John Crawford suggests a less politically explosive and much simpler way to reduce the tax incentives for rental property investors

So the auckland speculator renting a house out for 0 weeks pays 0 tax and still collects his cap gains?

'Deemed' rate of return?
Only a Bureaucrat would think up such nonsense, just like the Fair Dividend Rate.
How about the AFWPOOOA rate.
(any figure we pulled out of..)
It would be easy to administer because no-one could argue about how it was arrived at, and it certainly doesn't reflect any kind of economic reality, so could never be challenged in court measured against any kind of ACTUAL performance benchmark, why that would be a waste of taxpayers money.

Sounds like gareth morgans capital tax. ud see ppl structure there properties as a business paying and charging gst on each weeks rent like a hotel and having things remain as is claiming losses and pocketing the tax free cap gains

Deemed rates of return are, au contraire common taters above, quite common in certain areas: shares, utility companies (airports, electric generators etc).

So there's a body of experience, case law, and a general acceptance that sometimes, blanket ROR's, however arrived at, are preferable to the alternatives.

And it is a step towards GM's Big Kahuna - if applied to residential property....

Another load of drivel typical of those with little understanding of what actually drives property investment and yet another interference of market workings that will lead to increased distortion of investment decisions.

"How does it would work?"

This is the sentence that makes the most sense in the whole article!

How about a deemed rate of return for income tax? A Doctor would be taxed based on a deemed income of $100k. Hold on a minute.. some doctors earn less and some far more. What a ridiculous idea that would be!

Thus spake the nay sayers. But what are the alternatives? John correctly identifies that the options voiced so far are politcally unacceptable, too unweildy or other wise unworkable. This option has intriguing possibilities.

How does he see the potential "House bankers" being dealt with as identified earlier. The investment property bought but not rented, and only sat on until it's value had appreciated sufficiently?

What other otions are there?

Only a propeller head would dream up such a load of $$@@##
Might explain why he is a "former Deputy Secretary of the Treasury."

As evidenced by a comparison of Auckland and say any medium sized provincial town, the capital gains element of property returns varies considerably across the country so wouldn't someone (IRD?) have to calculate a variable 'deemed rental' for different regions, or territorial authorities, or towns, or suburbs, or........(see the problem), in order for the tax to be equitable?

As an experienced user of the Fair Dividend Rate scheme for FIFs, I can say that this method does make you question your investment decisions. When looking at a share with a yield lower than the amount you will be taxed, you have to consider whether the upside is worth it versus a share with yield higher than the rate which would save you tax.

So for a property investor, looking at a 2.8% yield and thinking they will be taxed as if it made a 5% yield would make it clear to them that they would need extra capital gain to break even. Conversely, if you found a property with a yield of 8% you would jump on it as you could save tax.

So we want fewer Landlords do we ?

Well blow me down , just who is going to house those among the 55,000 new faces arriving every 52 weeks who cannot afford to buy a home ?

Lets leave it up the Housing New Zealand , shall we ?

Prob is everyone would jump from low yielding auck to high yielding provinces so provinces would get the cap gains (and auck values may fall) to a point until yields are lowered in provinces (and increased in auck) to make the advantage over auck balanced with the risks of less organic growth.

"One focus of any new measure would be to reduce the incentives of investing in rental properties, which currently provide the majority of their returns through untaxed capital gain rather than via the rental income stream."

John.
You're yet another bullshitter.
If "the majority of the gains" were from "untaxed capital gain" then the problem isn't the landlords it's IRD not doing their job properly.

How many times to we have to say it before you bull artists admit that "majority of the gain" indicates intent to sell..... WHICH IS TAXABLE.

So how about this startling idea... get the current law to be properly used, get IRD to do their job properly, and then you pundits can stop bs-ing

This tax would also make building an incentive as having huge land value and small 2-3 beder sitting on it doesn't work anymore; auckland investors would try to add rooms build secondaries or multi units that produce greater yields. So this genius just solved the housing shortage prob too. Not bad for a propellerhead.

After taking account of all the froth from those piqued by the prospect ( so that makes it interesting) the final result would be to stop or lower expectations and hence prices.
So in the end those who pay will pay less tax and their yields will be higher!

The sole reservation I would have is that to not have the tax on unoccupied property or on bare land for that matter lowers the incentive to make the asset work for its owner.

re: One focus of any new measure would be to reduce the incentives of investing in rental properties, which currently provide the majority of their returns through untaxed capital gain rather than via the rental income stream.

Actually, capital gain only provides a return on sale. I suspect you will find that there are a heck of a lot of genuine property investors (i.e. not speculators) who have been in the Auckland market since before the current bubble ballooned out of control investing for the long term - i.e. to get an income stream from rentals, not a short term capital gain.

If you taxed these long term investors a deemed rate of return on the current insane valuations then surely there would become a risk that you would drive them out of the market (i.e. they would sell up). Who would take up their properties in that case? Speculators!

This is a bad idea. Holding rental property is done for commercial purposes so from a tax perspective it should be treated as such. To ignore the costs of rental property in the calculation of tax payable for investors would be totally unfair and could have disastrous consequences. Deductible costs are often significant (mortgage interest cost in particular) and applying an arbitrary 'deemed rate of return' would increase the tax burden to potentially crippling levels.
The issue in the market is speculation and this doesn't specifically address that issue. Instead this would hit all investors, long term holders or not with the same blunt instrument. We could end up with a real mess on our hands. Interventions like this would be very unwise and good intentioned or not would be far more 'politically explosive' that other potential measures.

Two points

1. the amount of personal abuse thrown at John Crawford suggests that he has struck a nerve, and those challenged have run out of rational responses so they revert to abuse . It reminds me of what happens if you challenge Climate Change, Big Pharma or Islam. Vested interests will always ferociously defend their income source, but is it fair and is it right? Is there a better way?

2. Grant Spencer was on the mark when he identified that the government has been fixated on supply side correction, but has neglected demand side options. Capital gains tax is one such option. So is limiting foreign direct investment, so is a deemed return. We need rational debate about which option has the best return for the least side effect. What NZ cant afford to do is nothing.

One thing is clear that unless we manage a soft landing the property bubble will ultimately burst and impact most of NZ.

Crawfords suggestion seems to have merit. If a property investor is making less than 5% ROI then he is almost certainly counting on making the difference up with untaxed capital gains. Chinese investors openly quote this as one of the attractions of investing in NZ property and this is advertised explicitly in Hongkong and Beijing. If a long term investor is making higher returns then he has nothing to lose. If those counting on capital gains decide to get out of the market then the house remains, most likely prices will decline and more people will be able to afford to own. Everybody wins .. apart from speculators but why should we care as they were breaking the law anyway.

finally NZ is looking increasingly isolated by allowing foreign investors to distort local housing prices. NZ is too small and too vulnerable to tolerate this. Lets follow the examples of Australia, Canada and many others and put a stop to this before it is too late.

and lets hope that more people like John Crawford have the ## to speak up with constructive suggestions to address major issues.

John, for someone who was high up in Treasury your thinking is a bit of a worry! You seem to have identified the problem, a shortage of housing in Auckland, then your proposed solution is nationwide. Is there something going on in the rest of the country that is bugging you, and if so, please enlighten us.

Auckland's population is growing faster than dwellings can be provided to accommodate this growth, with the result that the price of dwellings is being bidded up. Are rents also being bidded up at a similar rate (that would be logical)? Can any Akl landlords answer this for us?
If population growth (with a large net immigration component) is the main driver, your proposal may shift the balance between owner-occupied and rental dwellings, but is not going to make any difference to the shortage of dwellings. A better move might be to regulate some immigration to areas outside of Auckland, this could be of benefit to those areas.

You fail to comprehend that "property investment" (your words) is a business activity like a lot of others. Income tax on net returns is calculated the same way. The only "special treatment" it gets comes from the failure of the IRD to properly assess gains on sale. Trusting investors to be honest about their intentions at the time of purchase is naive and just plain dumb. It smacks of vested interests. The solution to this "special treatment" is to give the IRD a kick up the bum to do their job properly.

Your valuation methodology has no sound theoretical base. The most recent rating valuation or purchase price, whatever the higher, seems like a bob each way. One property we bought last year had a new RV released two months later at 250% what we paid. Rating valuations can be a very poor approximation of market value - just ask anyone who has owned property in Christchurch for the last 5 years!

A component of your Deemed Rate of Return is "expected capital gain" - the person who could accurately predict this, for multitudinous localities within NZ, wouldn't do the salaried job as they would already be mega-rich and retired.

I have earlier this month suggested a land tax on unimproved value, it can be a proxy for a CGT. It would have far broader scope that what you suggest. To discount other ideas because they might be "politically unacceptable" is simply pandering, and intellectually dishonest. If everyone held that attitude we would still have slavery today. Grow some!

At the risk of lighting a fire under yet another noisy special interest group .. has anyone noticed that the return on a dairy farm is a tiny fraction of what would be acceptable for any business of a comparable size.

And yet a dairy farmer faces massive uncertainty with FX flucutuations, global commodity price cycles, seasonal fluctuations. On a rational investment analysis that extreme risk would be factored in and deliver lower EBITDA multiples. Dairy farms sell for 4-5 times their fair value as a business. The only conclusion that I can arrive at is that they are factoring in expectations of future tax free capital gain.

And of course banks are complicit in the valuations and gearing.

Ultimately this winds up in land prices and milk prices and we all pay the price.

So perhaps we should widen the debate and put a deemed rate of return onto farmers as well.

Heres a radio advertisement playing in Singapore.

How to get an Aucklander to pay you half his wage? Buy an appartment. No sales tax, no capital gains tax. Half the price of similar in Singapore. What a bargain. Why wouldnt you?

http://tvnz.co.nz/national-news/would-you-like-people-in-nz-give-50-the…

And John Key says the overseas investors are having no impact? wake up and look around you JK before it is to late.

This is crazy, if you don't live outside Auckland. It is grossly unfair to assume capital gains. This would only push rents up. A better way in my opinion is to cap the percentage of the value of the house that interest can be claimed on. Anyone with their own house and a rental property should have a 100% mortgage in the rental as it is tax deductible and a lower mortgage on their own house. As the value increases they can move more debt into the rental from their own house and cut the interest overall cost. This shouldn't be allowed. Making the interest on a mortgage up to say 80% of the house value makes harder to gear up and buy more property. There is also enough in the current laws on capital gains to make property investors pay. They are in it to make money so if the projections at time of purchase show that it is going to lose money for the next several years, then I would say that is intent for planning to make a capital gain and they should be taxed according. The IRD should be far more aggressive on this.

This is crazy, if you don't live outside Auckland. It is grossly unfair to assume capital gains. This would only push rents up. A better way in my opinion is to cap the percentage of the value of the house that interest can be claimed on. Anyone with their own house and a rental property should have a 100% mortgage in the rental as it is tax deductible and a lower mortgage on their own house. As the value increases they can move more debt into the rental from their own house and cut the interest overall cost. This shouldn't be allowed. Making the interest on a mortgage up to say 80% of the house value makes harder to gear up and buy more property. There is also enough in the current laws on capital gains to make property investors pay. They are in it to make money so if the projections at time of purchase show that it is going to lose money for the next several years, then I would say that is intent for planning to make a capital gain and they should be taxed according. The IRD should be far more aggressive on this.

Its not nessessarily assuming say 8% cap gains, but assuming the overall return on the capital value of the property (rent + cap gains) is likely to be around 8% (the assumptions is fair as why else would an investor buy property unless yields made sense or cap gains were expected). Outside auckland I own property that nets close to 8% of cap value in rent alone, plus modest cap gains of around 10% over last few years, so I'm still getting slightly over the 8% p.a return even though my cap gains on these properties p.a have not hit 8% p.a. Effect then for me, outside auck, would no tax increase, possibly a tax reduction depending on the property. Auckland properties also get 8%, recently likely 10-12% p.a return, almost exclusively through cap gains, but are taxed as if they earn a negative return after expenses, so IRD actually pays them money at the end of the year. Obviously this is wrong (why should I be paying full tax on my net 8% rental returns, while aucklanders get a tax refund plus tax free cap gains of over 10% p.a!), and this approach would see them pay 8% on cap value, which in most cases would be a massive tax increase for auckland investors, I'd imagine it would be cripling for many if applied retrospectively, so prob only on future pruchases. In reality, John key is more interested in pulling pigs tails than doing anything about the housing crisis so cant see anything like this actually get traction (unless labour run with it, they're my pick in 2.5 years time, and im a nat voter)

Capital gain or loss is outside of any investor's or speculator's control. they depend almost entirely on political decisions. Both demand and supply are ultimately governed by government decisions and decisions governed by government decisions and therefore are not reliably predictable beyond the short term. The fact that some of my properties have made capital gains had nothing to do with any intention to one day cash up or not when I bought any of them. It was a random result of successive government desires to continue to allow rampant immigration and foreign investment and do things that stoke demand and constrict supply. Many investors are not primarily concerned with capital gains BUT perhaps most would be wise to avoid properties most susceptible to capital losses. The best way to protect yourself from capital losses has been to buy early in an Auckland boom.

What a stupid idea.

If interest isn't deductible, then you are taxing an investor for income they never earned.

Take the $500k property mortgaged at 80%. The investor has only invested $100k, yet pays $13,333 tax. In a location with near zero capital gains (ie the regions), and assuming 6% interest rates you would need a 12.8% net return to pay a fair rate of tax ie about a 15% gross return on a residential property.

So let's think about that, it will put banks out of business as the only property worth buying would be unmortgaged. It would also make the only reason for buying property be the capital gain. Yet prices will have to fall to adjust to the new tax regime. Hence there would be no logical reason for investors to rent out houses, so the market goes into a one off free fall, houses are not built, therefore a real shortage ensues and people are actually leaving on the street, and the banks all go bust.

But house prices have stopped rising. Did this guy really work for treasury??

If he wants prices to fall why not just have a 99% CGT rate, or how about 100% income tax over $50k so we don't have any rich people and therefore all houses will need to be cheap. Or how about the state just confiscate all property and divvy it up based amongst the poor...

So a deemed rate of return is basically taxing expected capital gains without realising it?
LOL Ok then I shall start a business with deemed losses for the next 20 years and claim my tax refunds in that case ;)