Do property investors really have "tax benefits?"
As the government contemplates tax changes which would alter the tax rules for property investors, much of the commentary around perceived "tax benefits" has become misleading.
Monday, November 30th 2009, 11:17AM 
12 Comments
by The Landlord
By Jenha White
The government is waiting for recommendations from the tax reform committee which will table a variety of alternatives the government may implement to curb the Kiwi enthusiasm for property investment and balance the budget deficit, in the wake of falling tax revenues.
Mark Withers from Withers Tsang & Co says the perceived benefits of claiming losses are not unique to property investment.
"Tax benefits are construed as unique to property, but any farmer or business person in New Zealand that makes a loss can offset this against their income, subject to the structuring of their affairs.
"The suggestion that this is somehow unique to property investment is completely false," he says.
If you lose $1 on property investment by incurring more costs than you earn in rent, the maximum tax benefit is 38% of the dollar lost.
To get that 0.38c from the government you have to lose the $1 first and even then, only if you have sufficient tax paid income to offset the loss.
"Where's the benefit in that?" Withers asks.
He says the "benefits" are only a by-product of circumstances where there's a genuine loss of money.
However, it needs to be acknowledged that property investors would only generally tolerate these arrangements if they had a long term expectation of capital growth in the property asset.
Withers says people do not invest in property to create losses.
Generally they are looking to reduce debt in order to become profitable and enjoy some capital growth over time as they work towards this. Ultimately they pay tax on their profit just like everyone else.
"Where do you draw the line? Is a farm a property investment?" he asks. Many farms return losses as a result of the high interest costs on debt to purchase land, just as property investors do.
Farming losses are tax-deductible and capital gains are also tax-free "but we don't demonise them".
Withers thinks the government will choose to implement a form of land tax.
"I believe land tax is the front-runner because the tax revenue collected by the government would be extremely predictable and regular which is in stark contrast to capital gains tax."
He says ring fencing tax losses would collect more tax now but less tax in the future when losses that are ring fenced get offset against rental profits.
The government's biggest challenge in introducing land tax would be dealing with the extent to which it applies.
"Would it apply to the farming community? How about Maori tribal interests which have received Treaty of Waitangi settlements of valuable but perhaps largely unproductive land?"
He says politically that would be a big problem, especially given the need to keep coalition partners on side.
Withers believes if the government introduced a land tax at the same time as a cut in the top marginal tax rate, this may be less politically damaging.
"Introducing a capital gains tax mid term at a time when the property market is essentially flat or declining seems mad.
"Not only would it collect virtually no tax in the immediate future, it could be extremely unpopular with much of National's middle New Zealand voter base."
Withers says that his preference is that we remain one of the few western countries free of hated tax regimes like capital gains tax, stamp duty, and death duties, "but we shall see".
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"Generally they are looking to reduce debt in order to become profitable and enjoy some capital growth over time as they work towards this. Ultimately they pay tax on their profit just like everyone else."
We don't have a capital gains tax so ultimately they DON'T pay tax on their profit (their profit being the increase in capital realised when they sell the house a few years later) and that is the problem the Govt is trying to fix.
If a million houses are required in NZ, home-owners can afford to buy only 60% of them, the rest have to be absorbed by investors or other organizations, otherwise some people in NZ will have to live in doghouses or garrages. Based on 40% being absorbed by investors; then a $120 billions or more debt will be taken up. But if investors do not come in to the party, who else can do it? The State Housing probably, and at what costs -certainly more amd much more than the $120 billions, on top of that, there will be other hidden costs, admin costs, repairs costs, loss-of-rents, etc, which can run into billions$ as well!!
So, if is clear a lie has been propogated! What a lie!
The investors are providing badly needed social services, and because of that, they are penalised! What a joke! We have bunch of useless and irrational politicians! What a tragedy for NZ!!!
shock horror..that would mean more houses available for young couples at good prices..darn
the reason behind it was that foreign shares often pay lower dividends than NZ shares because foreign companies then to reinvest profits into the business which thus result in better capital gains for their investors. Shares under the FDR regime are thus taxed the on the impkied economic returns of investing in said shares.
it is set at the lower of 5% of the opening value of the share or the combination of the dividend yield and change in comparative value of the share.
se.g If the share pays a dividend of 5% or more and its price increases the max tax paid is based on 5% of its opening value.
In this instance the investor pays no tax on the gains and in fact saves tax on any dividend yield which exceeds 5%.
if the share makes a loss then the tax paid is on the combination of the actual dividend yield and the loss. so the investor gets to offset the loss against their dividend earning.
If the loss exceeds the dividend received, then tax paid is 0 and the excess loss cannot be carried forward to future years. but you start the next year with a lower base so the 5% calculation is on a lower opening figure in your next financial year.
Hugh Compliance cost? i dont think so. all very straight forward to monitor.
Perversely the FDR regime was introduced in 2007 just prior to the stock market crash so in the past 2 tax year, I would surmise that the IRD would have collected zero tax from those investors holding shares subject to the FDR regime.
this is not mentioned when the press reports on the IRD's reduced tax take.
as both a property investor and a share investor, I hate seeing one sided argument put forwarded, with each set of investors trying to protect their corner.
tax is a necessary social "evil" - if we make profit we pay our dues.
we just ask the powers that be to be fair to all concerna - do not isolate one set of investors and subject them to constant attack.
Property investors provide the housing stock that the government will not or cannot. They keep a whole lot of tradesman in employment. They are not demons and do serve a social function.
Ambiguos tax laws and poor monitoring are the source of many of the IRD's ills. Proving Intention is a big headache. Better if the law is clear and simple eg sell within 1 years, pay tax on x% of the gains, sell within 2 to 4 years, pay y% etc. it is nice and simple, weveryone knows where they stand, no need to bother with intend.
apply this across the board to ALL investment, then we wont have this constant shares vs property argument, trading vs holding ....
Second the concept of taxing the increase in the numbers for a property without taking into effect the inflation over the period is nonesense. We measure a number of things in 'real terms' i.e. taking out the effect of inflation so a capital is not a capital gain until the inflation effect is removed. This would effectively reduce so called capital gains on houses to ZERO
Goverments went away from the gold standard to allow inflation to work its 'magic' so they could line up at the public trough and then tell us that in 'real terms' it was not what it seemed.
GOOD GRIEF - GET REAL
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1. Some landlords will get out of the market reducing rental property. It is unlikely new investors will provide this and a shortage will occur, driving up rents.
2. As investors get out and sell their properties fewer new houses will be built hammering an already depressed building industry.
3. Investors will pass on the tax costs to tenants and/or future purchasers.
4. There will be no effect on 'housing bubbles' as was shown in Australia. Housing prices are dictated largely by supply and demand.
Therefore the only gain will be that the tax take will grow but will be applied to subsidise the shortgage of rental accommodation & a more-depressed building industry. Where's the gain in that? The only reason for politicians pursuing this idealism is for political objectives.