Posts Tagged ‘no new taxes’
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:
- 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.
- 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.
- 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.