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Income tax cuts admirable, but let's look again at winners and losers

NZ Herald

If income tax rates are to fall, then someone has to pay for it.

We will all contribute through higher GST, which is fair. And many think it is fair for tenants and rental property owners to make up the shortfall.

The main reasons suggested are that property investors have a tax advantage and that they take money out of the tax system.
It is understandable why people may feel that increasing rental property tax is reasonable, but have we been told all the facts and the ramifications of these tax changes?

By Andrew King, Vice President, New Zealand Property Investors' Federation

"Rental property has a tax advantage" is a general statement that has been repeated so often it is assumed to be a fact.
Some believe that one advantage is paying no tax if you sell a property for more than it cost you. While that's true, this is also the same for buying or selling a business, shares or any other investment.

Vodka seller 42 Below Zero started in a garage in 2002 and sold the company four years later for $138 million.No tax would have been payable on this.

Trade Me was started from scratch in 1999 and sold for $750 million in 2006. The owners (including Tax Working Group member Gareth Morgan) paid no tax on this amount.

If I buy 100,000 shares in a company for $1 and sell them for $1.50 the next day I pay no tax on the gain.

Others say that because rental property owners can write off losses against other income they make, this is a tax advantage. However the same rules apply to any investment or business.

If I buy a part-time business and lose money while building it up, I can use this loss to reduce the tax on my other income.

Being able to claim mortgage interest payments as a tax deduction could be seen as a tax advantage. However if I borrow funds to purchase shares or a business then the cost of the interest is tax deductible as well.

Share investors have said rental property has a tax advantage because owners can claim depreciation on the building but they can't depreciate their shares.
While this is true, the companies they buy shares in have access to the same depreciation rules as rental property.
Plus, if the rental property increases in value when sold, the depreciation is clawed back by the Inland Revenue.
The fact is rental property has no tax advantage over other businesses or investments.
This was confirmed by Inland Revenue Deputy Commissioner Robin Oliver.
When asked by a Government select committee if there were tax advantages for investments in rental housing, Oliver said: "The short answer is there are none. Rules about expenses for deducting costs such as interest, upkeep and maintenance, as well as paying tax on income were the same for investments in shares or anything else. In fact under the housing case there are tighter rules to what is a capital gain."

Institute of Chartered Accountants tax director Craig Macalister sounded caution regarding the proposals to tax rental properties differently from other assets.

"Those proposals signal a departure from the way in which other income-generating assets are taxed. We need to be careful not to fall into the trap of selected taxes for different assets or investments for all the reasons why these were a failure in the past."

Many believe rental property takes tax money from the system rather than paying into it. This is because there was a combined loss of $500 million in 2008, resulting in around $150 million of tax deductions.

But information supplied to the Tax Working Group by the IRD shows the rental property industry has made losses in only two of the past 28 years. Interest rate and house price increases from 2003, without corresponding increases in rental prices, were the reason for the profitability declines.

To suggest rental property owners are tax takers rather than tax payers based on two of the past 28 years is clearly misleading.

It would be a mistake to target tenants and rental property owners based on incorrect information and assumptions.

However these two groups would not be the only ones to suffer from onerous property taxes.

If investment in rental property declines, the housing market is likely to decline as well. Some believe this would be good for first home buyers, but higher rental prices would affect them in raising a deposit.

There is a $6000 difference in the cost of owning the average NZ home rather than renting it, so there is room for rental prices to increase if the cost of providing rental property increases.

Tenants are not the only ones to suffer. Home owners' equity would reduce, and lower house prices would make it difficult for small to medium businesses that use their homes as collateral for business borrowing.

The aim of reducing income tax rates is admirable, but a great deal more thought is needed on how this will be achieved.

Source: NZ Herald

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