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John Key agrees it’s not fair ‘on balance’ that property investors pay no tax
November 9th, 2009Prime Minister John Key has agreed that it’s not fair “on balance” that property investors pay no tax on NZ$200 billion worth of property, but he is not committing to taxing them. Key made the comments to TVNZ Political Editor Guyon Espiner in the final Q&A programme of the year.
My view
Key seems to be leaving himself some wiggle room for reforming taxes on property investment, but his comments are hardly a clarion call to get on with it. We’ll find out more after the Tax Working Group comes back with its report at the end of this and we see more detail in Budget 2010. It’s hard to be confident though that Key is serious about reform when he talks like this.
‘On balance’ he seems more like a populist politician reluctant to reform than someone who really wants to use government to make long term improvements in the structure of the economy.
Your view? We welcome your comments below.
Here is the part of the interview referring to tax reform.
GUYON Okay and one of the big elements that people talk about there is tax, now I know you’ve got a review underway, so that you’re not going to want to give exact details, but let’s keep this broad. Generally you’re looking at trying to lower personal and company tax, and fund that potentially by raising consumption taxes like GST, or possibly some sort of property or investment tax.
JOHN Well the mix to the tax regime is possible, I wouldn’t rule it out, but nor do I necessarily rule it in. Let’s say a mix is possible, let’s go away and wait and see what actually happens, there’s a lot of different factors out there and I think the Finance Minister was on last week talking about some of those options around the edges of property investments and the like.
GUYON Yeah he said that we would seriously consider changes to the treatment of investment properties. Are you committing to some change there?
JOHN Well what we do know from the tax working group, is round about 200 billion dollars worth of investment in that area, and basically the Crown’s lost money on that investment.
GUYON Well they pay no tax.
JOHN That’s right.
GUYON And in fact they pull down 150 million dollars, is that fair?
JOHN No, probably on balance.
GUYON Okay, so you’re going to do something about it aren’t you?
JOHN Well we need to go and look at all that, I’m not going to pre-empt that on the last show of 2009.
GUYON You’ve said that it has to be fair and equitable this tax review, you’ve just told me it isn’t fair, that they pay no tax because they can organise their affairs correctly, are you going to do something about it?
JOHN That’s a basic principle of the tax system.
GUYON So they can expect change in some form?
JOHN Well it’s also about an issue that both IRD and other have identified the Treasury, and that is the robustness of the tax system over time. One of the concerns about New Zealand is that we tax labour and we tax capital, and they are by far the most mobile. Now on the other side of the coin we also want to put the right incentives in the economy, and we also very importantly don’t want to increase the tax burden, I mean we are running a deficit we understand that, but actually the last thing you want to do is put a big sea anchor on the New Zealand economy, and the more you tax people the more effectively you do that.
GUYON It sounds like there may be some change coming for property investors, what about GST, will you raise GST?
JOHN That’s an argument that the Tax Working Group’s put up.
GUYON Cos you’ve previously ruled that out.
JOHN No, what we’ve said is we’d need to be convinced of a good case.
GUYON But you have to fund these personal tax cuts don’t you, somehow?
JOHN Yeah, well again it’s about a potential change in the mix, that’s a possibility, but I wouldn’t put it any higher than that. We need to go and have a look. There’s a number of different factors in there, and what is true about New Zealand is, if you take our top personal rate it’s lower than Australia’s but it kicks in a lot lower, we kick in at $70,000 they kick in at $180,000.
GUYON In fact until you earn $200,000 you pay less tax than in Australia, and they’ve got a review over there you’re gonna have to move aren’t you. Are you going to move that top rate down?
JOHN Well one in four New Zealanders who are tertiary qualified now live overseas. We are rapidly &.
GUYON Are you going to bring that top rate down?
JOHN Well we’ve said we have an ambition to do that, and to get that down to a 33% rate to align that with the company rate.
GUYON Do you think that’ll happen next year?
JOHN Let’s wait and see.
Tags: Capital Gains Tax, CGT, Guyon Espiner, John Key, Land tax, Property investing, Q&A
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November 9th, 2009 at 10:13 am
Key cannot provide guidance on future policy because the Lords of Finance have yet to tell him what he is allowed to do.
November 9th, 2009 at 10:23 am
Its a wait and see game unfortunately. There is almost no point in talking to these politicians at the moment. Its going to be a frustrating wait followed by disappointment for some.
November 9th, 2009 at 10:29 am
Key’s problem is that he is reading from two reports at the same time.
1) The polling reports the National Party is doing.
2) The Tax Working Group meeting minutes and their future report.
I bet now that he knows the two will have no common ground.
November 9th, 2009 at 10:39 am
KEY: “One of the concerns about New Zealand is that we tax labour and we tax capital, and they are by far the most mobile.”
This is the crux of the matter, and is a key reason that both a property tax and removal of the tax breaks for property investment are necessary and urgent. This will widen the tax base and in the long run, create the opportunity to reduce income and corporation taxes.
November 9th, 2009 at 10:55 am
Wally: I agree about the Lords of Finance. However, the fiscal deficit is unsustainable, the govt must be aware of that. However much National may be terrified of upsetting their core constituency, they may be driven kicking & screaming into doing just that. & bloody good too. Subsidising landlords to the tune of billions of dollars is absurd when you are are borrowing $250 million per week.
November 9th, 2009 at 11:01 am
I’m normally a fan of John Key, however he is clearly painting a false picture comparing NZ and Australian top tax rates. While the top tax rate of 45 cents doesn’t kick in until $180k, they have a 40 cent tax rate at $80k, compared with NZ at 39 cents.
November 9th, 2009 at 11:03 am
This is pure BS. As Philly points out – “Subsidising landlords to the tune of billions of dollars is absurd when you are are borrowing $250 million per week”.
All they need to do is make the whole thing fairer. As much as we all hate payng tax, it’s necessary and as long as it’s reaped in a fairer way (and possibly distributed in a fairer way – get rid of WFF) then most people would surely not mind too much. You would hope not anyway.
November 9th, 2009 at 11:08 am
As you will gather from my other posts this morn, veedub, the comments made by that Fool, John Key, on Breakfast TV1, not only made my blood boil, but have dismissed from me ANY thoughts of a possibility that IT has anything other than the career of John Key at heart.
November 9th, 2009 at 11:08 am
Highly speculative investments like housing should be taxed, no question. It would bring house prices down to more reasonable levels, lower our exchange rate and turn the focus of our economy several percentage points away from consumption which is what excessive housing investment is.
November 9th, 2009 at 11:13 am
Too obvious, Simon. Don’t go into politics.
November 9th, 2009 at 11:18 am
Mattnz: I agree on the top tax rates. Plus it is very difficult to make accurate comparisons between taxation rates in different countries. eg Oz has a compulsory savings regime (not counted as tax) but NZ’s is included in our tax system. It can be better to look at the “wedge” of compulsory withheld payments, rather than just an individual tax rate. Key may be being fairly disingenuous here, no surprise.
November 9th, 2009 at 11:18 am
And that, Harriet, is selfishness at its most extreme. His job is to do what’s right for this country, not himself.
I don’t have children (I’m one of the reasons we need to “import” our population
) but if I did, I’d be worried about how on earth they’d be able to afford to buy a house, unless I told them not to worry as they would inherit mine (unfortunately I don’t have one to bequeath) or they lived in Stratford, or Patea, or Turakina….you get my drift. I ask my own father (BBer) what he thinks about the house price issue and he agrees that it’s a dire situation for younger people. But he then reassures me that I’ll inherit his so not to worry about it. It’s the principal of the matter!
November 9th, 2009 at 11:28 am
So when the Property Investors are driven out,who is going to provide the thousands of Rentals required? The Government? Yeah right!
November 9th, 2009 at 11:30 am
No, Graeme. The property speculators ( note, different to investors) will sell them to people who can afford them. They will go from a non productive asset to what they should be; shelter for people who make REAL things. That will mean LESS renters and more owner/occupiers. The Government AND the country will benefit from a realignment of the property sector.
November 9th, 2009 at 11:39 am
Harriet – well said indeed; you’re spot on there. ‘Shelter for people who make REAL things’ – excellent phrase.
November 9th, 2009 at 11:43 am
@Simon
Highly speculative investments like housing should be taxed, no question. It would bring house prices down to more reasonable levels, lower our exchange rate and turn the focus of our economy several percentage points away from consumption which is what excessive housing investment is.
How woould you feel if the value of your home came down to more realistic levels – say down 30% maybe. You guys don’t get it – we have a realestate bubble that when it goes will destroy the New Zealand and Australian banking system, not to mention any family that purchased a house since 1997 would loose most, if not all, of their equity.
Those in power know this – they inherited the crisis from ‘aunty’ Helen and ‘bubbles’ Cullen. Right now they are running scared of what will happen if the effluent hits the rotary air movement device.
Basically there is a 500 pound gorilla in the room, who is currently sleeping, and you guys want to tun up the sterio! Sheesh!!
November 9th, 2009 at 11:50 am
I know this isn’t very constructive, but I have to blow some steam; English and Key are turning out to just as big a wasters as Clark and Cullen. What have we done to deserve these kinds of people? Maybe it’s the ‘Hidawira Effect’ – Johnkeys’ donkeys leading lion-hearted Kiwis – to debt slavery for life, including the lives of our kids and grandkids.
Why do we have to keep suffering these types of people?
November 9th, 2009 at 11:51 am
I know from your posts which side of the equation you are on, Martin. But to quote from a friendly R/E agents last weekend:
“It doesn’t matter about the price of a house as long as you buy and sell in the same market”. What she meant was “…as long as prices go up. No one wants to take a loss, even if they are just relocating”
So 5% down; 50% up or your 30% down should not matter.
But , as you know, what is fixed is the debt gorilla.
November 9th, 2009 at 11:51 am
Philly for goodness sake…the fiscal deficit means nothing to these fools…they see it as no more than a minor problem best sorted with lots of spin and someone overseas lending the loot in exchange for future Kiwi fools paying them a fat return in the investment. They will keep the benefit bullshit system going because it buys them the votes they need to stay in power and it’s the Staying in Power that matters, not a wealthy NZ future. And you need to remember they are subsidising National Party Members..not landlords…so they don’t give a rats rear end about borrowing
November 9th, 2009 at 11:52 am
@ Harriet
Lets say that the law says that any property sold after 1 Jan 2010 copped a capital gains tax. Or even better lets say that the LAQC laws were modified on the same date.
ANy investor that was planning to liquidate a property in the near future would do so post haste, and we would have a run on property prices – remember that property is worth what your neighbours sold theirs for.
Take a look at America in the 90’s with the savings and loans crash – that was brought about by a change in tax policy – banks fell like dominos and the government had to spend billions to stabalize the situation.
November 9th, 2009 at 11:55 am
Martin – the sooner you turn up the stereo the less pain there will be in the long term. A stitch in time etc etc…
November 9th, 2009 at 11:55 am
Rodders was right…but wrong…..how ironic…..
MR KEY…do something…not waffle make…well done GUYON…
TRYING to keep em HONE-st is the biggest problem in NZ politics…
It was HELL-en here…..in PARADISE.
Keep asking the HARD QUESTIONS……. GUYS.
Maybe it will be paradise again.
November 9th, 2009 at 11:55 am
If a new institution is expected to create a redistribution of income that harms vested interests, or if the transaction costs involved in establishing the new system are high, the prevailing institutions tend to persist even though the new alternatives appear to be more rational and efficient (Libecap, 1989).
November 9th, 2009 at 11:55 am
Martin
Agree with your summation of the what the outcome of a crash could be. I don’t think anyone in NZ really would want to see a 30% price decline in a short period of time. I think most would opt for an orderly decline which would allow the banks to repair their balance sheets over time.
However what we have is an RBA throwing petrol on an out of control fire and a government using aforesaid rotary air movement device to fan the flames. A sure fire way to ensure that when we the bubble bursts it will be a loud band rather than a hiss.
November 9th, 2009 at 11:57 am
How long have “we” been talking about tax reform re R/E, Martin? Don’t you think the grace period has been long enough? I know about the ‘talk’; you do; so does every other ‘investor’ ( my accountant sent me an email last week, just to refresh my memory). So the smart money has formed it’s view, and moved or not. As with any change ( say, Telecom when it was split) there’d be a knee jerk reactuon. Some are ready to ‘pounce’ on a bargain; others will jump in fear; but it will normalise. And the country will be the better for it.
November 9th, 2009 at 11:57 am
Fair enough Harriet.I own two rentals(1xpos 1xneg geared) and on 50k a year. Not sure how talk of a land tax is going to affect me.
If too many investors get driven out then surely rents will skyrocket due to supply and demand.
November 9th, 2009 at 11:57 am
Hariet – I am not a propery speculator – I have a modest house and little or no debt.
I don’t agree with the LAQC tax structure and I am not happy that this has been allowed to happen.
I am opposed to the government taking almost 50% of what I earn and spending it with no accountability – which is why I am opposed to any solution to problems that involve more taxation.
November 9th, 2009 at 12:00 pm
Hey guys, hasn’t stupidly easy credit over the past decade ish been more of a driver for riduclous house prices than any tax regeime. I mean look at other countries around the world. They have had bubbles in property but yet they dont have LAQC’s and have capital gains taxes….
November 9th, 2009 at 12:00 pm
I think that December 7th, 2009 will be that day, Sam.
Another day that will live in infamy – funny how that all works out.
November 9th, 2009 at 12:03 pm
“No, Graeme. The property speculators ( note, different to investors) will sell them to people who can afford them. They will go from a non productive asset to what they should be; shelter for people who make REAL things. That will mean LESS renters and more owner/occupiers. The Government AND the country will benefit from a realignment of the property sector.”
Great point.
Its no coincedence that NZ has a worse home ownership ratio than both aussy and usa (and prob many more if i bothered to look).
Basically the incentive to buy tons of rentals, neg gear them, get govt. to subsidise a third of the paper losses (plus some with made up deprciation figures) while you get the tax free capital gains is just too great and has lead to over valued prices and poor productivity as a nation which is not sustainable.
John Key knows why 1 in 4 tertiary qualified people move overseas. Its because they see this and see there skills/quals not ever going to get a decent reward in NZ because NZ is set up to reward those who buy property and not those who want to add real value to others
November 9th, 2009 at 12:03 pm
Indeed Mark,
What we are seeing is the result of 40 years of compounding global inflation as the money is sloshing around.
On an unrelated topic, we could have a very interesting year with shortages of rice and grains – The Indian situation is looking very bad. I guess we will find out how long three weeks of global stockpiles will really last.
November 9th, 2009 at 12:04 pm
Graeme: Rents will FALL, initially, as landlord will attempt to recoup their ‘losses’ by putting up rents. Renters already pay the maximum that they can have extracted from them ( that’s business!) and WHEN rents are raised, tenants move. Properties are left vacant; and in the absence of NO rent – some rent, although now lower, is better than none at all ( ie: no tax offset on other income etc). The market for good tenants reverses as stability of income becomes paramount, and eventually normal service resumes at, probably, current rent levels ie: you can’t charge more rent that a tenenat can pay.
November 9th, 2009 at 12:06 pm
The question is: if the govt is going all out to tax landlords and drive them out of the market. Would the state be the one who will provide majority of the renting market???? As renter, I would reluctant to use Housing NZ as my landlord especially where you don’t have a choice of what and where you want to rent.
November 9th, 2009 at 12:07 pm
As Martin says, you are indeed right, Mark. But the Nanny Statists love to tax and churn, National is no different.
As further proof (perhaps an item for Bernard), the National government is potentially putting 500 Kiwis out of work next week – why, because they’ve just got to have their clobbering great jackboot over every damned thing:
‘Devilish real estate details about to shut down 500 NZ jobs.’
http://pc.blogspot.com/2009/11/devilish-real-estate-details-about-to.html
November 9th, 2009 at 12:13 pm
Graeme, If investors are driven out, the house will still be there. It will either have a family living in it or another landlord who bought it at a lower cost.
A house will only rent for the price someone is willing to pay. The same cannot be said for buying as LAQC’s and tax distortions mean you can pay a higher price than a family who would just live there.
For new houses, if there is demand for houses then they will be built – they just might not be at such a ridiculously high price compared to incomes that we have now.
November 9th, 2009 at 12:16 pm
@ Harriet – “Properties are left vacant; and in the absence of NO rent – some rent, although now lower, is better than none at all” – unless they’re like the landlords a few doors down from me. Their rental property has been sitting empty for 5-6 weeks now, the landlady calls in once a fortnight or so to weed the gardens etc, but no takers…….could it be that they’re asking too much? Me thinks so, at $140 more than what I pay, for a smaller, attached townhouse. So it’s all good and well to say “I can charge xxx rent” but if no one wants to pay that and the house sits empty, who’s the mug???
November 9th, 2009 at 12:18 pm
GBM, the goverment is not going to tax all landlords out of the market, just ensure that they pay fair tax like the rest of the country. They have been collectively rorting NZ and claiming tax back for too long, while getting all the gains from the house value.
As said above – the house will still be there, but may have different owners.
November 9th, 2009 at 12:19 pm
AT the moment, veedub, even an empty house gets some sort of tax offset against other sources of income. That’s why there is no imperitive to ‘get it occupied’. Take away negative gearing, and have a situation of no rent-no income of any sort, and see how long a rental sits empty!
November 9th, 2009 at 12:23 pm
I started looking at vacant sections last week, thinking briefly that it might be a better idea to build a house. Well, I’m certainly not buying an existing house at their current prices and standards of building. I found a couple of sections I thought looked OK, for about $200k with partial harbour views etc. I discovered that the average cost to build is approximately $2k per square metre, and could live with that. There’s just hubby and I, so a 150 square metre house would do us fine. $500k would then buy us a house that we really like, instead of something we only like bits of for not much less than that. So I phoned the listing agent for said sections, and in the space of a couple of minutes he scared me off! He told me it costs about $200k before you even start building (this is AFTER the purchase of the land) to get earthworks and supports etc as most sections in Wellington are on slopes. Wow, is that right? If so, forget it!
November 9th, 2009 at 12:23 pm
Changing the tax structure on rental properties will not in my opinion bring the whole house of cards down on real estate prices across the board.
The vast majority of rental properties are low end – poorly maintained properties. And yes, they should and will suffer significant nominal price decreases from what their ‘peak’ prices might have been should the Key government get off its ass and fix these tax rorts.
The reason only rental properties will suffer the significant losses is because during the ‘peak’ period, rental investors were beating out first home purchasers, paying far too much for these ‘do-ups’. Unlike the resident homeowner who they were bidding against, they had no intention of making the necessary improvements and so never factored in those additional costs, whereas the residential homeowner would have.
Further to that, the rental investors were factoring into the prices they were prepared to pay, the fact that the interest on their loans was tax deductable (which it was not for the resident homeowner), along with the other benefits of running the rental as a business – and again this added to their willingness to pay a higher price than the residential owner.
So, yes, with a change in the tax sturcture, all the dumps out there will plummet in price and become affordable again for the residential homeowners who will also then spend money on the needed capital improvements.
Sound, well-maintained owner-occupied houses will not be affected by potential rental property price drops – quite the opposite – as these ex-rentals are purchased and upgraded by owner-occupiers, entire neighbourhoods will benefit from capital gains.
November 9th, 2009 at 12:25 pm
I think at some stage ppl compared Key as a mini-Obama…and Obama has I think proved himself to be a plonker….what more is there to say.
regards
November 9th, 2009 at 12:25 pm
@ Harriet – that’s just freakin’ nonsensical!!! Crazy crazy crazy. The sooner this racket is stopped the better.
November 9th, 2009 at 12:32 pm
Exactly! Kate and Novo.
November 9th, 2009 at 12:32 pm
@Greame: “So when the Property Investors are driven out,who is going to provide the thousands of Rentals required? ” That’s simple, If property is so over-valued that “ordinary” kiwi families are priced out because of speculators (ie the price/earnings ratio is 6+:1 instead of the proper 3.5:1) that make tax back on “losses” then taking the speculators out puts,
a) property on the market at a more reasonable price that can be afforded, so ppl buy and not rent.
b) There are so many ppl in property speculation that that’s probably depressing rents ie the supply exceeds demands, so dropping out the “casual” landlords means the professional ones may actually make a decent living and not have to gamble on value gains.
regards
November 9th, 2009 at 12:37 pm
steven – and just to put a percentage on your point b) – I heard somewhere that 2/3rds of all single-unit dwellings in NZ are owner-occupied and 1/3rd are rentals.
In times past, the professional landlords purchased mainly multi-unit dwellings (i.e. flats) as they were the only type of property considered commercial real estate, and hence the only type of property which benefited from commercial tax treatment.
November 9th, 2009 at 12:37 pm
@martin: “How would you feel if the value of your home came down to more realistic levels – say down 30% maybe. ” You forget one thing, my home is where I live, its not a speculation. I bought it 12 years ago, its now worth 219% (GV v GV) what it was then….but this is paper wealth…its wealth Ive never seen, so if its paper wealth drops 30~40% it does not matter, its my home.
Oh…second thing….this is a bubble, the house is not worth the valuation in real terms….as someone said its value is in the real economy and not in some crazy speculators fantasy world….
regards
November 9th, 2009 at 12:38 pm
A capital gains tax doesn’t help as most property investors don’t hold properties in their own name, but in Companies which can ‘live’ forever and Trusts which last 80 years and can be resettled onto a related younger trust. Amongst others, Spain and Australia have capital gains taxes and guess what their house prices boomed and busted (more than in NZ too) – it is just another property cycle and CGT is not going to change it. We may even have to refund the leaky building investment owners and many thousands of kiwis who have made losses in capital on their investments.
The issue is that gearing levels are far higher than we can get for shares, and who in their right mind would gear to invest in Term Deposits, or Gold for long-term investment. I went to Westpac and asked them if I could borrow 80% to buy their shares at what I felt a low price in April this year – my manager said no way JP, we only lend at those levels on property as anything else is too risky!
THIN CAP INTEREST DEDUCTIBILITY
Perhaps time to trim the tax deductibility back on the average property investors’ biggest cost (interest), by allowing deductibility of interest up to a maximum loan to value ratio (“LVR”) of 65% (against Rates Valuation which you can contest as per statutory framework). This would also encourage safer lending by both borrowers and banks. If the backlash is modelled to be too strong, in terms of Housing NZ having to supply more rental properties since many the tens of thousands of Kiwi property investors at 80 – 90% LVR would be forced to sell their properties as it is less attractive a proposition, then I would tweak this deductibility up to say 70 or 75%.
Cheers JP
November 9th, 2009 at 12:41 pm
Philly,
“However, the fiscal deficit is unsustainable, the govt must be aware of that. However much National may be terrified of upsetting their core constituency, they may be driven kicking & screaming into doing just that. & bloody good too. ”
I reckon you are right. My opinion is that the govt was always going to have common sense forced upon it. We have reached the point where pretty much ALL independant economic commentary, the treasury and now Goff, English and perhaps Key are seeing the enormous damage ppty speculation is doing to the country. And lets be honest, WHY IS TAXING PPTY CONSIDERED TO BE SO UNPOPULAR?????? Most people are not ppty speculators/investors. Many boomers are concerned about their kids enough to be happy to see their ppty values fall (I know my parents are). ANd if the govt can show we will be able to offset other taxes then fine and dandy.
November 9th, 2009 at 12:43 pm
Every year in NZ between 75,000 to 100,000 houses are sold.
You people keep raving on about “speculators” so how about telling us how many of those houses were sold to “speculators”?
No, cant do it? What a surprise. Until you can then I am afraid YOU are the speculator.
Oh and also please name one Country in the world where a Property Tax or CGT has actually lowered prices.
Isnt it time some of you differentiated between “speculators” who do quick flicks and long term investors in renters who never sell?
Harriet-rents are rising
Veedub- yep, buy a section and build. If we had none of this “smart growth” bullshit then land values would be 60% of what they are.
Ps my view is get rid of LAQC’s for housing. Then the yield will be 5% gross and if thats what you want fine, otherwise put your money elsewhere. Elsewhere is the problem…..
November 9th, 2009 at 12:48 pm
David – around 1/3rd of them were sold to non-owner occupiers. It’s a better word than either ’speculators’ or ‘investors’ and is quantifiable.
November 9th, 2009 at 12:52 pm
John P
All evidence I have seen shows Australian prices havent dropped. In fact their “bubble” is now higher than the US.
And as you correctly point out, thats despite CGT, Stamp Duty etc.
Also surveys I have seen for gearing of NZ investor portfolios shows it to be around 60% Remember often collateral security is used. (ie the renter is geared to 100% for Tax while the personal home might be , say 40% which averages out to 60%.)
November 9th, 2009 at 12:52 pm
David, no-one is saying they are all speculators, can you say how many aren’t? Are you saying there are none and they don’t exist?
There is a distinction between a family who buy a house to live in and someone who negatively gears, rorts the tax system and hopes for a tax free capital gain.
Tax what is gained is to make it fair with any other investment gain. The idea being that there will be a wider choice of places to invest – maybe even in productive businesses.
Getting rid of LAQC’s and the ability to claim back losses is essential though.
November 9th, 2009 at 12:57 pm
Kate – it might take a lot less than 1/3 to raise the floor price because of the preferential tax treatment most SPIs achieve in comparison to FTBs X&Y.
November 9th, 2009 at 12:57 pm
Kate,
I’d love to see a link to prove that. I mean how do “they” know what the use is?
But assuming youre right, How many are long term holds or quick flicks?
Yes, I’m quibbling about language but so many people know stuff all about property framing the language correctly is important.
Especially when so many are arguing for MORE taxes. Just madness.
The key is reducing the abillity to pay no tax. Some 2 Billion went to LAQC claims last year.
(dont start me on Working For Families!)
November 9th, 2009 at 1:03 pm
Is it not as simple as scrapping LAQC’s and then enforcing the existing rules around paying tax on property sales?
People can still buy investment properties but would have to wait until they were making actual money on them – that is when they sell them most likely before they could offset losses against gains?
November 9th, 2009 at 1:05 pm
David, you could search the Statistics website, as the article I recall was quoting Stats on the 2/3rds owner-occupied / 1/3 non-owner-occupied.
The Prime Minister I think is more warm to changing the tax treatment on investment properties – which isn’t so much introducing a new/additional tax – but rather reversing the amount of deductions and thereby reducing the outflow of tax from the government by way of the tax returns on rental property losses.
So, it isn’t a new tax, just the full collection of an existing tax through the closing of a tax loophole, which has resulted in all the negative gearing going on in the investment property business/market.
November 9th, 2009 at 1:06 pm
Novo
When an Investor sells a house they have been claiming expenses on, then they have to pay Tax as a Clawback. The idea that it is a “free” gain is false.
Sure people can use the “my intentions have changed” route, so by all means. Scrap that.Tighten it up.
To fix the issue we dont need more Taxes. They dont work anyway.
Again.
Name ONE country where CGT has reduced prices?
November 9th, 2009 at 1:09 pm
When an Investor sells a house they have been claiming expenses on, then they have to pay Tax as a Clawback.
Only on deductions for depreciation of the asset, I believe – not on the capital gain necessarily.
November 9th, 2009 at 1:16 pm
Kate, yes some 32% and 412,000 households rent.
But that still doesnt say how many sales transactions per annum relate to people purely speculating. As in buying and selling for profit in a short period.
So many here bang on about these speculators who are ruiining the market for everyone I thought it was about time they backed up their statements with some evidence.
So????
Anyone found a country where CGT works in lowering prices yet?
November 9th, 2009 at 1:16 pm
David, as I understand, they still get the free capital gain and it has been financed at 0% for the prevailing years by negative gearing. OK over simplified.
No-one will tell you a country that prices have come down, but you equally cannot claim that it did not stop prices going higher – it is silly either way.
The idea is to stop the negative gearing and tax rort, broaden the tax base (not increase taxes) and make investments in other areas seem options – by the removal of the distortion currently in place for property.
I believe Les Rudd amongst others has many articles/comments on this as well.
November 9th, 2009 at 1:17 pm
@ David – if CGT doesn’t reduce house prices, so be it. But, to steal Philly’s line from earlier on this thread….” Subsidising landlords to the tune of billions of dollars is absurd when you are are borrowing $250 million per week”……..
THAT is what needs to be stopped. Property Investors need to give a bit too, it can’t all be one way traffic (take, take, take).
November 9th, 2009 at 1:26 pm
Have a read of this for comparison
http://www.finance.gov.ie/viewdoc.asp?DocID=1464
Once the rate was reduced to 20% – the Irish property market took off though of course there were other factors.
Still i think a high enough CGT rate with the tiered system of paying a higher rate if you have held the property for a shorter time would discourage the quick flick – if this is in fact a problem.
November 9th, 2009 at 1:27 pm
If a CGT doesn’t reduce house prices and yield a collapse of NZ’s ‘ponzi property scheme’ then let’s get on and introduce one soon as so we can and enjoy lower paye, corp. and trust taxes effective land, asset and capital gains taxation would facilitate – yay! Because this WOULD be one of the major benefits of said change in taxation – who wouldn’t want lower paye, corp. and trust taxation?
November 9th, 2009 at 1:30 pm
David,
“Oh and also please name one Country in the world where a Property Tax or CGT has actually lowered prices.
”
Consider the following
1) UK and US have CGT. They did have bubbles, but nowhere near as bad as us and now they have corrected.
2) Aus HALVED their CGT under Howard. The Henry report listed this as a factor feeding their bubble. They also have other ridiculous incentives such as FHOGs which were extended and played a part in arresting a much needed property deflation.
So in balance, NZ and Aus have the most unaffordable properties in the world. both countries have a tax system that favours asset appreciation v savings (where full taxes apply). BOTH also have negative gearing tax credits (the US does not).
TAX HAS PLAYED A PART. Not the only factor, but a big one.
November 9th, 2009 at 1:31 pm
ALSO, in aus it is possible to negatively gear a property, and if you move into it within 6 years you DONT pay any CGT. Another gift from Howard. THanks mate!!
November 9th, 2009 at 1:34 pm
Less Rudd,
Agree. Even if prices would not be affected. Why should we pay full tax on EFFORT and SAVINGS in a bank, whereas those who simply sit back and watch their land appreciate pay nothing. Its not just about reigning in speculation, its about fair and equal treatment. The speculation is a symptom of the unequal treatment.
November 9th, 2009 at 1:39 pm
jimmy – yep, and we get this kind of issue/problem dragging us back:
http://www.interest.co.nz/ratesblog/index.php/2009/11/06/opinion-how-neoliberalism-has-failed-new-zealand/comment-page-3/#comment-45942
Complex stuff huh, not.
Cheers, Lesssss.
November 9th, 2009 at 1:49 pm
Have truckies slipped some ” No Doze ” into John Key’s tea . ‘Cos he appears zombified ………. Bryan , can you pop back to Crafar’s farms , grab a cattle prod or two . See if we can spark a response from the P.M. that way . ………. .Earth to Mother-Ship : ” No signs of life , intelligible nor organic , from their leaders . “
November 9th, 2009 at 1:54 pm
Jimmy – you stated that “UK and US have CGT. They did have bubbles, but nowhere near as bad as us and now they have corrected.”
They had far bigger bubbles and upturns and downturns in their property cycles. Look at this link comparing the UK Nationwide Index and US Case-Schiller Index at http://ow.ly/Ax9N and then tell us that these aren’t bad bubbles with massive upswings (nearing 25%) and big (nearly 20%) downturns in one single year. They did this despite having CGT. At a business banking function in Wellington earlier in the year the IRD Policy Advice Division presenter said CGT was extremely expensive to collect and adminster, and not an efficient tax at all.
In the medium and long term David is right – CGT doesn’t lower house prices, and there is not one country in the world showing otherwise.
So as the NZ Government continues to mortgage this current and future generations to the hilt with their over $200 million loss per week and 1 in 4 tertiary qualified individuals leave NZ to work (and pay tax) overseas after we have heavily subsidised tens of thousands per person educating such people we have thinking to do. Time for us to slash Government expenditure including MP perks, number of advisors and party cronies per MP (especially Cabinet Minster), minimise the junket roles for foreign diplomats (internationally engrained gravy-train this one), review the huge increase in number of invalid benefits (where Helen Clark and Michael Cullen’s policies so bad as to cause the number of long term ’sick’ people to skyrocket in their term, perhaps we need the most efficient consumption tax GST to increase 17.5% and thin cap the deductibility of interest to somewhere between 65 – 75% of the loan on an investment property’s Government Valuation.
We must start with Government spending and stop the rot and over $10 billion annual deficits which we borrow from overseas to top up. Ludicruous.
November 9th, 2009 at 2:10 pm
John P,
Check out price to income ratios, you will find NZ and Aus are WAY higher than US/UK. At the height of the US bubble, property was around 4.5 time median income. NZ around 7. we are still not much off that mark. US now below 3. Our situation is FAR WORSE.
November 9th, 2009 at 2:43 pm
Interesting comments here.
There is no question that there is an enormous problem with house prices in NZ – tax changes to reduce house prices will improve recruitment and retention of skilled migrants (who are after all moving here for lifestyle reasons, not for a quick buck). They will also make other investments such as term deposits (to improve the proportion of funds raised domestically) and shares (helping to offset the flood of NZ businesses choosing to list overseas). EVERYONE knows that a rebalancing of tgf tax system is urgent and necessary. That is not in question. The problem is one of POLITICS.
The majority of investment property owners are middle aged and middle class. Many vote National, and property owners are significantly more likely to vote than renters. What is needed is a cross-party consensus to depoliticise the issue. If anything, we should be lobbying Phil Gough to make a deal on this with National. Only then will the necessary changes go ahead.
November 9th, 2009 at 2:44 pm
@David 12.43pm: You say ‘Rents are rising’. I actually haven’t said anything about what they may or may not be doing at the moment. But let’s take you comment at face value.
My wages aren’t going up. In fact all around me I see people hoping they are not next for the chop. So where is that extra community money coming from to fund the ‘rents going up’ bit? It can only be from national borrowing, part of the $250mio per week we need to import and pay interest on, and further indebtedness at the individual level. Tell me how that is good for the country? Ask the workers at Cedenco how they are going to pay more rent…..
November 9th, 2009 at 2:50 pm
Why all this focus on CGT? Broad based (i.e., including owner occupiers) land value tax is the way to go!
Land aint mobile so it should form the basis of the taxation burden. Then we can drastically lower all other taxes and get the country working.
It would also raise some income from all the foreign millionares/billionares who like to keep coastal crash-pads here.
November 9th, 2009 at 2:59 pm
I thought all property speculaters lost money for last two years and they will lose moeny again in next downturn. Can we just let the market to adjust the house value? Can we treat all investment same?
November 9th, 2009 at 3:07 pm
Sam_M wrote: “Land aint mobile so it should form the basis of the taxation burden. Then we can drastically lower all other taxes and get the country working.”
Interest.Co.NZers For A Single Tax!
http://en.wikipedia.org/wiki/Henry_George
November 9th, 2009 at 3:07 pm
In the aftermath of getting rid of the speculator, i.e who is going to build the new housing stock, bit like losing the finance companies, banks don’t provide the seed financing this is done by the finance co’s who are then replacedby the banks. In housing who will take the punt to build a house for either an investor, or occuper to buy, as unfotunately not many buyers build. if no profit in building, then no houses to buy, if the population rises then demand exceeds supply, prices rise.
November 9th, 2009 at 3:22 pm
I don’t think anyone is arguing for the removal of the building industry, John. That part of our society actually makes something tangible. And no one is against property investors or speculators per se. It’s the distortions created by the taxation and regulatory systems that need addressing, to put property on an equal footing with other businesses/investment vehicles. Speculate or invest in property all you like, but don’t ask me to subsidise your profits through my taxes.
November 9th, 2009 at 3:29 pm
Well said Harriet!
November 9th, 2009 at 3:42 pm
John, it is a bit arrogant to asume only investers buy or build new houses. It is common for a plain old family buyer to do it – happens a lot and you end up with a better finish to the house instead of the cheapest option for all the chattels. EG boring carpet, plain walls, basic kitchen, etc.
And – agree with Harriets comment above.
Anyone can speculate and invest all they like, but do it as a business decisision with business fundementals, not because there is a massive tax gain. Basically make a return on investment, not just tax refunds and hopeful capital gains.
November 9th, 2009 at 5:10 pm
Wish they would make thier minds up, loads of people are holding off buying investment property untill a decision (if any) is made. See what happens to prices when everyone jumps back in! Get rid of WWF and d@#khead politicans too, like to see some small business who sent an employee to europe and accept an apoligy for bunking duties and going sightseeing…
November 9th, 2009 at 5:17 pm
Property investment seems to be a BB phenomenom. Very few Gen Ys that I know doing purely because they are struggling to get the first home let alone a rental for $300-350K in Auckland. Near impossible to get a cash flow positive 3 beddy property in an ok suburb. So a big risk for many of my Gen Y peers to dive into the property investment market as simply too expensive and not enough equity. Foe me personally I’m buying good quality property with good rental income and paying them off over 20 years. Tax refunds/right offs are a secondary reason to buy. Rental returns and capital gains are my focus.
November 9th, 2009 at 5:41 pm
@ buyerinchch – “Get rid of WWF and d@#khead politicans too, like to see some small business who sent an employee to europe and accept an apoligy for bunking duties and going sightseeing…” – I totally agree! There are so many things about this economy and Govt that are screwed up, the tax rort that is property investing/speculating is one of them, and you’ve hit the nail right on the head with the other two!
November 9th, 2009 at 6:15 pm
veedub, claiming back 4-8k p/a isn’t that much of a problem IMHO, the other alternative is government becoming more of a landlord? I see the future bringing smaller rentals (m2) and more flats. Gone will be the days of renting a nice house for 1/3 of your income, just like USA, UK , europe etc. The market for rentals seems to have already sorted itself out as 28yr old said above. Heard of banks wanting 30% dep for LAQC loans.
November 9th, 2009 at 7:05 pm
The taxing of investment property could start like this.
The rental income should be added to the regular income of the owner (say by salary, commission, etc) and then they should be given a fixed rebate of say 10/15% of the rental income for repairs, etc, which is equitable. Also all property buy/sale transactions should have a GST of say just 5%, exempting the first/only home.
We could also have a grace period of say next 5 years when sale of investment property would be exempt from Capital Gains Tax and thereafter the CGT could be introduced at a flat rate of say 15% on the profits. This would give all landlords time to rearrange their affairs and pay to contribute to the revenue of the Government.
November 9th, 2009 at 7:48 pm
Why exclude the first/family home? People already put investments in wifes/sisters name to avoid CGT. If it makes a profit, tax it?
November 9th, 2009 at 8:14 pm
buyerinchc,
agree re the family home. No reason it should be exempt. A home is a shelter. If you get your money back (after inflation) then you should be happy. Anything else is a financial bonus and should be taxed like any other earnings. And on second thoughts, why shoudl the gains be inflation adjusted, my interest in my bank account is not inflation adjusted before tax kicks in. In fact after tax I am now worse off after inflation.
November 9th, 2009 at 8:15 pm
but i still thing the Land tax is the best idea. Impossible to avoid. Whether you a re a foreigner, LAQC, family, wife, trust etc the SAME amount gets charged. It also encourages a use it or lose it mentality.
November 9th, 2009 at 9:15 pm
Sorry folks but this isn’t the “tax property” government – it’s the “do nothing” govt.
November 9th, 2009 at 9:40 pm
Show me an overseas country where a Capital Gains Tax has made properties cheaper? It doesn’t. It would also initially cause a shortage of rentals and a surge in rents. Which would actually be very good for me, since I don’t sell, so second thoughts – bring on CGT!
jimmy – “my interest in my bank account is not inflation adjusted before tax kicks in. In fact after tax I am now worse off after inflation” – like I’ve always said, cash isn’t inflation proof. Property is. Shares can be, so long as you buy the right company….
28_year_old – “I’m buying good quality property with good rental income and paying them off over 20 years. Tax refunds/right offs are a secondary reason to buy” – you are destined to do very well out of property, and it probably won’t take 20 years……..
November 9th, 2009 at 10:14 pm
If Australia is seen as a country comparable to us ( sheep aren’t safe ) , then what good has a CGT done for them ? They have the mother of all property bubbles at this moment . And my anecdotal evidence suggests that CGT is costly to administer and complicated to calculate . The land tax , as mooted on this site , does have the benefits of simplicity and universality . Even those cash strapped Hollywood Yankee Doodles gotta pay it , on their mega-mansions and ranches around our fair land………Break out the gummy bears team , celebrate picking a foreign pocket or two !
November 9th, 2009 at 10:33 pm
The best industry in NZ to make (easy) money – REAL ESTATE. Most politicians, lawyers etc are involved in it, so why you people asking constantly for changes – senseless !
Change the people first.
November 10th, 2009 at 2:45 am
I think it would be a safe assumption to make that most people on this site believe that NZ property is fundamentally overvalued, myself included, although we would appear to be in a huge minority the country over.
Bernard predicted a 30% drop in prices, which I also thought would have been an accurate decline to bring prices back into line with what they should roughly be valued around. We have just been through the worst financial crisis in around 70 odd years and NZ’s property prices have barely even been dented.
My question is if this financial crisis has not been enough to shake the NZ population’s obsession with property and it’s associated wealth, what will pop the bubble? After all a bubble is only a bubble if it bursts right? Is it not feasible that we could go on for years and years with these absurdly over-inflated debt fuelled prices. I don’t believe a CGT will do the trick, it has been tried, tested and to no avail in curbiing other country’s property booms.
November 10th, 2009 at 3:15 am
Apart from allowing property investors to claim back PAYE tax what other purpose do the LAQC rules serve? Why was the system introduced in the first place? Personally I think abolishing LAQC’s (that’s simplying the tax system for the libertarians amongst us!) is sensible – it would at least the level the playing field between owner occupier and landlord buyers. Landlords can invest through a company or trust and are welcome to make tax claims back on profitable portfolio. If your portfolio isn’t profitable – make it so or pay for the equivalent cost that a homebuyer would have to pay for buying at that price.
At the moment there is in effect a perverse financial incentive to rent your own home whilst you buy someone elses house so that you can claim depreciation and maintenance back off your own tax. Thats bonker’s and has no place in a sensible tax system. it also does not encourage the continuation of a responsible homeowning stakeholder society – a key ingredient of stable western democracies throughout recent history.
CGT and land tax are probably red herring’s. Too difficult, too expensive and int he case of land tax quite non-discriminatory with regard to ability to pay (think pensioners, small holders, meat/wool farmers, parklands – and come to that DOC would have massive bill too!). If we really believe that property flipping is causing a problem them the solution is a Tobin-style transaction tax on property sales – and the world has an effective model for this already. Its called stamp duty and has been part of the tax system in the UK for hundreds of years – admittedly at a very low level. Of course given most people pay 4% to an RE agent already it might have to be set quite high in order to have an impact – but it could be introduced at 0.5% – which would have an impact on boadening the tax base and starting to address the national deficit without slaying anybody. It could then be slowly ramped over a number of years until the required effect on behaviour in the market is seen. Even better let the Reserve Bank set the stamp duty rate so that politicians can’t B***** up the ramping process. That gives AB the extra lever he appears desperate for, so that he can address the housing market and the real economy seperately with monetary policy decisions.
November 10th, 2009 at 7:28 am
Actually the financial crisis has reinforced the attractiveness of houses as investment in NZ. All those paper securities have declined so much all over the world that folks who invested in such investments for their retirement (US 401k springs to mind) have seen their nest egg shrink in size drastically. Add to that the financial shenanigans that is going on in the investment banking world and I think the average New Zealander will not touch shares for a long time to come. So it is back to property. If there is another crisis, even smaller, to affect our own Kiwisaver investments, then watch property zoom to higher levels.
November 10th, 2009 at 11:52 am
Roger and Murray,
See my comments above. Aus CGT was halved by Howard, so it still gets treated better than savings. The Henry report says this is a factor that has fed the boom. Other countries booms (eg US and UK) were not as bad as ours. In short, CGT wont STOP bubbles, it will lessen them though.
As for cash being inflation proof. I agree, often it is not ESPECIALLY when you have the combination of a low OCR designed to assist borrowers out of their self induced trouble AND full tax applied. If we were now getting 8% on TDs (as we shoudl given underlying inflation) and the same treatment as ppty (ie NO TAX), it would be a fantastic low risk investment.
November 10th, 2009 at 12:07 pm
Emkay,
Remember that property is a leveraged asset, and its existing price is based on massive debt loads. I agree it will always have some value, but you seem to assume the current value is not inflated. Clearly it is, have a look at rental yields. How long to turn a profit on an average house in NZ? What happens when the likely deleverage occurs again? What was happening to prices PRIOR to an emergency low OCR that will soon be rapidly unwound?? What happens when property tax changes are made. (it now appears inevitable that something will happen, and this will apply additional downward pressure). Unemployment is still going up.
The ASX is looking ok value at the moment, trading only 4% above long term multiples. NZ and Aus property is trading about 80% above long term multiples.
November 10th, 2009 at 5:40 pm
@ jimmy
The thing is the risk of losing value in paper securities is more (even wipe out of your entire investment). This has been amply proved in the latest version of financial crisis which happen so regularly and may happen again soon.
The same thing may not happen in House.
Of course, the debt cost has to be factored in, but that is compensated by the emotional benefit of staying in your own house, etc. Rental properties properly managed/serviced and limited to 1 or 2 will still beat other types of investment, especially in NZ.
It is only those who flip houses often who may be hurt at some point of the investment cycle, but long-term investors have a good chance of making it work.
In the stock/share investment, both short and long terms have been proved false.
Very few can time that correctly and even then I assume one needs lots of insider information, luck and good advice.
The proposed tax on real estate here in NZ may be another bogey like the OCR and may prove equally ineffective if and when introduced.
February 9th, 2010 at 8:50 pm
Ther “Capital Development and Working group have some things in common. some of them are ex trasury boffins. Nearly all have bee brainwashed by Milton Friedman’s doctrine of economics. That doctrine is simply a sophisticated presentation of Karl Marx’s path to communism for a free nation.
February 9th, 2010 at 9:03 pm
Ther “Capital Development and Working group have some things in common. some of them are ex treasury boffins. Noe of them have ever owned propery investments as far as I can see from the website. They have 3 problems; envy; coveteousness of those who have done real work;( not like Mr Cameron who is a speculator in investment banking);and they have worked really hard to build wealth. Nearly all the working group have been brainwashed by Milton Friedman’s doctrine of economics :which is hate first then tax hard the real earners and job providers of society which are property owners and farmers.
This hit on property will reduce employment on rental houses( trades and lawyers;) amd in 2 years Key will see much less net profit. His pockets will have holes in them and there wont be enough to squander on many more of those Ngai Tahu “claims”
Of course there is no tax on 200 million; why should there be; Mr Stalin and Mr Mugabe’s of NZ??
NZ will get further behind Aust because all they can think of is tax; tax tax and more tax. Not increase revenue and earnings and profit; not how to encourage and grow businesess; work horses of NZ ; but just starve those horses bit by bit till……………there’s no more food to feed anyone ………..including Ngai Tahu!!!!