number of zoology papers, including marine biology.  I was lucky enough to have tuition from two amazing individuals Professors John Montgomery and Scott Baker, and being able to spend some quality of time at the University of Auckland’s Leigh Marine Laboratory (the ‘marine campus’) about 100km north of Auckland.  I loved my time there and thoroughly enjoyed studying for my BSc (usually more than my law degree in fact).

More New Zealanders get hurt by getting out of their parked cars, than by shark attacks – maybe we need an article on that!  Getting to the subject matter of this article and what annoyed me, was the series of articles run in the NZ Herald where tax lecturers in the University of Auckland’s commercial law department, Craig Elliffe and Chye-Ching Huang, proposed the introduction of a Capital Gains Tax. They built upon the ideas set out by columnist Fran O’Sullivan in the NZ Herald article Ten ways to beat our snowballing debt, published on 9 December 2010.  Whilst I agree with most of Fran’s ideas, I didn’t like item 5 – introducing a capital gains tax or a land tax.

Elliffe and Huang wrote about how this is a great idea to help reduce Government debt and that it is fair and equitable to have a new tax, and this would not distort investment choices adversely.  They were disappointingly emotive in stating that having a capital gains tax would help save New Zealand from ‘fiscal suicide’.  Despite being respected academics, particularly Elliffe who has worked as a tax partner in a leading commercial law firm (Chapman Tripp), they have conveniently forgotten that New Zealand’s mountain of debt is mainly not government (or sovereign) debt.  In fact New Zealand is an outstanding performer globally when compared to most other countries around the world. Below I have included a graph from visualeconomics.com so you can see where the real debt issues lie.  Like Australia and China, we have low levels of public debt.  The countries in the red zone (just look at Italy, Japan and Zimbabwe) of the following graphic are the ones with a debt problem.  As a country we are in the safe dark grey zone with Government debt at (considerably) less than 30% of GDP.

Cut Government Spending

I don’t think for a minute that it is smart for our Government to borrow $300 million each and every week.  This figure has gone up over the past year as the tax take reduces, and we have more pressures for Government spending.  Whilst there have been arguments made about the ballooning of credit that we used for investment properties, farms, credit cards over the past decade, we clearly have a spending problem at the Government level.  So instead of increasing Government income by raising taxes, which makes things tougher for people choosing to work and striving to get ahead, we should consider something even simpler.  We should just cut Government spending.  After all how prudent is it to run a household that spends a large percentage more than what it earns, and plans to do so for over 6 years?  In our electoral system we voters have the chance to elect Governments and we are supposed to tell them what we want, and they as our servants (hence the term public or civil servants) carry out these tasks for us.  Do we want to borrow several billions of dollars every year until 2016 and create a noose for the taxpayers now, our childrens’ and grandchildrens’ generations in terms of servicing the interest on this debt?

That is not a New Zealand I want to life in.  So why we persevere with a universal pension at 65 years of age, when the statistics show that we are living much longer healthier lives in general, and that we can’t afford to keep funding it is beyond me, but for one thing – fear of being turfed out of Government in this MMP consensus style of politics with a very short 3 year electoral life cycle.

How else can we cut Government spending?  Let me give you just a few of my ideas to explore further as this is already a long blog:

• Cut the number of MPs down to around 80 people
• Cut MPs perks and benefits
• Cut the entourage MPs have
• Change the Electoral Act to have a longer term of Government (4 or 5 years) to encourage longer term thinking
• Dispose of MMP and its costly consensus based politics (foreshore and seabed anyone?)
• Reduce central government bureaucracy
• Reduce local government bureaucracy (including the sheer number of civil servants and focus on customers needs, not council’s needs)
• Sell non-core Government assets that have a poor return (on asset value – eg. Power Companies, Accident Compensation Corporation)
• Make the benefit system a hand up not a hand-out (remove the ability to choose whether you work or not)
• Question the doctors who certify people (including a past tenant) as medically unable to work, except they can lift kegs of beer with their “severe back injuries” and go fishing, and put an end to those vast numbers of people rorting the costly invalid’s benefit (note the sickness benefit is the temporary and short term one)
• Raise the tax on cigarettes so they cost at least $25 per packet (that will stop a great number of smokers and therefore save a lot of money on our pressured healthcare system)
• Ditch Working For Families
• Cut the silly subsidies (did billionaire Sir Michael Fay’s daughter need a $50,000 NZ on Air grant?, revisit the SuperGold card free trips to Waiheke Island subsidy, having TVNZ + TV3 + Maori TV bid all subsidised is rather ridiculous and put the bid prices up for the International Rugby Board without any additional benefits to NZ taxpayers – we could watch private broadcasters TV3 for free or even pay for the Sky Sport service for 2 months)
• Cut spending on tertiary education (but maintain the student loan scheme)
• Charge interest on student loans
• Don’t let people leave NZ until they have paid off their student loan (as chances are you will not get it all back)

No More New Taxes

We need another tax, like Rafael Nadal (world number 1 and holder of 9 grand slams at just 24 years of age) needs to be told how to play tennis.  The idea of a new tax really offends me.  It smacks of arrogance and a neanderthal like ‘big Government is good’ mentality without really thinking about it.  Do we really want to live in a country that seeks to strongly impact on an individuals liberties and intrude further on their personal freedoms?  Do we want to run the risk of more good Kiwis going overseas?

Lets encourage and praise those that want to make a better life for themselves and not be dependent on the Government for hand outs. Lets salute those patriots of New Zealand who own assets and contribute from paying for returns on those assets (eg term deposit holders in taxes on interest income; rental property owners in taxes on rental income and land rates; home and secondary property owners who pay land rates; share owners/managed funds/Kiwisaver funds who pay taxes on dividends etc).

I want to live in a New Zealand that rewards those who receive income, pay tax on this income and don’t spend all of their net income, so they have this money left over to built their asset base.  That is after all how I like thousands of others of New Zealanders have built our property investment portfolio and retirement nest egg.  It is a simple fact of life that many older New Zealanders don’t want to or can’t manage or don’t want the additional hassle of having ownership of their rental properties as the move into their 70s, 80s and 90s, so they sell them.  Sometimes proceeds are used to pay down or pay off debt, at other times term deposits are created.  Some even invest in high yielding shares.  Again these asset owners are making income which is taxable, to help Governments of the day, and they are far more self-sufficient than most Kiwis that own no assets.  So why is punishing these people with a capital gains tax a good idea?

Impact on Housing New Zealand?

Also if there was a capital gains tax in New Zealand, I wonder how many people would invest in Australia (that has a Capital Gains Tax with some exemptions).  Australian cities and towns have a higher capital growth rate than that of New Zealand over the years and they have a higher population growth forecasts than other New Zealand cities (apart from our financial hub Auckland).

With New Zealanders investing in Australia, how much pressure would this put on Housing New Zealand to borrow more money to buy houses for our nations poorest individuals?  This social aspect of property investment is an invaluable one and is often overlooked.  It has not been taken into account by Elliffe and Huang again either.

Raising Government income by its own means?

If it was not politically achievable to cut Government spending that is disappointing.  However we could always have fun like other Governments are doing with interfering with money supply, eg. quantitative easing (money printing) or do what we have already done and get our Reserve Bank back into trading the New Zealand Dollar to suppress it to help our exporters for an export led recovery, and to make billions of dollars in FX gains.  Baring disaster there will be pressure in 2011 for the Pound (GBP) to hit 0.5000 vs the NZD, and for the US Dollar (USD) to hit 0.8000. The Reserve Bank can buy some of these currencies when our dollar is high against them, and sell them as it gets low.  Other countries do this too – why can’t we?  New Zealand needs a capital gains tax as much as we need the plague to strike us.

PRESIDENT’S REPORT FEBRUARY 2010

Happy New Year and Decade everyone. We trust your are all enjoying another beautiful Auckland summer and are back into the groove. The Auckland Property Investors’ Association (APIA) has a great line-up of speakers for you again this year, and we are planning a special seminar for May this year too, that will be highly topical and popular. We had a large February Keynote meeting and an outstanding presentation with Dean Edgerton, Director of Markets from ANZ National Bank Limited. Dean heads the dealing room of New Zealand’s largest financial institution and was able to shed light on interest rates and their likely direction, and cover why long-term interests are so much higher than floating and shorter term fixed rates.

Market Review

It felt like 2009 went quite quickly, and it certainly was an interesting year for property investors. For Auckland properties we saw rents increase healthily in 2009, particularly in the mid-high socio-economic areas, yet some areas were hit hard by unemployment and towards the end of 2009 a tougher approach by Work and Income New Zealand. Our property values, recovered nicely from the doldrums of 2008. Whilst history provides no guarantee of the future, it can show trends and give strong indication of future direction. So lets take a look back at the decade to see what happened to house prices. In December 1999 the median sale price in Auckland was $235,000, and we closed out the ‘noughties’ decade in December 2009 with our city’s median sale price being $476,500. This represents a 103% increase in capital growth, or an average annual capital growth rate of 7% across the region as a whole. Over the decade the values of residential properties (this excludes residential sections and commercial properties) traded in the Auckland region (through real estate agents) was a massive $125 billion dollars.

So you can see property was a great investment over the decade, and the Auckland Property Investors’ Association was proud to assist you in your decision to take responsibility to become financially free, and to help make decisions that will assist you plan your own retirement – and in many cases we hope an early one! We look forward to servicing your needs and providing a platform for networking with you for another decade.

Tax – The Topical Issue

Normally tax is perceived to be pretty dry and boring, and an area reserved for mega geeks in grey suits with white shirts and black suitcases with packed lunch where they toddle off to work each day, come home, read some legislation, case law or tax information bulletins and then they go back to work in their grey suit, white shirt with their packed lunch and repeat this every day. I know as I used to be a full time tax lawyer working at Big 4 Chartered Accountancy firm Deloitte and then at leading law firm Russell McVeagh, before I saw light of becoming a property investor and immersing myself into the market. However times have changed and tax is cool once again. I can say to my many friends who are tax lawyers and accountants, that tax is very interesting, and highly topical. For many APIA members 2008 and 2009 were tough years. Some members have sadly even hit the wall being smashed in a high tide of debt as the property price wave crashed down upon them. Other members with lower gearing and sound management systems however thrived and been able to put their rents up and found respite with interest rates coming down from cyclical highs and property values recovering last year.

There was keen interest in the property market this summer, but this changes when the Tax Working Group published its findings on 20 January 2010. The relevant recommendations to property investors are:

1) Raising GST to 15% or 17.5%
2) Imposing a Capital Gains Tax on all properties, or excluding owner-occupied housing
3) Imposing a Land Tax at 0.5% of the property’s land value
4) Imposing a Tax on the net equity investors have on their properties (assuming a 6% return on equity invested, and investors would ignore rental income and all expenses, as only the equity invested is relevant) – thanks sharemarket CEOs/fund managers with vested interests recommending this market killer.
5) Removing depreication on buildings
6) Removing loading on new assets
7) Bringing the top personal tax rates down, to be the same as the company and trust tax rates (ideally all at 30%, with perhaps the company tax rate being even lower depending on what Australia do)

These recommendations were praised by the usual suspects that despise residential property investment including the Gareth Morgan (Fund Manager of Gareth Morgan Kiwisaver & Economist), Mark Weldon (NZX CEO & chief cheerleader of NZ’s long suffering sharemarket), Bernard Hickey (interest.co.nz) and the Green Party.

However we had mostly good news last week with Prime Minister John Key’s opening address to NZ Parliament stating:

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,”

So it appears that there will no land tax, no CGT or that ridiculous and market annihilating risk-free return method imposed on us. However Key said that the Government will “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.”

What this means for investors:

It is reasonably good news now with no Capital Gains Tax, Land Tax or Risk-Free Return Method being applied. But still the Government thinks “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 would vehemently argue against this as only in 2 of the past 28 years did the Government make a net loss on residential property investment. The 2008 income year was used by the Tax Working Group and that year had cyclically high interest rates (floating rates all above 10%, most fixed rates exceeding 9%) and peak prices in the cycle. Unfortunately the Government do not seem to understand this and are not listening to us. It seems that our depreciation claims will be slashed. It is likely that there will be a 0% rate of depreciation for building structure (residential and commercial), just like land! This is a little absurd. We have members with leaky buildings in their portfolio – try telling them that their property has not depreciated! It is likely that the 20% loading for new assets will not be there either. So we need to wait until May’s budget to find out exactly what is happening. I think members should wait and make an informed decision and not make a hasty decision that is later to be regretted to sell their property.

If you are not impressed about these changes, remember the politicians are their to serve us, and they need our votes next year. So consider lobbying to protect your rights. Do what some other members and I are doing and contacting your local MP. Otherwise email your own personal letter to Prime Minister John Key, Finance Minister Bill English or Revenue Minister Peter Dunne.

David Whitburn LL.B BSc
Vice President
Auckland Property Investors’ Association (Incorporated)

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,”

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.”

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.

With the Government’s finances again struggling and the typical time old resentfulness against landowners and people that are deemed ‘wealthy’ by those that aren’t, there are some new taxes that various commentators and media sources are talking about at present.  I have a fundamental objection to new taxes being imposed as they are just unnecessary and not what a remote country trying to compete for international investment, and to keep its most productive citizens in it as opposed to flooding Australia and the United Kingdom with tens of thousands of our finest people.  In addition I know that residential property landlords provide valuable service to the country in easing the burden of housing the country’s poorest people.  Housing New Zealand can’t do it alone – that would require the Government to borrow even more money offshore to purchase new houses to ‘rent’ out.

Therefore I take huge issue with the Tax Working Group’s general agreement that the “glaring hole in the current tax system is the rental property sector”.  They are currently considering:

1. Capital Gains Tax (CGT) - this is a tax likely to be imposed on all properties apart from the family home.  It would likely take the form of being a %age tax on the real (inflation adjusted) gain made when a property is old.  We are unlikely to see that anytime soon as John Key and Bill English have ruled CGT out on various nationwide media sources this year, and restated their promises not to impose it before the next election in 2011.  This tax has been acknowledged by the Inland Revenue as being administratively inefficient and difficult to administer.
2. Land Tax - attractive on the basis of the large value of land in NZ at $450 billion.  This is inequitable as it taxes the wealthy.  This tax is liked as land is immovable.  If an own home exemption applies – then this will encouraging having large and expensive own homes (for the wealthy), as opposed to the more productive investment and public service of residential property investment, which also helps ease the burden on Housing New Zealand in housing the very poorest New Zealanders.  At a tax rate of 1% on land value every year, this is forecast to wipe out 16.7% of land values immediately.  The lenders are also understandably not keen at all about the prospect of this happening, as it would erode their security, cause several clients to breach lending covenants, and lead to them losing more money (with loans defaulting and not being able to recover their security, and not lending as much on the reduced security value).  In addition this would absolutely smash the hoards of people that get no or very little cashflow from their land, eg bach owners, older people with their investment properties helping out family members, church, community and charitable organisations that own land for their various activities etc.  In addition it is simply put, a spiteful tax, created out of a jealously and is a tax an aspirational country like New Zealand should not entertain having.
3. Risk Free Rate of Return Method (RFRM) - this is a method that will tax the net equity in properties.  A figure of 6% has been brandied about and it would mean no accounting for repairs & maintenance, depreciation, mileage, property management fees and other expenses – it would simply tax the net equity (council value of your property less total amount of loans secured against each and every investment property you own).  My concerns are that this would lead to increased borrowings when we are trying to deleverage and be safer, lead to pressure on high valuations being given and gearing as high as possible so the deemed equity amount against the council valuation (often lower) will be very low or possibly even negative, meaning less tax to pay under the RFRM.

I think that it is unnecessary to add in these taxes.  In my opinion it would be better to reduce Government spending and to keep rents down for New Zealanders, and not have the Government buying houses when the private market can afford to do this.  The rental property sector used to pay a lot of tax in decades and years gone by.  It is only this last boom that has changed things.  We should be looking at how this has changed, and what has happened is that values have doubled yet rents have typically only done up 30%.  Many investors have been gearing up and purchasing more properties, which have lower yields.  With council rates, levies and development contributions being imposed there have been a great number of increased costs on property investors, as well as higher depreciation claims on the basis of higher capital property values.  With inflation putting up rents and repairs & maintenance expenditure, there have been a great number of very real costs on property investors, meaning the actual cash that we are making is not great.

When it comes to housing the population of New Zealand, with around 1/3 of New Zealanders renting, someone has to do it.  Residential Property Investors fill that need.  Sure there are a significant number of dishonest people renting their own homes, or being fancy and renting their ‘investment property’ out to their great friend on a long term basis, while their great friend ‘incidentally’ rents them out their home on a long term basis too.  Whilst the Taxation Review Authority has ruled that renting your own home to yourself is tax avoidance, I would also argue that renting your investment property to your great friend, and a rent back arrangement from them back to you, is just a little bit too cute, and is also tax avoidance.

The Solution – thin cap interest deductibility

Instead why don’t we consider keeping things simple and not impose any new taxes.  Lets instead encourage safe and prudent lending and instead only allow tax deductibility of interest on residential investment property loans of up to 65% of their council (government) valuation.  With so many investors being more heavily geared than this will mean that they cannot deduct all of their interest.  A property schedule could be filed in addition to an annual income tax return to state the investment property owned, its latest valuation and the loans against the property.  This would keep the banks happy as it would not encourage reckless lending, but also give hope to homeowners and investors with smaller deposits as they can borrow more (if the banks let them), just not deduct all of the interest.  It would be interesting to see the exact numbers done on this.

In the event that this was not enough, Government spending should be cut further (perhaps trimming the size of Parliament down to 80 MPs for a start), reducing the number of civil servants and Government contractors strategically, and consideration of trimming the depreciation rates (particularly removing the loading on new assets which does give the construction sector a mild boost, but is just not necessary).  Our depreciation regime is amongst the most generous in the developed world – lets be honest and say it was fun while it lasted, but it is time to get more accurate and to get the system right.

New taxes are not the right way forward for New Zealand.  Better enforcement of LAQCs with big losses filed in the past couple of years would be a great start, tweaking the depreciation rules and only allowing interest deductibility to loans of up to 65% of a property’s government valuation, would be how I would do it.