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Stop the misleading talk around property

Friday, September 18th 2009, 12:16PM 5 Comments

by Philip Macalister

We, the New Zealand Property Investors’ Federation are concerned about the high level of misinformation around taxation of property and the introduction of a capital gains tax (CGT).

The following is a reply to much of the misinformation and outlines why a CGT is not a magic bullet to solve New Zealand’s economic problems.

A CGT will not stop property price changes. Countries with a CGT have had at least the same level of property price increases as New Zealand, with many having greater increases. If anything, a CGT will increase property prices as vendors demand higher prices to offset the tax.

Rental property does not have a tax advantage over other investments or businesses. This was clearly confirmed in 2007 by Deputy Commissioner of Inland Revenue, Robin Oliver, when asked by a government select committee if there was some tax advantage for investments in rental housing.

"The short answer is there is none" was Oliver’s reply. “Rules about expenses for deducting costs such as interest, upkeep and maintenance, as well as paying tax on income, are the same for investments in shares or anything else. In fact under the housing case, the capital gains boundary is brought back a bit. There are tighter rules regarding what is a capital gain."

With the exception of fund managers, anyone who generates an income through trading an asset (property, shares, gold, antiques etc) is taxed on the profit they make.

Property traders/developers/speculators are required to pay tax on profits they make through selling property. The IRD has been allocated over $14m to ensure that people in this sector pay the tax they owe and is achieving good results.

Anyone who sets up a business, buys shares or owns property primarily for long-term income, is not taxed on any capital gain they make. Therefore if a business owner sells his or her business and makes a $100,000 profit, this is not taxed. If a shareholder buys 100,000 shares for $1 and sells them for $2, they pay no tax. The same rule applies to rental property.

Many businesses make a loss during the first few years while getting established and rental property is no different. The rental market is extremely competitive and tenants enjoy lower rents because of this, helping them to save for a deposit on their own home.

The claim that rental property owners are somehow ripping off other tax payers and that a CGT would level the playing field is false.

A third point, often raised by CGT proponents, is that the rental industry is not part of the productive sector. This shows little understanding of what it takes to make a country productive.

Rental property owners house around a third of New Zealand’s workers. Without access to decent housing, these workers would be considerably less productive.

Rental property owners also contribute to the general economy through supporting banks, local councils, trades people, professionals, hardware stores, insurance companies and a host of other businesses.

It has been said that a CGT will allow a reduction of income tax.  This is an argument that may appeal to New Zealanders, especially high income earners who primarily invest in shares.

However any increase in tax revenue from a CGT is likely to be small. Overseas experience shows that a CGT does not raise a high level of tax dollars and is costly to administer. This means that any potential reduction in income tax levels is likely to be insignificant.

In addition, if a CGT is restricted to just rental property and excludes the family home, farms, businesses, shares and other types of investment, then the ability to collect enough tax to reduce income tax rates is even smaller.

Consider the tax losses that are currently being experienced by many rental property owners and the negative affect this would have on tax revenue should a CGT be introduced.

In summary, a CGT would not reduce property price increases and would not significantly increase the tax take. Rental property does not currently have a tax advantage over other businesses or investments, so a CGT would not create a level playing field - it would distort it.

Rental property is definitely part of the productive sector and to suggest otherwise is misleading.

Martin Evans is president of NZPIF
« Go pick on someone your own sizePotential dousing for a warm market »

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Comments from our readers

On 18 September 2009 at 5:15 pm david garratt said:
I couldn't have put it better myself.
A well written and balanced piece of blogging.
I wrote a short blog myself on the subject earlier this week. You can read it here if you are interested...
On 18 September 2009 at 5:54 pm Jeff Wilson said:
Excellent response. One thing we need to ask all the critical reviewers of those who own property is:

If we wish to stop New Zealander's investing in property:

- Who do they think should invest in the rental housing that 30% of our population live in? Perhaps they want overseas investment? Or Government? Or local Councils?

Investors DO NOT cause property bubbles (they gain from them certainly) - it is the short term speculators who cause these. Many of these are our next door neighbour who buys a section, builds, live in for 3 months, sells and then buy another section etc. These people are no different to the speculators who appear during a share market boom. IRD should be able to act against them under the present rules.
On 21 September 2009 at 7:17 pm Phil Harris said:
It shouldn't come as any surprise to read Martin Evans self serving comments as president of the NZ property investor’s federation on the topic of CGT. While I actually agree that a CGT by itself is not the magic bullet required to solve New Zealand’s economic problems, I disagree that there are not any tax advantages to investing in rental property, and that indeed, rental property is an attractive investment class driven mainly by tax considerations. If it was not, how do you explain the disproportionately high percentage of property investors in NZ relative to other asset class investment and also relative with other OECD countries? NZ has one of the highest ratios of average household values to average household income, and one of the highest household debt to house price ratios.

I also contend that investing in passive residential property is not productive and that the over generous tax treatment of property investment has been one of the main drivers behind why NZ has slipped in the economic growth stakes over the last 20 years or so.

Attracting investment capital into rental property has a significant cost to the economy. Firstly, investment capital is put to non productive use and it contributes to house price inflation, which results in higher interest rates. The higher interest rates combined with a strict anti inflation monetary policy attracts speculative capital to New Zealand. This drives the currency higher. The current policy hits the exporters in three ways; diverting capital away from them, higher interest rates and a higher currency. Secondly, as property prices increases, more household disposable income is directed into mortgage servicing rather than being spent on goods and services. This in turn restricts the productive sector and ultimately slows economic growth.

Macroeconomic policies should be constructed in a way that insures investment capital is directed to productive use. The tax policy needs to be simple and fair. If there are any tax incentives provided it must be towards the productive sector of the economy, preferably the export sector. It should not be towards an unproductive asset class like rental property that has serious detrimental effects to the economy and society.

Before continuing, let me put a slightly different perspective on Martin Evans comments re CGT above.

1.Robin Olivers comments related to property traders. We all know that if you are in the business of buying and selling property or property purchases are made with the “intention” of making a profit, then the capital profit made is taxable. The problem is intention is hard to prove. By far the majority of property investors in NZ invest for the long term and are therefore not caught under these provisions, however if necessary should a property be “flicked on” at a profit in the short term, then it’s a matter for the law to determine intention and that is never easy. All property investors know this.

2.“Many businesses make a loss during the first few years while getting established and rental property is no different.”...yes, but can business losses ever be deducted against other PAYE income while being set up. A person entering into business full time does not have this luxury, its investment capital at risk with no particular guaranteed income to offset losses. The risk/return ratio favours passive investment into property where losses are supported by a rental income. This begs the question, why even try when there are more lucrative less risky investments in passive property that can be made with a similar amount of investment capital. Again, less productivity, less employment opportunities, less growth in the economy.

3.“If anything, a CGT will increase property prices as vendors demand higher prices to offset the tax”...Vendors could apply anything they like to the price of a property, but the market determines what it will pay, not the vendor. The price is driven by macro economic and fiscal considerations, not by the purchase price, or any other cost recovery factors.

4.“Rental property owners house around a third of New Zealand’s workers. Without access to decent housing, these workers would be considerably less productive”....Where is the proof that landlords provide decent housing? Is there actually a correlation between productivity and housing? The point of the discussion, I would have thought, is to make housing more affordable to working class families (and no, I am not a socialist) by bringing the cost of housing down, and this can be achieved by making property investment less attractive. In doing this you wouldn’t have 30% of the population renting because houses would be more affordable, also no one is suggesting that landlords do not provide a service, it’s just a matter of ensuring that incentives are not higher in investment property than more productive investment areas.

5.“Rental property owners also contribute to the general economy through supporting banks, local councils, trades people, professionals, hardware stores, insurance companies and a host of other businesses”....So do home owners, in fact more so.

In my view there is only one effective and efficient way of limiting price rises in property and that is to ring fence deductibility of property losses against income that has absolutely nothing to do with such losses. Most people invest for the purposes of reducing personal income tax liability and the capital gain is just a bonus. It has also become a favoured investment vehicle for the wealthy on the highest tax bracket because it is possible to keep adding to property investment portfolios to increase debt and maintain a lower tax rate while earning. By holding property investments over a longer period once retirement is reached, selling a few to pay down debt and receive a positive rental return on the remaining properties at the lower tax rate is hardly going to bring them into an IRD investigation as a property trader.

The ring fencing view has been floated before under Michael Cullen but was soon dropped, for what reason I am not sure. I do not see any reason why such tax losses could not be accrued say within a LAQC and then set against future rental streams. As losses abate with mortgages being repaid over time, this method would still allow an effective tax free income while tax credits were being used. It would also not create a wholesale abandonment of investment property as an investment option either as advantages still exist, just not as much as before. At the moment having the ability to deduct losses from investment property losses against PAYE income from another source, and then sell a property for at a tax free capital gain on the other is not a level playing field nor as much as a productive use of capital as investing in business to increase economic growth.

Phil Harris
Rutherford Rede (ChCh) Ltd
Investment Advisers and Financial Planners
On 20 October 2009 at 9:42 pm Mitch Buckley said:
I don't see the big stink to be honest. Investors have been luck so far and they just need to factor CGT into the numbers as traders do. It is a business we are in and therefore it should be taxed like a business. Although home owners being a families place of residence should not have capital gains taxes. Although I am not to bothered about all of this I still don't believe it will curb growth. In fact I was reading something the other day about it increasing growth in other countries like Australia. Something about people deciding to to sell their properties to save on tax and therefore creating a shortage of property and increasing values.

Barking up the wrong tree if you ask me...
On 7 January 2010 at 6:51 am B. Mason ( ) said:
Imputed rental value of owner occupied housing (net of mortgage interest) should be taxed as income. This was the case in the UK until the 1960's. It's explained on the internet - just Google it. No great mystery. The policymakers are undoubtedly quite aware of it but they choose to overlook it because it is politically very contentious. Clearly, failure to tax it amounts to a subsidy to owner occupiers effectively capitalised into higher house prices. Also it is inequitable that rent payers effectively do pay tax at income tax rates on the rental value of the property they occupy (they have to find a gross amount of income and pay tax on that before having a net amount of income with which to pay rent). Introduction, would broaden the tax base, remove a subsidy capitalised into higher house prices and remove a gross inequity.
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