Stop the misleading talk around property

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