David Whitburn

Posts Tagged ‘land tax’

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.