Controversial philanthropist and aspiring politician Gareth Morgan recently released his new political party’s tax reform proposal.
The Opportunities Party (TOP) proposal is that all productive assets – including housing and land –can produce income annually and that all income should be taxed, whether it is in cash or in kind.
This change to the tax regime would make tax fairer, boost economic growth and, over time, improve housing affordability, by erasing the reason for property speculation, according to TOP.
However, tax specialist Mark Withers has challenged TOP’s tax policy, which he described as long on rhetoric bemoaning tax loopholes that benefit those with wealth, particularly in property.
He said it was frustrating to hear that tax loopholes supposedly favour the property sector when, in fact, the opposite is true.
For example, the property sector is prevented from depreciating its productive building assets while the commercial sector is not.
The bright line test, which taxes any gain made on the sale of a property within two years, is in place but there is no equivalent for gains on share sales.
Further, the IRD has a dedicated compliance division to enforce property taxes and there is now a residential land withholding tax for non-resident property buyers.
Withers said that falling interest rates and the removal of depreciation deductions mean a far greater proportion of property owners now operate at a cash surplus - and pay tax on their net rental income.
“To suggest that the sector is largely unproductive paying little or no tax is simply not correct in a low interest rate environment.”
TOP’s policy seemed to be claiming that imposing a tax based on a deemed rate of return would persuade people to invest in the share market and that this form of investment is better for our greater good, he said.
However, investors are often wary of the volatility of, and the potential for speculation within, the share market.
Withers said rather than taxing deemed notional returns on properties, it might be a good idea to focus on removing risk and volatility in the share market.
“Investors might be convinced their investments are safe if banks were as willing to lend against them as they are with property.”
He is all for closing loopholes in the tax system where distortions are created, he said.
“I just can’t now see how these loopholes aren’t stacked in favour of the equity markets and to the detriment of property.”
Economic commentator Michael Reddell is also sceptical of TOP’s tax policy, especially given its lack of practical detail.
He said that it would be hard to make the policy work well; that it doesn't offer very much in a low interest rate world; and that it is misconceived as a structural answer to New Zealand’s housing price problems.
Search
