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Auckland University’s Retirement Policy and Research Centre (RPRC) has challenged the Tax Working Group’s (TWG) assertion that New Zealanders have NZ$200 billion invested in residential rental properties, arguing the actual number is less than half that. (Updated to include more detail)

The RPRC has released a briefing paper examining the NZ$200 billion number, which was a central figure in the TWG’s call for reform of the tax rules around property investment. The TWG argued that property investors made losses of NZ$500 million on that NZ$200 billion of property in 2008, creating NZ$150 million of losses in tax revenues and justifying changes to tax rules.

“The TWG gave no source for the $200 billion investment, but suggested that the tax system needed change to reduce this apparent over-investment by households in this sector,” said RPRC co-director Michael Littlewood (pictured left), adding New Zealand does not have good information on home ownership.

“The TWG took what was effectively only a passing comment on a possible level of rental property investment and has turned that into a reason for changing the tax system” Littlewood said.

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By Olly Newland

NZ Prime Minister John Key made a fundamental blunder when he recently delivered to Parliament his views – the government’s views – of the proposals from the Tax Working Group.

Quite rightly he booted out the looney leftist ideas of land tax and capital gains tax (typical notions that arise from those whose lives are filled with envy whenever they see people other than themselves doing well).

However he caved in on one recommendation and gave a clear signal that the treatment of depreciation on investment property would be attacked in the Ministers of Finance’s Budget due out in May.

What the new measures would be was not made clear. No details were given, so the public has been left guessing about the imminent new measures.

Neither, it seems, has anyone considered what the flow-on effects may be and what unintended consequences may eventuate.

Even more disappointingly, by innuendo the Prime Minister appeared to go along with the suggestion that property investors act as some kind of free-loading extortionists ripping of the system while swimming up to their armpits in ill-gotten gains.

It appears that he chose to be ‘the populist’ – swayed by the ignorant masses who bay for blood, revel in public hangings, while cutting everyone down to size at the first opportunity.

The government as a whole has stumbled badly this time, which is hard to understand given that the Prime Minister and the Minister of Finance, Bill English, both have a good background in finance. Surely their collective wisdom would have taught them one thing:

Uncertainty creates unease and unease creates distortions.

Initially I believed that the proposed changes to depreciation would do little harm. On further research and discussions with others, the ramifications and problems became clear and I am now of the opinion that any major changes would indeed be harmful.

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By Adolf Stroombergen from Infometrics

Many people do not support an increase in GST, or so the polls tell us. I recall the same popular sentiment in 1986 when GST was first introduced. At that time there was a natural fear about a type of tax that was unfamiliar to most New Zealanders. Would it work? Would politicians deliver the accompanying income tax cuts? Who would gain and who would lose? Would government be bigger or smaller? Perhaps these fears still exist even though the change being talked about this time is much less dramatic.

The policy options currently on the table involve a change in the tax mix that deliver the same amount of revenue to the government. Whether the total tax take is too high or too low – whether government is too big or too small – is a different issue. The aim of the current proposals for tax reform is to find a better way to collect the same amount of tax revenue. What is meant by a better way? One that is more conducive to economic growth, fairer to those who can least afford to pay, easier to understand, more difficult to avoid and cheaper to comply with and administer.

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Bernard Hickey delivers a special report in association with BNZ, including a look at 10 reasons why the government should not increase GST from 12.5% to 15%.

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David Chaston presents a Special Report on the half year Crown accounts and why we need some serious innovation in the forthcoming Budget announcement, brought to you in association with BNZ

On May 20, Finance Minister Bill English will present his second Budget to Parliament.

It will be one of the more eagerly awaited policy statements from this government.

This year we have had the
- 2025 Commission,
- the Tax Working Group,
- and the Capital Markets Taskforce.
all appointed by this government to look at some tricky issues, ones that require special leadership to solve.

They have now all reported back but the reaction from the Prime Minister, and his cabinet colleagues has hardly been enthusiastic.

The Finance Minister clearly noted the challenge the country faced at last year’s Budget review, pointing out that unless something significant was changed, we all face a “demoralizing trudge” out of the debt binge we had over the past ten years or so.

Surpluses are not expected to return until 2016 at the earliest – until then we will be adding public debt that grows from 5% of GDP to 35%. And this is on top of 120% of GDP incurred by the private sector, basically for houses and farms.

We shouldn’t be trying to solve our debt problem by borrowing more, or shifting debt from the private sector to the public sector.

Today we got the Crown accounts, the status at December 2009.

At first glance, they look better than expected.

But look a little deeper, and what is keeping things this way are a series of one-off positives. Things like …
- backing off some of the deposit guarantee provisions
- better settlements with the banks over their tax cases
- shifting out Treaty of Waitangi settlements
- and lower interest rates and lower immediate borrowing requirements.

But, few of those things will get repeated.

Tax revenues aren’t holding up well
- taxes on individuals are more than $400 million less than originally budgeted,
- and $250 million less than the Treasury’s own half year fiscal update,
and without the bank tax settlements, corporate taxes collected are notably less as well.

It is only GST that shows any chance of achieving last years Budget estimate on a sustainable basis.

The Tax Working Group declared our tax system ‘broken’. It needs a comprehensive fix, for all the reasons that we have explored on this website.

But it seems unlikely we are going to get a proper fix on May 20, based on the Prime Minister’s recent equivocations.

All that seems likely is a stream of sickly government accounts showing revenues less than expenditure and rising debt levels, all to be paid for by the next generation of taxpayers and voters.

Or, until we get real leadership.

Finance Minister Bill English was asked by a couple of questioners at a Massey University Finance conference in Auckland today about his advice to young professionals thinking of leaving New Zealand because of relatively low wages and a lack of opportunities. One queried whether the government was being ambitious enough with its tax reforms.

One asked what his advice would be to a young New Zealander who wanted to work overseas. English replied:

“Just Fly Air New Zealand. Go off and do it. Any Kiwi kid is a globally attractive human resource.”

But English said the government’s role was to reform the economy enough to make it attractive enough for those New Zealanders to come home when it was time to have a family.

Asked what he told his own children at the breakfast table, he said: “I tell them I’m going off to work so that when they’re 30 they can be back here to raise their kids.”

English said the aim was to make New Zealand attractive for those wanting to run and start small businesses, rather than for those working in very global big businesses. “If you want to run a big oil refinery or be an M&A banker then off you go,” he said, adding that those who wanted a more entrepreneurial and innovative place to live and work should be able to return home.

He said there were no magic bullets for reforming the economy.
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