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Posts Tagged ‘Tax Changes’

Finance Minister Bill English (National Party) has just revealed the Government’s 2010 Budget.  It proposes a number of changes, including the biggest tax reforms since GST was first introduced and other tax rates slashed 25 years ago (under the Labour Party).  These were designed to make the tax system fairer, lift income levels and address long standing economic weaknesses.  Bill English stated:

It continues the Government’s focus on getting long-term, sustainable growth and shifting the economy away from borrowing, consumption and government spending and back towards saving, investing in productive areas and exporting.”

Key Changes from Budget 2010:

• Personal income tax cuts across the spectrum, as below:

• Increasing the GST rate to 15% from 12.5% from 1 October 2010, as expected, and unlike when the Labour Government raised GST by 2.5% 21 years ago, with compensation to beneficiaries and super annuitants as pointed out by Prime Minister when he reminded Phil Goff of what he did as a Cabinet in that Labour Government 21 years ago.
• Reducing the company tax rate to 28 cents from 30 cents from 1 April 2011 (start of 2012 income year).
• Reducing the PIE tax rate to 28 cents, increasing incentives to save money for retirement to reduce dependence on the Government
• Property investment losses can no longer be claimed by those looking to reduce their taxable income to claim Working for Families.
• No depreciation on buildings with a useful life of more 50 years or more (which is the vast majority of rental properties) – ie. 0% depreciation rate on building structure.
• Businesses and Property Investors (building or replacing assets) will no longer be able to claim the 20% new asset loading (accelerated depreciation) on new plant and equipment.  This change will apply to assets purchased after budget day.  Note that the old rules will continue to apply for assets purchased before this date, so you can continue to claim loading.
• Changing the rules for Loss Attributing Qualifying Companies and Qualifying Companies as they apply to property investors, so they are taxed like Limited Liability Partnerships (ie. limiting the amount of a loss that one can deduct through a LAQC in any given financial year to the amount that the shareholder has invested in the LAQC. The balance of the loss would then be carried forward to future financial years.)
• Commercial fit-out depreciation rule changes (details yet to come)
• Changing the thin capitalisation rules for foreign entities who have loaded up their local subsidiaries with a lot of debt, meaning they will have to reduce their interest bearing debts and pay a whole lot more tax in New Zealand.

See http://www.taxpolicy.ird.govt.nz/sites/default/files/2010-sr-budget2010-special-report.pdf for a Guide to the Tax Changes Announced in Today’s Budget.

Tackling Government debt

The Finance Minister reminded us that we are currently borrowing $240 million each and every week to fund Government over-spending, and the interest servicing bill is going up as a result.  Unfortunately we are going to need to borrow more.  This means our net debt as a % of Gross Domestic Product will be nearly 30% in 2014.

This is then projected to go down to an extremely manageable 14% of GDP by 2024, assuming at least a decade of disciplined spending – which will be a challenge as history shows us exceptionally few Governments last over 9 years, and the Labour Party has a strong history of overspending, or as John Key said today ‘spending and hoping’ for things to get better.

Look at the graph below to see the forecast and projected Core Crown expenses as a % of GDP.

Source: NZ Treasury 20 May 2010

My thoughts

On the whole I think that this budget is fine.  Investors lose the ability to claim on building structure (I don’t like this as I do believe commercial and residential properties in fact depreciate – just with high variance amongst properties).  However we are still able to depreciate separately identifiable items (chattels) like curtains, carpets, heat pump, letterbox, which is fair.  In addition any repairs and maintenance expenditure and items under $500 in value are tax deductible.  So if you have to repaint your window sills and fascia, like I do on 1 of my houses before the full force of winter sets in, this will be tax deductible as repairs & maintenance.  In fact it may be smart to spend money on things that need to happen before 1 October 2010 when GST goes up 2.5%.  With tax losses not completely ring fenced I consider that there will be no major fall in property prices as a result of this budget.

As an update to my blog on the evening of Anzac Day, the poll on www.billenglish.co.nz has got a lot busier.  The news for the Government is not good with 79% of respondents (at 11:45am on 27 April 2010) voting NO – I do not support tax changes to property.

The big "NO" vote: from 64% to 79% in one and a half days

Perhaps unsurprisingly I am one of these voters.   However I am pleasantly surprised at the number of people voting at 1,710.  Dr English should take a lot at the plethora of comments in relation to his poll.  There is some really interesting feedback there, including from former Deloitte Consulting Partner Paul Kane, and a number of investors in not just property.

Focus on the real issue – the NZ Government Overspending

I am not impressed at the Government losing around NZ$240 million each and every week and the fact that we are forecast to lost over NZ$10 billion per year for nearly 6 more years!  We raise this money typically on the Global Debt Market.  It is interesting to note that New Zealand is a ‘company’ listed on the New York Stock Exchange (see our SEC financial statements).  Looking at how much our debt is on the Reserve Bank’s C3 Aggregates is a bit frightening.  It is $205 billion dollars!  Someone has to service this debt – guess who that is?  Of course it is us, as New Zealand taxpayers. And we will be servicing this debt for decades to come.

It is time to cut Government spending now.  Dr English’s knows from Inland Revenue that around 10,000 property investors have tax losses and then use Working For Families tax credits – this must stop.  But why not get rid of this middle class welfare and Government dependency that Labour introduced towards the end of its 9 year long reign of overspending?

Friends in MFAT and Government departments in Wellington (including the big ones of health and education) say numbers of staff can be chopped, and there is a perception that it is far “cruisier” to work in a Government department than for a private commercial entity.

Private companies and individuals are making big cuts – shouldn’t our Government be doing the same?

In a fascinating development since my last blog, the Minister of Finance put up a poll on his own website at www.billenglish.co.nz asking:

Do you support tax changes to investment property”

The interesting thing is that out of 863 votes at 7:07pm Sunday 25th April 2010, that 548 people voted no.  That’s a massive 64% of the total vote.  Whilst this poll has a small sample size and cannot be said to be scientific like most web polls, even with a massive margin of error of 13.9%, it would still have more people not supporting tax changes to investment property.

64% of voters do not support tax changes to property investment

This is a very interesting result indeed as this Government doesn’t want to do something its followers don’t like.  National cannot govern alone, and with ACT not guaranteed to win Epsom or get the magic 5% threshold in next year’s election, nor the continued support of the Maori party – I view that the Minister of Finance may have to retract his words he mentioned on NewstalkZB and just keep the tax changes to 1 thing only, depreciation.  This vote is an indication that these tax changes are going to be unpopular policy – obviously to the many tens of thousands of property investors New Zealand has.

So why don’t you have your own say at www.billenglish.co.nz before the poll closes.  I will continue to monitor developments in the lead up to the all important 20 May 2010 budget with the legislative sword looming over property investors heads.

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.