Treasury says tax system out of kilter

The New Zealand tax system is unfair and creates the wrong incentives for investment, particularly in the property sector, says Treasury Secretary John Whitehead.

Tuesday, April 6th 2010, 3:00PM 8 Comments

by The Landlord

In a speech to the New Zealand Institute of Managers, Whitehead said the department thinks the tax system is unfairly weighted towards property investors because of the way property is treated for tax purposes.

He said the government needs to stop the tax system creating the wrong incentives, such as losses made through property investment offset against income, as it was encouraging investment in a class that typically made losses rather than profit.

"By illustration, 1996 was the last year that more people made profits than losses from rental properties and there were 115,000 private rentals (according to Inland Revenue Department data), yet the number of private rental properties has very significantly increased since then."

Whitehead questioned why an increasing number of people invest billions of dollars collectively in an area that was unprofitable, saying "it's hard to believe it's not because of some of the tax advantages".

He said tax advantages included the ability to claim depreciation on investment properties - even when most real estate was significantly increasing in value; the ability to deduct tax losses on property against other income; and the fact that if a rental property is sold, the capital gain made, if any, is usually untaxed.

"Across the board, our tax system would benefit from a stricter application of economic principles to the design and implementation of taxes - examples the TWG [Tax Working Group] gave in this area were depreciation and thin capitalisation rules," Whitehead said.

TWG suggestions to remedy the imbalance in the tax system, which are expected to be confirmed in the Budget, include ring fencing property income and losses, and scrapping depreciation allowances on buildings whose value increases.

Last month Finance Minister Bill English said the Victoria University-led Tax Working Group (TWG) over-estimated how much tax could be garnered from the property investment sector and also the amount of money invested in the sector overall, making the Budget tax package more difficult to write.

Those statements have led to speculation that the government will attempt some of the more difficult measures to police, including income ring-fencing, a policy known to concen tax officials because of further distortions such rules can create for other classes of investment.

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Comments from our readers

On 8 April 2010 at 2:17 pm John said:
So Whitehead is once more picking on real estate investment. Suggesting, mistakenly, that real estate has privileges over other forms of investment. Would he be happier if we started betting on the share market and claiming losses there? Would he feel this were somehow more worthy?
On 8 April 2010 at 5:37 pm Anita said:
since 1996, costs have increased considerably, e.g. rates/regional rates, insurances, interest rates for rentals is higher. can they not figure this out!!! cutting depreciation out will not affect many or increase profits considerably. Government needs to stop spending our money, thats where the real problem is.
On 8 April 2010 at 5:44 pm duane said:
can someone ask Whitehaed if landlords exit the market who the hell will provide the accommodation.It certainly won't be the govt
On 8 April 2010 at 6:04 pm Peter said:
So where are investors supposed to put there money then?This bloody government want it all!Even if you just put your money in the bank and earn the measly bit of interest on that,they still bloody tax even that,and even that tax has gone up.They should give people an incentive to save,by giving you a tax free vehicle such as ISA's,as is the case in the UK,whereby you can save up to a certain amount tax free each year.
On 8 April 2010 at 8:03 pm Kerry said:
Maybe All Landlords should give their tenants notice & see how the govt would cope with finding alternative accomodation for the tenants who would be out on the street!
On 9 April 2010 at 3:31 pm Brian said:
I wonder what Mr Whitehead thinks about Whanau Ora? His logic in unfairly targeting property investors is probably the same as what has brought us Whanau Ora! With my rose tinted glasses on I say it's time politicians and treasury officials did what is right for once and not what is politically expedient.
On 11 April 2010 at 7:22 am Edward McGill said:
What will happen is fairly simple - house prices will fall and more tenants will be able to afford to buy homes. the market will self correct and the ecomomy will be on a more even keel. and on the sharemarket issue - yes you can claim losses if you make them.
On 12 April 2010 at 12:23 am Maurice said:
The above comment does not make sense,a loss on the sharemarket at the end of the tax year does not have to be paid back.Depreciation claimed on a building has to be paid back when a propery is sold,this includes all property, not only residential property.Houses never come down over the long term price wise,also the cost of building a new house always is on the up with inflation,and could be more so after after the budget via G.S.T. I.R.D. always have stated private rentals are a small busness,and the tax rules are the same as any body else.John Key said any changes,has to be fair to all tax payers,so any rule changes would need to include all property not just residential. Some people seem to have a fetish about private landlords,who overall run a very good service.The false information and lies over the last few months amounts to a witch hunt and needs to stop.
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