Budget preview: Property in line of fire

The most likely tax changes affecting property investors are the toning down of depreciation allowances and potential ring fencing to prevent tax deductability of property losses against other taxable income. Also on the table is a rise in GST from 12.5% to 15% to pay for cuts in income taxes across the board.

Property investment was identified by the Tax Working Group (TWG) as "a major hole in the tax base concerning the taxation of capital, which is manifest in high investment and low returns in the property market".

ASB believes changing depreciation rules would help increase government revenue and discourage unproductive investment and debt accumulation in rental housing.

Treasury's estimates of household assets and liabilities currently show that houses make up nearly three quarters of New Zealand's total gross assets worth $603 billion compared to the $212 billion in financial assets.

"Tax changes will also aim to address the situation where highly uneven tax rates apply between taxpayers with similar incomes, due to property investors' use of property related losses to reduce tax liabilities."

Minister of Finance Bill English said in February that the government wants to create a tax system that strengthens the economy, rewards effort, reduces tax avoidance and keeps talented New Zealanders at home.

"We also want to tilt the economy towards exports and investment and away from consumption and borrowing."

ASB says the 2008-09 recession adds to the challenge of reform as the current high government debt forecasts mean that any tax changes must be "broadly cost neutral" over the next four or five years.

ASB says the New Zealand tax system has distortions due to differing tax rates for companies, trusts and the top personal income tax rate which are regarded as harmful to growth.