Revenue Minister Peter Dunne has described how the government considered tougher measures to discourage rental property investment before the May budget, but decided that enough had been done for now to reduce demand and raise revenue.
Dunne told interest.co.nz in a Double Shot interview that measures such as a 'bright-line' test for rental property traders and a stricter ring-fencing of property losses from income tax had been considered. But in the end the coalition government decided that removing depreciation on buildings and proposing changes to rules around Loss Attributing Qualifying Companies (LAQCs) would be enough. A 'brightline' test would automatically classify any property bought and sold within a certain period (possibly a year or two) as being bought and sold for trading purposes, meaning any proceeds must qualify as trading income.
Currently property investors are exempt if they can prove it was not their intention to buy and flick the property for trading purposes.
"Tipping the equation a little bit and starting to see some more rigour is introduced into the way LAQCs are run will help achieve the objective, but is this the forerunner to other things? No we don't think so," Dunne said.
"We looked very hard at the bright-line test. Both the bright-line test and whether we abolished the ringfencing of losses was a very pragmatic consideration. Did we need to in terms of the construct of the whole package, and the conclusion was no we didn't," he said.
The measures announced in the budget would be enough, Dunne said.
"They will achieve what we were after, which was some dampening of the demand, some removal of the distortion. But what we didn't to do was kill off property as an investment for obvious reasons," he said.
Dunne said the government was now consulting on the exact form any changes to the LAQC and QC regimes would take. Here is the fact sheet published on May 20 about the changes. There were already some concerns being expressed about unintended consequences, he said.
"There are some issues arising about the scope of the change and some unintended consequences. We understand what you're doing with property, but what about the situation where my LAQC is not property related? There's two schools of thought. One says how do we separate them out. The other says this was our primary objective and you're bringing in some other business activity. We may need to look at how those rules are applied and that's a debate internally," Dunne said.
Dunne said there were now around 130,000 LAQCs with accumulated tax losses of NZ$2.3 billion over the last 8 years.
He also said he was opposed to a Capital Gains Tax or other more comprehensive measures.
"From a United Future perspective we were very wary of any moves. If we looked at what we've got for property -- the changes to depreciation, the changes around LQCs, the cuts in the personal tax rates, the rise in the GST -- we think that's a sufficiently robust property package," he said.
Meanwhile, Dunne also talked about the IRD's recent activism in the courts enforcing tax laws and the need for a broader, simpler tax system.
He said a broader, simpler system was needed in the long term, but that he had also worked to beef up the IRD's resources to prosecute the existing tax laws. He said the increased activism was needed to ensure the broader public saw the system as fair, and would therefore accept reforms involving some tax increases.
"People would put up with things like the GST going up to pay for tax cuts, if they see that people who are rorting the system are held to account."
Dunne said he was working with an advisory group on the transitional issues for increasing the GST, but did not see any issues delaying the increase to 15% from 12.5% from October 1.
He said a bill on income sharing was a month away from being put before Parliament. United Future and National had agreed to put the bill before the select committee with no coalition agreement for progress beyond that.
"There's some willingness to leave all these things on the table and see how they pan out long term," he said.
"All I want is for the bill to be before the select committee for a reasonable period of time to allow this wider debate to take place and hopefully to have a solution in place to start from April 1, 2012."
Here is part II of the interview.