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TWG got it wrong

The government has said the Tax Working Group's (TWG) predictions on how much revenue could potentially be collected from tax on the property investment sector was too radical.

Thursday, March 18th 2010, 4:16PM 19 Comments

by The Landlord

Finance Minister Bill English is talking down the size of the tax package for the May 20 Budget, saying Treasury analysis was finding a smaller contribution available from rental property tax changes than was estimated by the TWG.

The Victoria University-led TWG reported in January that up to $1.3 billion in tax could be raised.

 "As (the Treasury) has done more work, their estimates of revenue have tended to come down," English said today.

Although English did not put an exact figure on the amount of tax Treasury predicted could be gathered, he said it was "significantly less than the TWG suggested".

"The trade-offs are a bit tighter," he said of the capacity to use money raised from ending depreciation allowances on rental property to help fund personal tax cuts and offset an increase in the rate of GST to as much as 15%.

"It doesn't make any significant difference to the tax policy issues", which boiled down to lower than desirable effective tax rates for many rental property owners.

Vice president of the New Zealand Property Investors Federation (NZPIF) Andrew King says property investors should be pleased the government is doing its own research into the TWG claims.

"It's great the government has actually started to look critically at the information the Tax Working Group put out," he says.

"Although we never saw the exact workings, we couldn't see how they could get $1.3 billion and assumed they had taken into account commercial as well as residential."

He says the $1.3 billion could also have been calculated on getting rid of chattel depreciation, as well as the depreciation on the building itself.

King says the NZPIF never had a problem with the government, but rather the TWG and its obvious use of mis-information.

"If the government is given wrong information they will make the wrong decisions.

"The truth is starting to get out."

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Comments from our readers

On 18 March 2010 at 5:08 pm Sean said:
It will be interesting to see what this ends up meaning for property investors. Free markets are dynamic and balance themselves out so any negative impact in the way of tax changes for property investors will result directly in rent increases for tenants. Negative tax changes will result in investors leaving, being forced out of or not entering the market. The result will be supply decreases, rental demand increases and as a result prices (rents in this case) increase. Simple economics. I'm a substantial investor and I'm relaxed.
On 18 March 2010 at 9:12 pm Peter said:
Sean is exactly right. The Tax Working Group was loaded with persons with a vested interest in trying to stop property investment - sharebrokers, and academics. The Government, as usual has got it wrong, and in the end will be forced to prop up (even more) low income families who cannot afford higher rents brought about by the tax changes. Within a year there will be an outcry about affordable housing.
On 19 March 2010 at 7:31 am Bruce Fuller said:
Before announcements that are bound to cause controversy and upset people are made, they should be better examined first. In many instances people who think they may be effected change their planning. This current nonsense is ill conceived - a dogs breakfast.
On 19 March 2010 at 8:43 am Geoff said:
Common sense should prevail here.

My understanding, and I am no expert is the depreciation rules were introduced to encourage the private sector to invest in rental property , to help reduce the housing burdon upon the state and every tax payer. Remove this crucial benefit, and investors will be pushed to down size or leave the market for good. The on flow will be billions of dollars required from the NZ tax payer to purchase new state owned property.
The Govt wants to encourage investment in the share market to boost companies, hence jobs, one small step would be to make kiwisaver compulsory.
Another to take the funds from the cullen fund and invest in new govt backed infastructure bonds, so we can accelerate big projects & improve productivity sooner, and do so with private investment also, to reduce the liability.
Singling out residential investors and putting more financial burdon on them in a reccesionary period, is not a good move.

NZ has a large number of industries & thousands of jobs involved in the housing market, & we need stability in this sector not booms & busts.
Long term stable Monetry policy would help here, & provide confidence to local & overseas investors to invest again.
The NZ Govt needs investors, not the other way around.
On 19 March 2010 at 8:47 am Peter said:
Sean is right on the money. Changing taxation rules is risky because it can have unintended consequences. Rather that targeting a particular sector (and therefore distorting the economy) the government should focus on aligning and simplifying taxation rules across the board. The need for housing in growth areas like Auckland is only going to rise and the government should not be trying to chase private investors out of this market.
On 19 March 2010 at 8:50 am ManNG said:
Is the Gov't not wasting tax money? Using the wrong people to `advise' it of important policy issues? Obviously, these people are hardly qualify for the job; they don't even understand the dynamics of social equilibrium? Even worse, rampant use of misinformations!!! Isn't it a sad day for all New Zealanders that we have such undertakings that affect our life and livelihood???
On 19 March 2010 at 8:59 am Brian said:
News flash guy's the Government is funding renters through the depreciation on landlords properties. And I doubt the landlord of those properties that have significantly increased in value have been passed these gains on to the renters. They have probably just purchased a flasher Audi.

Don't be soo blinded by your personal circumstances to got see a grater picture to this. You point your finger at others for their personal interests, but 3 of your won fingers point back at you.
On 19 March 2010 at 9:08 am Clint said:
I think you will find the whole TWG debarkle was a white elephant designed to scare monger via the media to slow the then fast recovering property market. Essentially they (Govt) never had to actually implement any form of property related tax changes, but simply indicate there were looking at doing so to have the desired effect at slowing the pace of investment in property. It is fair to say they have been successful.
On 19 March 2010 at 9:49 am John said:
I must be missing something. I thought that although you could claim depreciation on a rental property, you have to give it back upon selling. So how could the Govt save any money by eliminating this? However, agree very much with what Geoff says.
On 19 March 2010 at 9:53 am Gerard said:
Peter (and Sean), you obviously both have a vested interest in the property market. You are correct though that tax rules can distoret the economy, at present they distort the attractivness of the propoerty market. So many property investors see themselves as business people and yet if the property market played by the same rules they would not invest. To invest in a "business" to make a loss is nonesense. As for your scaremongering about increased rents and unaffordable housing, thats just one sideded rubbish. If investing in housing suddenly becomes uneconomic because you lose your tax advantage then many investors will sell. People (by inlarge) makes rational decisions, this is why so many invest in property, it's just so loaded with advantages that other areas don't have), change those rules and in reponse people will make new investment decisions (rationally)to maximise their advantage. This could certainly reduce the number of rental houses available, but at the same time push house prices down in the very market we need to be affordable. Apart from Brian, you are all clearly one eyed property junkies who are going to lose their special tax advantages and aren't prepared for it. Lets hope Clint is wrong and Key and English don't whimp out on these changes, the country needs this to happen. Yes the changes will hurt some people, but the market will find a new equilibrium and NZ will be better for it.
On 19 March 2010 at 10:12 am Chris said:
All interesting stuff - as I understand tax laws were changed some 17 years ago to encourage NZers to invest in property to fund their retirement years. We have an ageing population and in fact Govt stats tell us by 2012 there will be only two workers per superannuitant, hence those tax law changes years ago to make property investment attractive to NZers to enable them to invest for their own retirement. Should tax law changes make investment in property (the only option we have in NZ with real growth for retirement) then government is still left with an ageing population that it will not be able to afford to pay super. The May Budget will be interesting to say the least but I do agree with comments above - why are we tax payers paying huge consultation fees to experts who are not looking at the big picture!
On 19 March 2010 at 10:51 am Matthew said:
The only way to make the tax savings the government needs to help fund personal tax cuts is to ring fence rental losses. It's a no-brainer. Stopping depreciation is immaterial as the bulk of many landlords' rental losses come from interest expense. If these losses can't be applied against other tax paid income then no more refunds.
On 19 March 2010 at 11:03 am Sean said:
Thanks for the news flash Brian on depreciation benefits. Landlords pass on the shortterm benefits of depreciation claims in the way of lower rents. This is a shortterm benefit only as depreciation claims are eventually clawed back by the IRD when the property inevitably sells at a higher value and the building has generally appreciated. Moves to get around this with a smart valuer border on tax evasion and aren't worth the hassle. I paid back $10k in depreciation the year before last when restructuring the ownership of a property.

Gerard you make some fair points but you need to be aware that the key driver of property values is net migration not taxation policy. Yes not just in NZ but globally. Any reduction in property values due to taxation changes will be very short lived and not impact longterm affordability there is bigger picture stuff at play here that non of us will ever influence. Your comment regarding property being loaded with advantages (tax advantages I assume as this is the topic) is not supported by experts on tax. Robin Oliver, Deputy Commissioner of the IRD pointed out to a govt select committee in 2007 that rental property has no tax advantage over other investments or business. The view that there are significant tax advantages in property investment is a common misconception fed by the media and ill-informed. By the way talk of increased rents due to potential tax changes is not scaremongering its just econonics 101.
On 19 March 2010 at 11:26 am Jim said:
The most obvious distortion in the present tax regime is working for families rebate. This rebate is being rorted by all sorts of people it was never intended to cover. If the Government does nothing else it needs to tighten up who can claim this rebate or better still dunp it altogether
On 19 March 2010 at 12:53 pm anita said:
well, well, I read with interest and must say, as I have said before, the property investors were never/still aren't the problem, the problem is solely with government spending and the beneficiares. I have to work so should they. Another point: the banks have kept quiet, they are equally to blame with their still high interest rates in some cases - my next wish is to sort them out!!! Sure reduce depreciation to half and with reduced bank loan interest rates, the government in turn will start collecting more revenue, that simple!!!
On 19 March 2010 at 1:21 pm Lex said:
This is yet another bogus attempt by the Govt to claw in some of the votes from the left to stay in power. Consider how many rentals those in power own and how much they would lose. When push comes to shove, I think the Govt will bail and the change will either not happen or it will be so small that it won't be of real concern to us. If there is a reduction in my investments due to Govt decree, I will do as most Landlords and increase rents to cover the loss.
On 20 March 2010 at 5:48 pm Chris said:
> increase rents to cover the loss.
Rubbish. Landlords charge as much rent as they can, ie as much as the market will bear. It is not as if they aim for whatever return figure and are content to just charge a rent that is enough to yield that.
On the other hand, fewer investors means fewer rentals, but also less pressure on house prices thanks to fewer buyers. If rents were to go up and houses prices to go down, guess what woud happen?
Longer term, I tend to agree with Sean though, net migration vs building will dictate the prices more than anything else.
One thing that propery investment has and stocks or other investments don't have is that you can invest the bank's money. For all the banks' talk about shares being great in the long run, they will not lend you a cent against them. If the banks don't believe in the shares they sell, why should we?
That is *the* reason property investment is popular, not supposed tax advantages or other voodoo reasons.
On 22 March 2010 at 1:52 pm John - Cambridge said:
I own a large number of residential rental properties as well as some commercial. I also develop property, some of sale and some to keep. The tax changes don't concern me at all. If one invests for the long term the cash flow effects of possible tax changes and negligible. If some investors sell their investment properties and less investors get into the market there will be a shortage of rentals and rents will go up, economics 101. Once again its the little guys, the people who haven't bought their first home or investment property who are going to pay the price.
On 24 March 2010 at 2:22 pm Mark said:
@chris
"Landlords charge as much rent as they can" - they are actually limited to what they can charge because if it is deemed to be over "fair market rate" by the tenacy tribunal they have the power to reduce it.

"One thing that propery investment has and stocks or other investments don't have is that you can invest the bank's money. For all the banks' talk about shares being great in the long run, they will not lend you a cent against them." It's called margin lending and is a relativly common product from banks. They won't do it for complete share newbies and you do have to put up a min of 20% up and prove you can pay if you loose the lot, they won't do it on all shares but you can still do it.

https://www.asbsecurities.co.nz/section55.asp
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