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Tax changes ‘essential' to remove investment property bias - SWG

Tax changes are "essential" to remove the distortions that favour housing as an investment over basic savings products, according to the Savings Working Group report.

Tuesday, February 1st 2011, 12:00AM 5 Comments

by Benn Bathgate

In its report to Government on how to boost New Zealand's savings, the SWG also said steps need to be taken to prevent a repeat of the unsustainable boom of the last decade, which saw a large increase in the country's debt, "much of which went into housing and a 'bubble' in house prices."

Resolving tax distortions is one of the key recommendations of the report.

"The SWG estimates that the tax system bias in favour of housing caused about half the increase in house prices, with serious implications for affordability," the SWG said.

"Moreover, the boom boosted investment in housing rather than investment in more productive assets that would have lifted productivity and potentially lifted exports."

The SWG highlighted the tax treatments of capital gains, owner-occupied housing and rental housing against the over taxation of interest income and over-deduction of interest expenses because of inflation as one factor behind the bias.

"Overall, an incongruous and distorting outcome of current tax policy is that simple savings products, such as a fixed-term bank deposit, which produce no capital gains or opportunities to write off expenses against taxable income, end up having the highest effective tax rate, by a substantial margin over, for example, housing."

The SWG call for tax changes was echoed in the ASB report to the group.

The bank revealed more than a quarter of its home loans were for rental property (72% owner-occupiers, 28% investment property) and that work was required to reduce tax distortions "that encourage ‘non-productive' property investment."

The SWG report recommends that in the absence of a capital gains tax, a measure already ruled out by the Government, reduced taxes on financial assets - the main investment alternative to property - would be one way to address the imbalance.

"In short, a lower rate of tax on the returns from (especially) long-term savings would provide a higher after-tax return and thus a more attractive alternative to property investment," the report said.

"This would be likely to restrain house prices and therefore aggregate mortgage debt."

The report also argues for indexation as a means to leveling the investment playing field between property and other long-term savings vehicles.

While acknowledging that indexation is not common overseas, and would add complexity and additional cost to the tax system, the SWG argues non-indexation may be one factor behind the recent house price boom, which as a result, lowered home ownership rates.

Also, "the failure to index the tax system increases the tax incentives for New Zealanders to invest in owner-occupied housing rather than other forms of savings products, and for investors to invest in property rather than other classes of assets."

Finance Minister Bill English said the Government would carefully consider the reports findings, with any immediate policy decisions likely to be included in the Budget later this year.

However, any broad taxation of capital gains or a land tax have already been ruled out.

English said that while those measures, along with changes to NZ Superannuation, were off the table, "otherwise, we are not ruling anything in or out at this stage."

"Ministers will carefully look at the Working Group's report over coming weeks with a view to picking up practical ideas that can feed into the Government's economic programme and Budget 2011."



Benn Bathgate is a business reporter for ASSET and Good Returns, email story ideas to

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Comments from our readers

On 2 February 2011 at 9:39 am perplexed said:
This housing affordability factor always uses the multiple of the single average wage. Surely most 3 bedroom homes are occupied by families and a large proportion of these families have both spouses working providing a combined median household income from all sources of ($1236 p.w. $64272 p.a. according to statistics NZ June Qtr 2010) which maybe more than enough to service a mortgage on a modest 3 bedroom property in suburbia.
There is never a mention of real estate agent fees in house price inflation. Taking an example of say 60,000 houses sold in one year, with an average agent fee of e.g. $12,000 plus GST, would result in a $720m payout to real estate companies with a productivity factor, in my opinion, of ZERO. The government may receive a net GST return of $108m from these transactions.
On 2 February 2011 at 11:00 am Jay said:
If the government decreases tax on savings investments then this will further deflate the property market. I suspect this time next year many sellers who were waiting for prices to lift will wish they had been realistic and sold now, taking a moderate sized hit rather than the likely knock-out punch they will receive in year.
On 3 February 2011 at 8:59 am Andrew Fraser said:
OMG when is the stupidity about rental housing mouthed off by economists and interest groups like the banks and the tax working group ever going to stop? If so called "unproductive" investment in rental housing is stopped who is going to provide the rental housing stock and do the banks really want to lose 28% of their loan book? C'mon people how about putting the brain into gear before making such inane statements.
On 3 February 2011 at 1:26 pm Martin said:
The desire to encourage investment in "productive" assets rather than in property is being driven, in my opinion, by those people with a direct financial interest. In particular by the likes of brokers and financial "advisers" who make nothing when a property is sold but take out their costs (read my profit) from investments done on my behalf no matter how well they perform. I am sure that if they could work out how to get their cut on each property sale that suddenly investment in property would not be so bad.
On 4 February 2011 at 2:18 pm Vicki said:
Good opionion Martin and probably absolutely correct! Can somebody please tell me if I am still entitled to claim a special tax rate (IR23) with regards to our 1 rental property, from April 2011? I have not been able to get an answer on this from anywhere.
Commenting is closed



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AIA 4.55 2.55 2.69 2.79
ANZ 4.44 3.15 3.25 3.39
ANZ Special - 2.55 2.69 2.79
ASB Bank 4.45 2.55 2.69 2.79
Bluestone 3.49 3.49 3.49 3.49
BNZ - Classic - 2.55 2.69 2.79
BNZ - Mortgage One 5.15 - - -
BNZ - Rapid Repay 4.60 - - -
BNZ - Std, FlyBuys 4.55 3.15 3.29 3.39
BNZ - TotalMoney 4.55 - - -
CFML Loans 4.95 - - -
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China Construction Bank 4.49 4.70 4.80 4.95
China Construction Bank Special - 2.65 2.65 2.80
Credit Union Auckland 5.45 - - -
Credit Union Baywide 5.65 3.95 3.85 -
Credit Union South 5.65 3.95 3.85 -
First Credit Union Special 5.85 2.95 3.45 -
Heartland 3.95 2.89 2.97 3.39
Heartland Bank - Online 2.95 1.99 2.35 2.45
Heretaunga Building Society 4.99 3.50 3.40 -
HSBC Premier 4.49 2.45 2.60 2.65
HSBC Premier LVR > 80% - - - -
Lender Flt 1yr 2yr 3yr
HSBC Special - - - -
ICBC 3.69 2.45 2.65 2.79
Kainga Ora 4.43 2.93 3.07 3.24
Kainga Ora - First Home Buyer Special - 2.25 - -
Kiwibank 3.40 3.30 3.54 3.54
Kiwibank - Offset 3.40 - - -
Kiwibank Special 3.40 2.55 2.79 2.79
Liberty 5.69 - - -
Nelson Building Society 4.95 3.45 3.49 -
Pepper Essential 4.79 - - -
Resimac 3.39 3.35 2.99 3.35
Lender Flt 1yr 2yr 3yr
SBS Bank 4.54 3.05 2.99 2.99
SBS Bank Special - 2.55 2.49 2.49
The Co-operative Bank - First Home Special - - - -
The Co-operative Bank - Owner Occ 4.40 2.55 2.69 2.79
The Co-operative Bank - Standard 4.40 3.05 3.19 3.29
TSB Bank 5.34 3.29 3.45 3.59
TSB Special 4.54 2.49 2.65 2.79
Wairarapa Building Society 4.99 3.55 3.49 -
Westpac 4.59 ▼3.09 3.29 3.39
Westpac - Offset 4.59 - - -
Westpac Special - ▼2.49 2.69 2.79
Median 4.55 2.94 2.99 2.80

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