Blog: The Landlord says...

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

Property investors could well feel battered and bruised after many of the comments made in the media, following yesterday’s official cash rate announcement.

I’ll put it on the record now. Much of this property investor bashing is totally unwarranted. There is a perception, which is wrong in my view, that all these investors are hell-bent traders and speculators, buying and selling residential properties non-stop.

Wrong. The large majority of the investors we deal with through the NZ Property Investor Magazine and www.landlords.co.nz are conservative, buy-and-hold investors.

Some people chose to invest in shares, others prefer managed funds, while others go for cash and fixed interest. Many people have decided that property is their preferred means of saving and providing for their retirement. There are lots of reasons for this, and all of them quite valid. They range from the desire to hold something tangible they can see, touch and feel, through to having poor experiences in the sharemarket.

So I often come across investors who feel they have been unfairly castigated and discriminated against because of their choice of investment. Their view is at least they are doing something to plan for their retirement and aren’t relying in taxpayer-funded pension from the state.

Investing in property is not like some of the other asset classes. Yes, there are different tax rules and there are benefits like depreciation and gearing.

What seems to get lost in this debate is that these people are not only investors. They are running a business providing a service to fellow New Zealanders. Therefore, they quite rightly can use some of the same structures as business owners, such as loss attributing qualifying companies (LAQCs).

The other thing which surprises me is some of the comments about putting a capital gains tax on property investors. For the record, there already is one. The Inland Revenue Department is on a $15 million, three-year education and enforcement campaign to enforce this part of the law.

Already it has pulled in hundreds of millions of dollars in unpaid tax.

One comment I do agree with from Dr Bollard is this: He says New Zealanders should not consider housing investment to be a one-way bet. Investment expectations need to be realistic. We won’t go back to the boom times of the past eight years. However, in the long run, property prices, like those of other asset classes, tend to appreciate.

Next week we have more of the latest house price data coming out. These numbers are always eagerly awaited, but arguably more so this month.

Everyone wants to know whether the market has bottomed and is going to resume its upward trek or crash again.

As readers will know I have argued in favour of the market at least bottoming or maybe embarking on a slow upward recovery.

Not for one minute do I think we are heading back to the boom times again. Indeed as the lead story in the NZ Property Investor Magazine out next week warns, we are unlikely to see another boom period like the previous one.

The story suggests a back-to-the-future approach maybe the best strategy for investors.

My view continues to be that there are a bunch of factors, such as low interest rates, positive migration etc, which will put a foundation under house prices for now.

However I questioned my view when I looked at this chart prepared by ANZ and presented to the NZ Property Investors Federation conference.

The chart shows that if you believe in cycles and history then there is likely to be a further fall in house prices.

On the upside there are five periods where house prices rose, with the latest from 2002 to 2007 being the longest and strongest.

When house prices fell the downward periods lasted from 10 to 24 quarters and the falls ranged from 5% to 40%.

When you look at the strength of the last boom, prices rose 88% over 24 quarters, but have only fallen 16% over eight quarters then you could quite reasonably be expecting to see a further decline.

My guess though is that in this next round of house data releases we will see further gains. After all that is what the Barfoot and Thompson numbers showed earlier this week.