Jeepers , dude ! We're only trying to fix the tax system , not gonna vote Obama into power , or something .

Roger Thompson,

We're only trying to fix the tax system

Good luck, but by itself that is as useful as re-arranging the deck chairs on the Titanic. I can't see much point in wasting time on it.

PeterR:
- Government has no business messing with our cultural issues i.e. what did you learn from Helen Clark?
- MMP... can you think of a better political system?
- Major economic issues will be addressed if the Tax Working Group recommendations are implemented. Not solved. But its a start.

Like RT said, you want fairy dust and unicorns... move to USA.

Health, education, law and order. Additional meddling only creates more than offsetting unintended consequences. We are individually responsible for all other issues NZers face.

Thanks BH,

I think much of that 213b is borrowed... and when you consider that probably half the rental stock was purchased before 2003, then the recent doubling in values distorts this number to appear large.. (I don't count my virtual gains until they are realised) ..so the amount that people feel they have invested could well be less than half this... and maybe not much different to the stock market... because most people don't borrow to invest in shares.

I guess what I am hinting at that is this 213b figure is always presented as if to suggest some sort of rort is going on... when it might actually be reasonable in the sense that a business which is capital intensive and requires large borrowings, will therefore produce a similar loss despite the value of the asset. Eg If you were a private power company building a hydro electric project like the Waitaki or Clyde dam today... you would probably be offsetting profits elsewhere against losses on such a project for a few years.

I think the real issue for productive growth is not only lower personal income tax but that you can only borrow money to buy property in NZ. Our company directors had to use their houses as collateral to get 100k overdraft. Have you tried to borrow money from a bank to develop a business (especially IT) .... without any property behind you?

Sensitivity? Yes. Frustration. Yes. Fighting the erg to write in caps. YES.

Again, fairy dust and unicorns is all I am hearing. What could possibly be your solution for "Excessive and unservicable debt; A shrinking productive sector with relentlessly increasing cost structures and; Bloated government and service sectors"?

The government cannot force private citizens to pay down their debts, nor should they. Or would you like to see an attempt to persuade them with tax-payer funded incentives? Like the current 10% repayment bonus on student loans. Any net benefit to society?

A shrinking productive sector... anything to do with the high tax burden?

Bloated government... same sh*t, different pile, the world over, since the dawn of time.

Bloated service sector... 10% interest rates would sort out this so-called inefficient use of resources, right?

Thanks to the political cycle where it is, we might actually see an improvement in our tax system and 'potentially' real benefits. We can get back to fairy dust and unicorns later.

Re Bernards comment.. "NZ$213 billion is the total value of the asset. We don't know exactly what the equity is, but I'd be surprised if it was less than 50%.

On what basis do you believe purchasers of rental property in 2008 retain on average more than 50% equity in their property? From an investment perspective it doesn't make sense. Try closer to 20% tops.. before factoring in debt secured against equity in the primary home or other assets.

Re Bernards comment.. "Buildings don't depreciate, otherwise we'd see house prices fall."

Buildings do not have an infinite life, therefore they do depreciate. Which is why in most civilized countries for tax purposes buildings are depreciated.

House prices can and regularly do fall as a result of depreciation, which in turn can devalue neighboring properties and entire communities.

Other factors sustain or drive up value, such as supply and demand.. but the underlying value, particularly in older neighborhoods, is not necessarily the building but rather the location, zoning, lot size or simply the land itself.

@John W: On the shallow level the tax reforms make sense if the suggested ones happen. A Govn sets policy and direction which takes time to take effect and tweaks it as necessary...the biggest issue is this should have happened a decade ago...if not two. I dont think major, fast changes are good at a Govn level...small changes dont alienate/frighten ppl, or give the mischivious a chance to fool others to further theri own ends.

On a deeper level "All based on neo-classical economics that believes it can defy physics and biology. To quote Wolfgang Kasper" We are indeed wasting our ttme as the World is finite and we are up against the boundary...but as per "market forces" will sort it out it will, its going to hurt. Our Govns are choosing to do nothing because the problems are in the future (or were) and/or the voter wont stand sensible policies to curb the worst of the coming pain...too many ppl think their lifestyles can defy gravity...and they wont stand for a Govn that tells them it isnt so...just look at the calls for theGovn last year to cut tax on petrol when it got expensive...rather than changing the use of the fuel...ie move and live closer.

Personally a decade at most two from now I think we will find we look back at 2010 with great nostalga...because we will be in a world of pain...energy will be very expensive, probably rationed (power blackouts, limited petrol per week), many of the gadgets we have will be boxed out of sight...too expensive to run. Few cars....anyone trying to drive their "Aston Martin" around town will find themselves the centre of a riot, or shunned. The big TVs probably skipped... food will be plain and seasonal...our taxes will probably have doubled....unemployment past 15%...maybe 20%...culturally and socially we will have to change and fast.

There are some good pieces on youtube....on Cuba and what it went through in the 1990s, thats our future.

http://www.youtube.com/watch?v=CCiHpPkp3pU&NR=1

So yes its the Titanic syndrome....which is quite apt....the first class passengers had the chance to get into the lifeboats and refused they were too comfortable and believed themselves safe....the stowage class were held back at gun point...so the boats left 1/2 empty.

regards

I have a complete lack of faith in accuracy of the figures when such obvoius contridictions are made....

There was NZ$213 billion invested in residential rentals in 2008 and they generated losses for tax purposes of NZ$500 million.......

About NZ$800 million of those losses are directly related to rental property investments, the IRD estimates

So which is iit $500M or $800M .... pretty big diference in the first two so called facts on the tax system........ hard to take anything oin the article seriously after that IMHO

Cheers
Spaceman

@bjr: "This view should not make people despondent, just encourage them to remain flexible, plan differently and work towards an independence that is quite rewarding."

One of the biggest things right now is to "remain flexible" IMHO...sit and watch the future unfold....most ppl in here probably have 1/2 or a 1/3rd of their lives left...so 20~40 years...20 years ago I didnt expect to be in NZ...or doing what I do now...things like pensions dont move across borders easily, yet we take them out for 40years...for my parents generation that didnt matter, for mine and my children it will IMHO...fixing a mortgage for 3 or 5 years is a huge lockdown....is that really wise? look at the costs to break it...

Peak oil is going to be interesting to watch....this elephant in the room is going to go "bush" and wreck things IMHO, not least of which is most Political Parties credibility. The only party Ive seen comment on it has been the Green's and they seem retisent/low key like its bad news and no one wants to deliver bad news. and the news is bad....sorry but your entire lifestyle goes down the tubes when Ghawar stops producing....(as much as from panic as loss of its 5mbpd production). Just how can National and Labour retain any credibilty once the obvious is obvious. Their claim that economic growth will lift all NZers out of poverty will look like the whitewash it is....so not only do I wonder what the world / NZ post-realisation of peak oil will look like but what the political landscape will look like.

regards

It wasn't exactly a million years ago that losses on a rental property were effectively ring-fenced. I remember listening to the budget speech that unlocked the gate but can't even recall which decade it was. (Much of the seventies are pretty hazy for me). The stated purpose was to encourage investment in rental property as the government was unwilling and/or unable to meet the demand at the time.
Investors have been exiting the market for some time now with most places being sold to owner occupiers. This process is going to accelerate in anticipation of the coming changes. Nobody (repeat, nobody) will be building new places with the intention of renting or selling to investors now that it has been decided that owning rental property is on a par with running a P-lab. As I write there are 490 rental properties on TradeMe for the North Shore, last year at this time there were over 1,000. A property that I had to offer a teaser rent to get a tenant for in 2008 I rented last week for the $180 a week more in 2 days.
Even if none of the suggested changes are implemented, undoing the looming rental shortage wrought by their anticipation will be like trying to put toothpaste back in the tube.
Plus ça change, plus c'est la même chose.

@ stevie wonder
Apparently it worked too well !

hugs

Despite what Bernard repeats ad nauseum, LAQC's do not provide any tax advantages over personal ownership or partnerships. Someone please show me if there are. Twelve years of property investing and I still haven't found them!

Trusts only reduce tax for those higher income earners who are not self employed, and they could achieve the same thing (better in fact) in a standard company structure anyway.

Less than half of New Zealand's top 100 income pay the top personal income tax rate because they derive their incoem from trusts or companies that do not pay the 38% rate.

If you want to crusade to reduce the top personal tax rate, fine. But why attack people who are trying to achieve financial wealth for themselves and their families within the law? Not only does it detract from what you're trying to achieve but you're undermining many people who have not even made it into the top income tax bracket!

From my limited perspective , the attack is squarely upon the rules of the game , not the players . .............. And in my instance , I relish attacking the lying thieving incompetent wastrals who constructed the scenario , the Labour Party , and Michael Cullen specifically . The envy was Cullen's . He abhorred business , and " rich pricks " .

Just thought, the $19b benefit cost is the biggest waste for the country. BH, do you have any idea to fix that?

My friends have invested in housing only because of the tax breaks from LAQC's. Otherwise they would have not.

There are a lot of comments here that are incredibly insular, thinking the effects only hit them. Tax changes reprioritise for the country on the whole, more productive = more employment, more employment= less welfare cost. Let's think a few steps ahead and how you can benefit.

Dave is correct, LAQC has no more advantage then personal ownership - infact LAQC can cost more in terms of compliance costs eg. company report, tax returns etc.. the only real advantage in LAQC is when transferring the asset to a trust structure - can be done without delay.

LAQCs allow a high income earner to isolate assets and attribute losses sorely to themselves. Especially where one partner is on low or no income.

One can do this without LAQc structure "“ just proportion the ownership in the property title "“ say 75% Mrs B and 25% Mr B

Difficult with a married couple as the IRD will look through that and say 50/50.
OK with a business partnership.

It is all very well investigating tax reform, I agree with some of it and the end goal must be a flat tax rate.

However, I am still concerned with how the tax is spent - we have a health system / acc shelling out for sickness beneficiaries because they are addicted to drugs, a justice system that is so keen on having criminals back for more business, and a benefit system throwing money at "deadbeats" who just find it too easy to be unproductive, and people that don't save for retirement.

Tidy up this rubbish, then I'll be a little more keen on fixing the way the tax is collected.

"Andy, higher income earners already subsidise all sorts of things, such as low income earners, beneficiaries, health, education, roading"¦ etc etc. Not to mention low rents!! Many people who invest in property are already paying *far* more tax than most even after offsetting losses."

Thats a different issue about government spending not distribution of the tax take.

"Many people who invest in property are already paying *far* more tax than most even after offsetting losses."

If this is true then they will pay less tax on their income and more on their "investment"

"I could have bought properties in my own name or in a partnership and achieved exactly the same result tax-wise as within an LAQC and at less cost. "

True, but if you were married and you tried to split the allocation of the losses with your wife other than 50/50, even though your ownership papers said 70/30 then IRD could view that as tax evasion and tax you 50/50 anyway.
Yes the transfer of assets is easier.

"Also, how will this capital be redistributed? Please explain. Banks generally only lend to businesses when property is held as collateral!"

Sure the banks require this, but the money will be used in productive enterprise ultimately.

I tend to think that NZ's tend to be too insular, not really understanding how the rest of the World handle their tax affairs.

1. NZ has got itself caught in a "tax and give" system because even the poorest have to pay tax on every single $ earned, they then have to go through the benefit system to have this returned. This creates costly increased officialdom, with the right hand taking and the left hand giving away to the same people, it takes away both dignity and hope. It is not the fault of those on benefits rather the mess the system has got itself into.

2. Most counties also have lower absolute tax levels than NZ larger because not all income is actually taxed, many have personal universal tax free allowances before any tax is payable. Having allowances enables a Government to increase these and in effect give any tax reduction across the whole tax paying population. It decrease compliance costs and removes many form the tax system. A personal universal tax free allowance would also act as a backstop to the minimum wage effectively increasing it at a stroke.

3. Very few Governments would consider it politically realistic to heap any tax cut on the highest tax payer group, this is simply enriching the few at the cost of the many and is socially divisive and political suicide. It rests on the view that any tax cut to them will cause a almost mystically conversion so they start not looking for the means to decrease their tax bill.

4.The Government says we do not save enough preferring to put money into rental property and other "naughty things", that they really want us to save our money and not spend it on buying houses or imported goods. But what do they do to encourage us to actually save? Absolutely nothing, savings are taxed at the highest marginal rate so where is the encouragement to save for the anybody?. Cut tax on savings to 5% or better yet 0% and then see the effect.

@Foreigner

Wondered about your first and second points for a while.
Isn't this the point of tax bandings in the system we already have?
Just 'widen' the bands, e.g pay 38% above a higher income level.

I'm begining to think that the tools exist (maybe 'inherited' from other countries), but they don't seem to be used.
e.g. Capital gains on investment property does exist but .....

People don't seem to understand that LAQC's provide limited liability which is just as important if not more so then the ability to offset losses (which can be done in a partnership or sole trader structure).

Income $100 per annum gives tax of $12.50 ........SORRY typo

@Foreigner

Personal allowances - yup

Joint income splitting is/used to be another popular way of 'targetting/favouring' a particular group. I think Peter Dunne has pushed for this (historians correct me if I'm wrong). Maybe its too mired in the messenger rather than the message.

This would use the tax system rather than another bureaucracy. Maybe its cheaper?

None of this is new - and maybe therefore not newsworthy enough.
After all "30% top tax rate" sounds so much better than "Tax banding change".

I really am beginning to think we just don't have enough to go round in NZ.

The in-fighting is a symptom of us "disappearing up our own (collective) bottoms" - to put it politely (Steptoe Steps said this one too!).
Collective "death by 4 million bites".

The other thought that keeps occurring is that somewhere along the line someone decided that its 'better to have lots of us being paid to do part of a job rather than one of us doing the job properly' i.e. pointless division of labour per se, rather than for the sake of specialisation.

I'm for W Kunz grand vision!

IainC, while "it may be interesting" to see if removing/altering rules for LAQCs would have an effect on negative gearing / property ownership etc, it would also be costly in implementing and on an ongoing basis (administration) - especially if it does not achieve the intended result.

I guess what I was saying above is, there are many reasons why people buy properties, tax benefits are not the only reason.

Steven,

You're still assuming that investors actually pushed prices up beyond where they would have gone anyway, which I don't believe they did. Investors are over-represented in mortgagee sales and I know many who have sold-down or got out entirely.

Where are house prices now? The highest since 2007. It's sure not investors holding them up!

Pete - just fighting the good fight! :)

I think we're likely to see some panic selling by investors who are highly leveraged with all the talk of tax changes.

As I see it there is nothing wrong with purchasing & owning rental properties as long as you are not buying a house that someone could buy to live in. If there was sufficient supply of houses that everybody who wanted to buy at a reasonable price could and those that didn't rented, then you would not see the attacks on landlords that currently exist (or they wouldn't be as strong). The rental market would reflect a proper investment market with true levels of rental demand, not one overinflated by people wanting to buy their own house.

Landlords being the marginal buyer keep up demand at the lower end of the market through tax breaks that owner occupiers do not have. In effect landlords create demand for their product by restricting supply at a lower price. If you wanted to see this effect writ large, give owner occupiers the ability to deduct the same expenses as landlords, then watch house prices go.

"give owner occupiers the ability to deduct the same expenses as landlords, then watch house prices go."

Unfortunately that is called tax evasion.