Your comment hits the nail on the head, Bernard. EVERY housing invesment seminar advocates the philosophy of "get the tax man to contribute to your future wealth." As long as this legal possibility is allowed to continue the poorer we shall all become. True wealth comes from hard work, not playing with figures on a piece of paper. Some will do well.Those that get in and most importantly, out, but the rest will see deteriorating hospitals, schools and roads. After all; wouldn't the ' $700m+ Hole" in the ACC books be covered by just one years worth of removing neagtive gearing on properties?

if you make an analogy between the human body, and the body politic (ie our society of 4million souls), the recommended volume of blood donation is 500mls from an adult male (vol blood 5 litres), which is 10%. The body then produces replacement blood and everybody does okay. Take too much for too long and eventually the body will become weak and die. The same goes for society. I liken the Inland Revenue to a bunch of vivisectionists who want to experiment with how much more blood they can extract without killing the patient. Everybody pays GST as well as Income Tax, as well as various levies etc ,far in excess of 10% total. The money is made round to go round, and the miracle is that the donors keep going. If the IRD want us all too have a simple and fair system, bless their venepuncturing hearts, then let's go for a low flat-rate system, and get out of the way of real productivity. The tax system has never been fair anyway. What is the average total tax take by the government, through GST, PAYE and income tax, car reg, petrol tax etc etc for each NZ citizen? Can someone tell me what that is as a proportion of our average annual income? Surprise me, and tell me it's 10 percent.
Rather than focus on property investors who can claim interest deductions (and incidentally are doing a job of maintaining sufficent rental housing for the nation) why not look at the insane profits that the privately owned issue of all money by the banking industry, bleeds from us. another topic for discussion.
signed -- a donor

For every $1 a land lord gets in tax refunds he has had to spend $3. Just who is subsidising who?

Whats wrong with letting PAYE earners being able to claim some real losses, bad time to even consider shedding buyers of homes.

Janet

I'd suggest that you look at the cost of housing that is provided by housing NZ (ie the Govt) because they are so subsidized that it could be equally argued that the private landlords benefit the government. Withdrawl of the LAQC system, could cause private landlords to withdraw supply of rental accom, now if the price doesn't drop (due to growth in population absorbing the ex rental houses) then who would provide the housing?

Its not quite as simple as, ban LAQC's, house prices drop ergo all those renting, buy their own house, it would be more like, Ban LAQC's, Private landlords plan to quit their houses when the market can absorb it (your not going to dump your rental at a huge loss because you are not getting a tax break on it), Housing stock growth stalls, increased demand on HNZ

Neven

Janet

Yes but the "law" on this is very vague and as far as i know has not been tested in a case yet. I just pity the poor bugger who gets nailed to the wall because they are picked to draw the the "line", I crash at work often, does that mean I can't totally deduct my office rent as an expense?

Neven

Neven, I don't think Child Support is a tax, is it? That's not to say the manner in which that system is calculated and administered is fair/unfair however. It's just I don't think it could be considered a tax.

What society needs to focus on is the fair/unfairness of the DPB, which is indeed a benefit paid from the taxpayer system. Seems dumb to me that we have both a state-managed child support system and a state-supplied benefit system as well. If we did not have the state-supplied benefit system, but rather only a state-managed child support system, I think everyone might be better off.

Your child support payments might go up, but your tax payments would likely go down.

I can't be sure but I think they recently changed the law such that all mothers must declare the father of their children? If indeed that is the case, then the need for the DPB reduces surely?

Kate,
I think the paternity thing is still going through the motions. But WHEN it does come in I hope that it includes the fairness clause that allows men who have been wrongly paying for children who are not theirs ( stats. indicate that at about 30% !) to seek recourse from those who have engaged in actions of deliberate deceipt.
Sorry..... this blog is supposed to be about Bernard's Tax...... sorry Bernie.

James

The LAQC system is not just applied to rentals, this just seems to be the most visiable use. I have argued here that the LAQC is a small distortion of the rental market, it allowed the transfer of loss to the current year, there are other ways rental property owners could make use of a loss if they had other activities, the LAQC structure put PAYE earners on the same footing as other tax payers. Frankly i can't see your scenario playing out, because if the rules changed you wouldn't dump your rental simply because the rules changed (you might ride it out for a couple of years until the next gov bought it back in!)

Kate

"Child support is not a tax"..hmm...Its collected by the IRD, tick, its goes into the consolidated fund, tick, It is used to fund a state activity (the DPB) tick, so to me it passes the sniff test as a tax, only in name it doesn't. I would compare it to the targeted tax on fuels, that go toward roading infrastructure, they don't call that "Road Support" do they?

And here's a good one for you, How many dependents do you have to have in your care to collect the DPB?.....none (you have to be a woman, over 50 who has cared for someone for 16 consecutive years)

Neven

Of course wealthy smart people take advantage of tax efficient vehicles. BUT they still pay massive amounts of tax (relative to the average).

If central government wants to reduce tax avoidance simply reduce tax rates (which will reduce the benefit of LAQC's and rental property). Apart from the odd hard core ideologist most kiwis are happy to pay a fair amount of tax.

Cullen's 39c fiasco was a bitter ideological kick in the guts that led to outcomes that were not hard to predict (strongly assisted in the sustained property boom).

Thank god we now have a government that is willing to rationalise govt spending and take less cash, by force, from the citizens.

Janet

It goes into the fund if the custodial parent is on the DPB, In your case it sounds like you weren't (on the DPB) and also pre the IRD being involved, I can tell you it would not take 5 years for the IRD to come down on you, the classic tale of a Non Custodial Father going to the IRD and saying he can't afford his rent and CS is that he is told to move into a flat or get a smaller house, to which he replies "Where do my kids sleep"? There are many tales of deadbeat dads not paying CS and abandoning their children, this is the convenient "justification" tale, much the same as the DPB is "necessary" for women to escape abusive relationships, the truth is a lot harder to get across

Neven

Is neven paying child support to janet?

Kate

"based on the cost of providing a normal, healthy lifestyle for the dependant" Yes thats what what you would think but for 2 children, the maximum amount is $22,972 per annum after tax see ir150, on this basis (and this is meant to be my share of raising 2 children) it costs $22,972 per child to raise children in NZ (not including accommodation). Thats $441 per week per child for food, clothing etc.

Being self employed is no better (as you still have to file a tax return)

Neven

Two points - "(A) good tax system is characterised by high levels of voluntary compliance, which is helped by the tax system being perceived as broadly fair." Clearly this is not the case. The 39% rate was introduced by sleight of hand and the Reserve Bank targets adjusted upwards from 1-2% range to 1-3% range to guarantee increasing revenue to the govt. So it was better for lawyers and celebrities to invest in uneconomic vineyards and apartments in silly old Queenstown than just hand over the money.

My problem with high tax rates is it says GO AWAY, YOU ARE NOT WELCOME HERE.

Second point. There is a need for rented housing, under the current system it is provided privately. If you start to single out private landlords for special treatment you had better start building state housing at a high rate.

I think it is a crying shame that housing has been the only game in town but there you are. Perhaps some of the other respondents have not tried being an employer.

based on the cost of providing a normal, healthy lifestyle for the dependant" Yes thats what what you would think but for 2 children, the maximum amount is $22,972 per annum after tax see ir150, on this basis (and this is meant to be my share of raising 2 children) it costs $22,972 per child to raise children in NZ (not including accommodation). Thats $441 per week per child for food, clothing etc.

Wondering where you obtained the above assessment for raising one child per annum?

I dont get why any "smart" investor is willing to make a loss just so they can recover a small portion of that loss as a tax off-set ? Maybe ok if your making capital gain, but we wont see those days for a while.

And why would a government encourage this practice through the provision of LAQC's.

I wonder what Rich Mastery conferences discuss these days?

AH - You get the same outome if you own property in your own name. In an LAQC losses can be allocated to shareholders based on shares. If a couple owned a property in their own name the loss would be allocated 50/50. If an individual owns a property then there is no difference.

"Previously on interest.co.nz we have argued that property investors have taken advantage of the tax system"

Taking advantage is legal...advoidance..
The issue is the wholesale illegal claims, where the IRD just doesnt have the facilities to check and enforce, this is not just property, but many other areas as mentioned above.
We could look at pumping more money into IRD for this, but that is faulty logic.
It is a very apparent the system is on that is in the 1st place is often well thought thru, but like much of our legislation is very poorly written resulting in grey areas and misinterpretation from the original intention.
Then to add to that the legislation and regulation is then patched up, re patched and re patched, creating a system so complex administration becomes expensive and unenforceable full of even more anomalies.
Bottom line, the whole system needs to go back to the original concepts and intentions, and start from scratch.

A classic example:
If someone looses their income but keeps paying child support , goes thru litigation and wins...and the 'income' is reinstated a couple days after 1 April, and they are reemburst for lost income of the previous yr...
The new yr income is estimated at double, the child support is doubled, and the tax rate for that yr is far higher.
So one pays child support twice for a yr and is basically taxed twice.

It is now a system that penalises those property people who play by the book, over those who make false declarations, and those who are up front and honest in many other areas (as mentioned in previous posts) are easy targets compared to those openly defraud the IRD and every honest New Zealander.

The solution is a simple one....'KISS' Keep it Simple Stupid

It has been estimated that if everyone paid the tax that was intended everyone would be paying around 10 to 15%

We dont have a tax system that is to high, we have one that is to complex to administer and to complex from from decades of patching up.

Neven
"the point is a tax rebate to those who pay tax, that benefits the state (by providing rental accommodation) is not necessarily an evil thing."

My point is we would not need the tax break to make rental accomodation viable if we remove the tax break. WHY? because prices would drop and the property would become less cash flow negative. Once this adjustment occurs the cash flow result will be the same for an investor, so we would expect the same level of property investment and therefore rental properties which we do need to some degree.

"What is your motivation in this anyway, do you just want cheaper houses so you can buy one or do you just hate people who have acquired more than you?"

Phew - thats a little harsh. I want cheaper houses so that more people can afford them like we used to 30 years ago. Personally I can afford, but I choose not to buy an investment that will lose me money over the next 5 years. As for hatred - no. But it makes me angry if people get wealthy via a reduced tax pool which other taxpayers by default must fund.

Shorts,

I'm greedy because I dont like others being able to avoid paying their due taxes and in the process push up the general tax burden and make houses more expensive? I guess you would have called sparticus greedy for wanting to be free from slavery. There is a difference between self interest and greed.

James

"If people get wealthy via a reduced tax pool which other taxpayers by default must fund"

So why pick on investment property owners with LAQC's, why not beneficiaries, or bureaucrats or some of the near 40% of GDP that is government driven, paid for by churning taxes?

Your response is typical whining left wing drivel, the "victim" based, middle class guilt driven socialism that Helen & Michael have fed on for the last 9 years. The truth is that most tax is paid by the top 20% of earners and it Cullen hadn't continually caned the 'earners' (via the 39c rate and bracket creep) to fund his lolly scamble then the tax system would be 'fairer'

Paul Henry (who I personally dislike) called it correctly when the guy from local govt said that valuations were "free" and "we (the councils) paid for them", councils and government pay for nothing, citizens do.

Neven

Shorts
"I don't think it's your job to dictate the what taxes other people are or are not paying."
No - but I can still have an opinion, this is what this forum is for.

Neven - I have never voted Labour and the 2 major parties both buried their heads on this issue. There are many areas where tax could be reformed, but I have chosen to comment on this particular area because of the direct affect it has had on the property bubble and as a result on people's home owning aspirations. I have no issue with reducing tax rates, simply with preferential tax treatment. Is mortgage interest deductible for a homeowner??

John please share your calculations with us peasants.

One alternative is to ring-fence residential property investment losses against other income UNLESS the property was a brand new property. And even then limit the period of time to 3 to 5 years.

That is, allow negative gearing for new stock. Limit negative gearing for the new stock to 3 to 5 years.

This would encourage new stock to be built. And encourage investors to ensure that the property was cash flow positive after 3 to 5 years.

Another alternative is to limit the amount of interest that can be offset to a multiple of the income received.
For example, if you receive rent of $20K per year, then the tax dept can make an assumption the fair rate of return needs to be at least 5%. And therefore the highest loan amount you can claim interest off would be $400K. - 5% of 400K being 20K

This would make it harder for speculators who buy on rental rates of return of 2 or 3 % during boom times as they have an expectation of capital gains. It might even be an idea that if you only make 2 or 3% rent in the first year then the IRD can make an assumption you have bought with the intention of making a capital gain and capital gains tax will apply.

The Fair Rate of Rental Return rate could be adjusted by the RBNZ during the cycle. Giving it another tool instead of just interest rates which hit businesses as well as people paying mortgages. So the IRD could state the Fair Rate of Return could be 10% during a boom - that is, can only claim interest offset against a 200K loan for 20K rental income - and 5% during a slump

(Donning Tin hat & Flak jacket and waiting for the ideas to be shot down )

Well now -is our tax system fair?

Is it fair that as far as tax is concerned you are guilty unless you can prove yourself innnocent?

Is it fair that your liability to tax depends not on what you did but on what (say) you were thinking when you did it?

Is it fair that where capital gains are taxable, there is no allowance for inflation so that the more the government allows inflation to run the more tax it gets?

Is it fair that you can be taxed on money you do not have? (Notional capital gains which are unrealised and may never be realised)

Is it fair to make a distinction between realised capital gains and income?

LAQC is the smallest of the questions!

The IRD:

"Pay em what ya have to but dont tip em - they're just not doing that great a job!"

That's always been my philosophy!

Paul

"Funnily enough after 9 years of a Labour government I know plenty of "˜retired at 40"² Management Consultant millionaires."

I would agree with you on that one. I dont think management consultants operate in the real world, the ones I see at the bank I work at provide little value and wear no accountability - they are largely the product of a bubble economy where plenty of money was floating aruond and not much rational budgeting was going on. Throw some consultants at a problem and it will go away .. yeah right!

Neven

"how about we want better incomes so more people can afford to live in NZ sustainably so that we don't have to flog the country off to people in other countries?"

There is nothing wrong with aspiring to higher incomes .. but in the meantime we should take measures to keep NZ affordable for NZers rather than taking the easy approach of selling our nation for which we will be worse off int he long run. Also, bear in mind that property in Aus is just as bad as NZ and they earn a lot more than us - so earning more does not necessarily convert to better affordability. Skyrocketing prces has created the affordability problem, not low wages.

btw - I did not vote Green, but I do agree with most of their housing policies, except the ones limiting urban sprawl.

Neven,

if its cheaper for others to buy NZ then what is the problem as long as NZers can afford it as well???? Its only when NZ is only affordable to foreginers and those already in the market that we have a problem.

And we would not be legislating to drop prices, merely removing an incentive that should never have been there.

Neven,

I never said the tax breaks were the only factor, rather they have exacerbated a situation by allowing investors to gear up further than would previously have allowed. I would be quite happy to remove this break for margin lending situations as well.

To repond to a few responses...

Paul:

My calculations are start with the Harcourts estimate that there are some 450,000+ 'investment' properties with a capital value of circa $150 billion.

After that it is just a matter of plugging in numbers for key variables such as investor equity, financing costs, rental returns, other costs (rates, insurance, dep'n, maintenance, etc.) - and voila - a conservative figure of $2 billion...

And remember, this figure does not include the un-paid but legally required taxes on capital gains.

I suggest you try it yourself...

Or get one of the 'plenty of retired at 40 management consultant millionaires' that you know to give you a hand!

Really Paul, the bitterness in your posting is so unbecoming - and just to make it clear, I retired in 2000, and voted National in the recent election.

Gibber:

I appreciate some of your sentiment - but the suggestions you make would add more layers of complexity in the tax system.

And I don't like the use of FRoR calculations - I prefer taxes to be levied on actual returns - FRoR regimes are notoriously arbitrary - and often unfair.

Nevin911:

There is no shortage of housing stock - there is enough stock to meet demand - so there is no market fallacy in my argument.

The issue is simply that the current tax regime favours the investor over the buyer - indeed it is worse than that - it results in the 'out-bid' buyer effectively subsiding the investor.

Which you might not see as a problem... but I do because...

It encourages investors to put their money into property - which at an aggregated level is non-productive - I would rather they were investing in productive enterprises of their own, or of others, or even productive activities of the state - e.g. infrastructure.

And let's not get to hung up on the LAQC issue - just simply ring-fence residential property investment as we used to - and the problem goes away!

James:

Sorry to read that your experience of consultants is poor - but I'd like to think that this doesn't apply to all of them.

My experience is that poorly run businesses spend more on consultants - and get worse consultancy - than well run businesses.

And having worked with both General Motors and Toyota - I've seen examples of both type of business - no prizes for guessing which gets which label!

On a different topic - I would have voted Green as I agreed with all their housing policies (and I think the issue is that important) - but they tied themselves to Labour - so, for me, that ruled them out - didn't leave me many options lol.

> I'd suggest you go for a drive thru south Auckland and see how many people are sleeping in garages, caravans and 4 to a room, the whole statement is nonsense anyway because supply always meets demand, its the price that varies.

So you agree the price is too high?

Paul

"legally required taxes on capital gains"...um glad you were not a tax consultant, capital gains are only liable on those gains made in your sphere of business, hence in domestic rental you are not (cough cough) in it for the capital gains, so you are not liable for GCT (also you can't claim a loss!)

All those people on TV however climbing the property ladder by doing a do-up and flick are liable for capital gains

As I said prevoiusly, I think the LAQC concept was fine BUT the companies so incorporated should have been designed to make a profit at their establishment, this would have eliminated heavily geared rentals from becoming LAQC's

Neven

Some more responses...

Paul:

What is unbecoming is your bitterness...

And it appears to be driven by jealousy - which is sadder than sad.

Coming as I do from a state-house, broken home and with hands callused before I was a teenager - I suppose your jealousy is understandable... not!

And my background taught me not to talk down to hard-working people - but it also taught me to argue on their behalf with bitter people (hard-working or not) who choose not to see inequity when it suits them.

I think you confuse your own status.

But then bitterness and jealousy often blind.

I note that you have failed to rebut a single point I made but have responded instead with posts laden with with sarcasm and contempt.

I don't know whether you are successful as a residential property investor - but I can assure you, you clearly lack the wit and wisdom to be a successful retired at 40 management consultant.

Neven911:

Glad that we share sentiments re ringfencing... and I would have no problem with the idea of carrying a loss forward.

You are correct in assuming that I was/am not a tax consultant - but I believe (based on advice from my accountant and the IRD) that you are wrong wiith regard to the 'cough cough' assertion about 'sphere of business'.

I believe this is one of those many (mainly urban) myths that surrounds the topic of capital gains tax i New Zealand.

The advice I have recieved from the two aforementioned sources is that the defining qualifier is intent - i.e. if you buy something with the intent of later selling it for a capital gain - then that gain is taxable.

Perehaps we should ask the IRD to adjudicate - I'm sure Bernard must have a contact there...

Hi Mark...

When I look at this site - and others - I'm not 'looking' for people to debate with... rather I'm looking to keep myself up to speed with what is happening in whatever topic area the site is addressing.

Most of the time, I leave the sites I visit a smarter person than when I arrived...

However, when I see (what I feel is) a legitimate position being advanced and that poster is attacked ad hominem (check out the posts on this discussion before I joined) I don't like it - and I respond.

The reason for making my personal position clear in my post was to deny those arguing against me the possibility of the same ad hominem attack.

I hoped that this would move these posters back to discussing the issue...

And in the case of Neven911 - he did...

And in the case of Paul - he didn't...

Paul, instead chose to up the ante...

You win some - you lose some...

More to the point, on the topic/s of this thread, do you have a view?