What taxing property investors might amount to
Over the last few days, after tax working group’s recommendations have been made public, I have received some calls from my clients who are Property Investors and are asking for my opinion if they should sell their investment properties.
There is growing fear that the government will try to raise more revenue out of property investors by disallowing tax incentives. There are many possible ways, like imposing land tax, imposing capital gains tax, reducing or eliminating allowance of depreciation deduction on buildings, charging tax on house equity assuming notional income calculated at risk free rate.
According to estimates there are over $200 billion invested in residential rental properties in New Zealand.
These properties generated tax losses of around $500 million in 2008 and as a result there was revenue loss of $200 million to the government.
It looks that the primary aim of property investors is not to earn rent but to generate tax losses and save tax. It makes sense to tax these people.
Most commentators have welcomed the working group’s recommendations related to taxing property investors. But there are few points to consider and I have contrary views.
It is estimated that after taking into consideration the Working for Families payments, 76% of tax is paid by top 10% of taxpayers. So by investing in residential investment properties, most of tax is saved by those who are the major contributors to revenue. There should not be an outcry against those who are the major taxpayers even after claiming tax losses on investment properties.
Second, if tax incentives for property investors are removed, it will adversely affect demand for properties.
The construction activity may go down resulting in shortage of houses in future. Drop in construction activity will adversely impact economic recovery as well.
Third, if the tax incentives are removed, it will put pressure on house prices, as many investors will turn sellers and thus it will adversely affect economic recovery. If the house prices go down, the consumer sentiment may weaken. The major cause of the current recession is falling house prices in US and some other countries. It caused financial crisis as well, world has still not come out of the same. Can we afford to allow our house prices to go down at this stage?
Fourth, what is the justification in axing depreciation allowance on buildings? The deprecation rates are calculated according to economic life of an asset. The buildings also have got some life, so it is wrong to say that buildings do not depreciate in value.
Fifth, if tax incentives for property investors are removed, it may put upward pressure on house rents as the property owners will try to make good their loss by raising rents. It will not only effect low income families, but will also increase WINZ payments on account of accommodation supplement. Part of the increased revenue raised may be lost for that reason.
In my opinion, the government should consider the alternate options of raising tax revenues rather than taking away benefits enjoyed by property investors. There are many other ways suggested by different experts like charging Estate duty and charging financial transaction tax, government should explore those.
Whatever is decided will be implemented in forthcoming budget due in May. There would be wide spread public discussion. I am sure our government will take a decision that will not derail economic recovery and at the same time move towards a more efficient tax system.
--
Ravi Mehta is an Auckland based Financial Advisor and can be contacted on ravi.mehta@pfsl.co.nz. He is a regular Indian Weekender columnist
Over the last few days, after tax working group’s recommendations have been made public, I have received some calls from my clients who are Property Investors and are asking for my opinion if they should sell their investment properties.
There is growing fear that the government will try to...
Over the last few days, after tax working group’s recommendations have been made public, I have received some calls from my clients who are Property Investors and are asking for my opinion if they should sell their investment properties.
There is growing fear that the government will try to raise more revenue out of property investors by disallowing tax incentives. There are many possible ways, like imposing land tax, imposing capital gains tax, reducing or eliminating allowance of depreciation deduction on buildings, charging tax on house equity assuming notional income calculated at risk free rate.
According to estimates there are over $200 billion invested in residential rental properties in New Zealand.
These properties generated tax losses of around $500 million in 2008 and as a result there was revenue loss of $200 million to the government.
It looks that the primary aim of property investors is not to earn rent but to generate tax losses and save tax. It makes sense to tax these people.
Most commentators have welcomed the working group’s recommendations related to taxing property investors. But there are few points to consider and I have contrary views.
It is estimated that after taking into consideration the Working for Families payments, 76% of tax is paid by top 10% of taxpayers. So by investing in residential investment properties, most of tax is saved by those who are the major contributors to revenue. There should not be an outcry against those who are the major taxpayers even after claiming tax losses on investment properties.
Second, if tax incentives for property investors are removed, it will adversely affect demand for properties.
The construction activity may go down resulting in shortage of houses in future. Drop in construction activity will adversely impact economic recovery as well.
Third, if the tax incentives are removed, it will put pressure on house prices, as many investors will turn sellers and thus it will adversely affect economic recovery. If the house prices go down, the consumer sentiment may weaken. The major cause of the current recession is falling house prices in US and some other countries. It caused financial crisis as well, world has still not come out of the same. Can we afford to allow our house prices to go down at this stage?
Fourth, what is the justification in axing depreciation allowance on buildings? The deprecation rates are calculated according to economic life of an asset. The buildings also have got some life, so it is wrong to say that buildings do not depreciate in value.
Fifth, if tax incentives for property investors are removed, it may put upward pressure on house rents as the property owners will try to make good their loss by raising rents. It will not only effect low income families, but will also increase WINZ payments on account of accommodation supplement. Part of the increased revenue raised may be lost for that reason.
In my opinion, the government should consider the alternate options of raising tax revenues rather than taking away benefits enjoyed by property investors. There are many other ways suggested by different experts like charging Estate duty and charging financial transaction tax, government should explore those.
Whatever is decided will be implemented in forthcoming budget due in May. There would be wide spread public discussion. I am sure our government will take a decision that will not derail economic recovery and at the same time move towards a more efficient tax system.
--
Ravi Mehta is an Auckland based Financial Advisor and can be contacted on ravi.mehta@pfsl.co.nz. He is a regular Indian Weekender columnist
Leave a Comment