Tax Working Group says property investors pay no tax

Sunday 4 October 2009

The $200 billion rental property sector not only pays no tax, but is actually getting refunds when it might fairly be contributing tax of $500 million to $900 million a year, says a report from the last meeting of the influential Tax Working Group.

By Businesswire.co.nz

The TWG calls widespread and growing tax minimisation using rental property investments, especially by top bracket taxpayers on the 39% tax rate, "the glaring hole in the current tax system".

Led by Victoria University, with input from the Treasury and Inland Revenue Departments, the TWG's latest report was issued Friday and all but rejects a capital gains tax on property as an option for New Zealand.

Instead, it turns its guns on the rental property sector with proposals to apply the so-called risk free rate of return method to assumed income from rental property, which the TWG estimates could be worth $500 million to $900 million in additional tax revenue every year.

"Recent data show that revenue from the approximately $200 billion rental property sector is negative and has trended downward since the introduction of the 39% tax rate in 2000," the working paper says.

"The glaring hole in the current tax system is the rental property sector. There are efficiency and equity problems with the different treatment of savings in the form of bank accounts, and savings in the form of rental property."

Under an RFRM tax, "rents from land would not be taxed, and other expenses relating to the investment would not be deductible, but a risk-free rate of return would be applied to the net equity in the property and included in taxable income".

This approach would not work if a capital gains tax were introduced, but if such a tax was rejected, then "the TWG considers that the RFRM for rental properties is an option worth considering".

The downsides would be the potential for rents to rise and hurt low income renters to meet new tax obligations; lower property values; the potential to make debt-funded rental property investment more attractive than equity-funded; and tax being payable on loss-making properties.

Applying such a tax only to rental properties might also encourage further personal home ownership as a preferred investment by New Zealanders.

The working group paper on the RFRM proposed, prepared jointly by the IRD and Treasury, also suggests $1.3 billion a year in tax is not being collected because of the questionable practice of allowing depreciation deductions for buildings.

While buildings were a normal business expense and should perhaps be depreciable for consistency's sake, the group noted that only industrial buildings are allowed to depreciate under United Kingdom tax rules.

The group identified an alternative option as ring-fencing losses on rental property and making them non-deductible against other income, although previous ring-fencing attempts had proven "reasonably easy to circumvent".

Along with a land tax, such a tax on rental property could go a long way to creating the substantial new sources of income the government requires to help fix looming Budget deficits, without seriously distorting economic activity.

A rental properties tax might also potentially discourage speculation in residential property, which is commonly blamed for imbalances in New Zealanders' savings and investment habits that lead to high foreign indebtedness.

The TWG's land tax paper suggests between $160 million and $460 million could be collected in land tax applied at a rate as low as 0.1% of capital value.

The group has a day-long conference scheduled in December, and its final report is expected to have influence on government deliberations on tax reform, which Prime Minister John Key has signalled is one of his government's top six economic policy priorities.

Comments from our readers

On 5 October 2009 at 9:50 am Sam said:
It's about time tax policy stopped favouring property and encouraged investment in NZ companies; which actually have potential to improve NZ's economy in real terms rather than just paper gains. Unfortunately the RFRM is not going to be a perfect solution but could be a step in the right direction.
On 9 October 2009 at 4:01 pm Meghan said:
Again, the politics of envy. Drag everyone down to poverty level. If the high top tax rate has had a causal effect on investment in rental property, how about having a fairer income tax rate so people have more choice in their investing rather than making investment decisions based on attempting to keep a few more of their hard-earned dollars.
On 9 October 2009 at 4:27 pm Barry said:
Perhasp the Government should focus on cutting wasteful expenditure rather than blaming property owners for tax shorfalls. Tax on property already exists (its called rates) and penalising a group who offer a service (accommodation) will simply constrain the supply thereby forcing the Government to provide more housing and/or resulting in a lower construction of houses. Look at Australia and the UK and tell me that Capital Gains taxes or any variant works.
On 9 October 2009 at 4:54 pm JitP said:
Investment property is a means of retirement savings. If anything, individuals should be encouraged to save more with the continual decrease in the value of the govt super. Not sure tax is the answer.
On 9 October 2009 at 5:03 pm Robert said:
Correct me if I'm wrong, but I beleive Australia tried these ideas during the 70's or 80's. As a result there became a shortage of rental properties, with investors bailing out of property, which then caused an increase in rents. The govt. had to back track because of the lack of rental housing
On 10 October 2009 at 1:33 am Martin said:
Any increase in the costs of owning rental property will pass along to rents one way or another. This will increase the need for the government to provide state rental housing, or housing relief. This will increase the need for higher government revenues, i.e. increased taxation to pay for that. Sound like a vicious cycle?
On 10 October 2009 at 2:00 pm diana said:
Rents are already taxed. Depreciation is not tax free as it has to be paid back. The rental sector pays tax as in any other business. The government and the tall poppies needs to look elsewhere to make up for the tax shortfall as it will backfire on them and cause rents to increase. Honest reporting on rental investment may help to alleviate the misconception that all landlords are raking it in.
On 10 October 2009 at 2:30 pm Graeme said:
did you see the programme on TV1 the other night, about the shortage of rental property in australia leading to social services paying the homeless to stay in motels. From where I site, the rent on my rentals will either have to increase significantly under theses scenarios, or I quite the market. Perhaps I should invest in a motel.....
On 10 October 2009 at 3:40 pm Wolfgang said:
Bring it on! I am looking forward to having tenants queing for properties and being able to really select, then! Rents will finally go up, looking forward to that, too!
On 12 October 2009 at 3:45 pm Tom Webb said:
Rental properties are a business for some, not just an investment. To suggest that this sector should be taxed differently is a simplistic approach to a much more involved aspect of govt revenue. How about looking at trusts and the way these are used to avoid corporate resonsibility and allied taxes.
On 13 October 2009 at 8:35 pm Jason said:
Like the law of gravity what goes up must come down, the law of unitended consequences will ensure the results will not be the desired outcomes.
On 19 October 2009 at 7:25 pm Tim Munro said:
As New Zealanders have a relatively high rate of home ownership compared to other countries, then by definition we must have a relaively low percentage of investment properties compared to other countries. Thus the arguement that New Zealanders are over investing in investment properties compared to other countries must be incorrect!
On 1 November 2009 at 1:56 am Alman said:
Just another excuse to rip off the hard working NZ people to fund luxury prisons with underfloor heating, new state houses for a lot of lazy people who cant be bothered to work etc.... The Govt is hungry for $$ to fund the biggest drainers who deserve little to no funding!!! At the end of the day it is up to us taxpayers how & what we use & invest our hard earned money. Be it property or savings a/c there should not be any tax beyond property trading.
On 4 November 2009 at 12:17 pm ken said:
At the moment propety is one of the only ways to turn the Inflation Tax on Illusary Income around to our advantage, Once that is gone whats the point of owning property, The people on low wages will get hit hard with this one, As in other countries with this policy there will prob be big rent increases and shortages of housing, As if Govt policy hasnt already got us in a mess.
On 26 March 2010 at 3:29 pm philippa said:
What about the older generation who have already been hit by the recession holding on to property for rental return for their proberley impossible retirement. The govt has f up again another exodus of kiwis to australia then where will the dollors be for the deficit.
Commenting is closed

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