IRD confirms property investors don’t get tax breaks

The notion the tax system favours property investment is a myth, says the Inland Revenue Department.

Thursday, June 14th 2007, 12:00AM

by Rob Hosking

IRD officials appearing before Parliament’s finance and expenditure select committee were asked about the frequently heard statement that the reason New Zealand’s housing market is overheated is because the tax system favours real estate investment.

Asked by National finance spokesman what tax advantage real estate has over other forms of investment, the IRD’s head of policy, Robin Oliver, said “the correct answer is there is none”.

And as far as taxation of the capital gains on property, Oliver said if anything the tax rules for real estate are tougher than for other forms of investment.

That is because investors can have their capital gains reassessed as income and be required to pay tax on them.

“In housing, the capital revenue boundary is a brought back a bit, there are tighter rules for what is and isn’t capital gain.”

“I suppose the concern is that with housing it can be more easily geared than other forms of investment.”

“But that’s nothing to do with the tax system, that’s about banks wiliness to lend,” English said.

Oliver reiterated, “There is no tax advantage under the law and I don’t think officials have ever said anything different.”

The NZ Property Investors’ Federation welcomed Oliver’s statement, with the president Martin Williams saying, “it is good that the IRD has publicly corrected this false impression spread around by various groups over the years”.
“Many investment or financial planners have spread the view of tax benefits for rental property to advance their own desires for favourable tax treatment in order to sell more of their products.”
“Some property investment seminar presenters and property salespeople have also given this impression to help them sell seats to their events, or property.”
Andrew King, vice president of the NZ Property Investors’ Federation says that these false impressions have harmed the public’s view of property investors in New Zealand. “Many people have the false impression that rental property owners are somehow ripping off the IRD and not paying their fair share,” says King. “Clearly this is not the case as rental property owners actually provide a necessary service by housing a large proportion of our population.”
“Many people do not realise that rental property owners provide great value accommodation and this is a key reason why more people are choosing to rent.”

The IRD was given an extra $14 million, over the next three years, in this year’s Budget to enforce existing tax laws around property investment, and the main focus of this looks like being on enforcing the tax rules which reclassify a capital gain on a property sale as income – and thus taxable.

The IRD has already been cracking down on this area over the past three years.

English raised the issue of whether the extra $14 million is necessary, and whether, because both Finance Minister Michael Cullen and Reserve Bank Governor Alan Bollard have been talking about the need to use the tax system to induce a slowdown in the property market, “there’s been pretty strong political pressure on the IRD to look like its doing something when in fact its probably not necessary.”

Revenue Minister Peter Dunne responded that the change was because the IRD has responsibility for maintenance of the revenue base.

The new Commissioner for the IRD, Bob Russell, told the committee the first part of the spending would be focused on raising awareness of the tax rules.

“The increase in the audit activity will be more over years two and three,” he said.

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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