Thursday, January 21, 2010

$1.3 billion a year - Rental Property 200 billion

We have $200 billion tied up in residential rental property, four times the capitalisation of the NZX, yet it results in negative tax.

read this again:

We have $200 billion tied up in residential rental property, four times the capitalisation of the NZX, yet it results in negative tax.

OWNERS PAY NO TAX?

wow!

Tax plan slammed as 'an orchestrated attack on landlords'
By Anne Gibson
4:00 AM Thursday Jan 21, 2010

Tax recommendations presented to the Government have been criticised as "an orchestrated attack on residential landlords" by the Property Investors' Federation vice-president.

Andrew King said the tax working group's recommendations would devastate his sector and could affect the lives of about 1.4 million tenants.

He predicted landlords would rush to leave the industry in large numbers if the Government acted on the report.

The tax group singled out landlords as one big target, saying they were being "systemically under-taxed" and recommending a more direct approach. Axing tax depreciation on buildings, a big bonus for many landlords, is on the cards.

Peter Dunne, the Revenue Minister, backed the tax group's aim of pulling landlords into line.

"There is growing evidence that trusts and companies and highly geared residential rental properties are being used to reduce taxable income and so qualify for Working for Families. Such abuse potentially places an unfair burden on the 60 per cent of families who do not receive Working for Families tax credits," Mr Dunne said.

John Shewan - a tax group member, PricewaterhouseCoopers chairman and landlord - is aghast that some multimillionaire landlords qualify as state beneficiaries because they appear poor on paper. He debunked Mr King's views.

Article continues below

"Landlords are in a business inherently of an investment nature rather than of an operational nature like farming. We have $200 billion tied up in residential rental property, four times the capitalisation of the NZX, yet it results in negative tax. We felt that was very hard to justify in policy terms and we feel some change is required," Mr Shewan said.

About 460,000 privately owned rental properties worth at least $165 billion are home to at least 1.4 million tenants. The state has a big hand in the sector: Housing NZ runs 69,000 houses worth $14.5 billion. The state owns most of those but manages some which are leased long-term from private landlords.

Mr King predicted the recommendations would create social chaos by creating a rental property shortage. All house prices would drop because landlords who bought under one set of rules would quit and flood the market with properties. Tenants would be out on the street if the changes were enacted, he predicted.

The tax working group had a strong bias against landlords and was not interested in the federation's views, Mr King claimed, a point Mr Shewan rebuffed, saying the group had listened to the federation but did not agree with it.

Mr King was outraged that he and president Martin Evans had to pay $200 to attend the group's final session in Wellington last month.

Rental property had no tax advantage over other investments or businesses, Mr King claimed. Rules about expenses for deducting costs such as mortgage-interest payments, upkeep and maintenance were the same for housing as for investments in shares or farming, he said.

"Many businesses make a loss during the first few years while getting established and rental property is no different. The rental market is extremely competitive and tenants enjoy lower rents because of this, helping them to save for a deposit on their own home."

Mr King said many landlords had bought on the basis that they could claim depreciation as an expense. That benefit allowed them to keep down the cost of renting.

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READ IT AGAIN:

PricewaterhouseCoopers chairman John Shewan, a member of the working group, pointed out that the more than $200 billion invested in rental properties yielded less than nothing in tax - between $100 million and $200 million less - because of the ability to use losses to shelter other income.

and again:

PricewaterhouseCoopers chairman John Shewan, a member of the working group, pointed out that the more than $200 billion invested in rental properties yielded less than nothing in tax - between $100 million and $200 million less - because of the ability to use losses to shelter other income.

P R O P E R T Y !! Own rental buildings, let them rot and
PAY NO TAX!!


Tax group targets building depreciation
By Brian Fallow View as one page
4:00 AM Thursday Jan 21, 2010

Tougher rules for depreciation and thinly capitalised companies are among the more targeted base-broadening measures proposed by the tax working group.

These are measures the Government could adopt quickly, it says.

It regards it as illogical that taxpayers can claim depreciation on assets that are in fact rising in value.

It suggests denying depreciation on buildings if, as it suspects, evidence suggests buildings do not depreciate.

Officials estimate it could raise up to $1.3 billion a year in revenue, though that could be reduced by up to $600 million if an offset was allowed if buildings were subsequently sold at a loss.

The working group also suggests reducing or eliminating the 20 per cent loading that applies to the depreciation rates for new assets other than buildings. This is estimated to be worth about $300 million a year.

It also suggests reducing the 'safe-harbour' threshold for thin capitalisation from 75 to 60 per cent.

The thin cap rules are meant to curb the scope for foreign-owned companies to reduce the tax they pay in New Zealand by funding their local operations mainly by debt, which gives rise to deductible interest payments.

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But Deloittes tax partner Thomas Pippos opposes such a change.

He argues it would put New Zealand out of step with other countries and does not address the issue, which is that the thin cap regime is not being applied as it was originally intended.

Institute of Chartered Accountants tax director Craig Macalister questioned the case in principle for tax changes targeted at property investments when the rules are in fact consistent with those applying to other investment classes.

PricewaterhouseCoopers chairman John Shewan, a member of the working group, pointed out that the more than $200 billion invested in rental properties yielded less than nothing in tax - between $100 million and $200 million less - because of the ability to use losses to shelter other income.

"It is very hard to justify that outcome. It is not a sustainable ongoing position," Shewan said.

Pippos agrees and said the short-term answer to the issue was to remove depreciation deductions for residential properties.

Ring-fencing or quarantining losses might also need to be considered in the medium term if the Government continued to sustain losses from the sector, he said.

In this context there was also a case for tighter rules on the ability to claim deductions relating to "mixed-use" assets such as holiday homes which were used partly to generate an income as well as providing an amenity for the owner's use. These could give rise to material tax losses, Pippos said.

Deloittes opposes a land tax, a view strongly held by tax partner Mike Shaw, a member of the working group.

He argued it was distortionary in imposing a tax on one asset class, land, that others escaped. It did not address the issue of losses being generated in the residential rental sector.

"It raises a plethora of other issues, including cash flow and valuation concerns and whether certain sectors should be exempt," Shaw said.

Some members of the tax group favoured applying the risk-free return method to residential rental properties. This was advocated much more broadly by the 2001 McLeod tax review.

Investment properties would be taxed on a deemed return equivalent to the risk-free rate (set by a Government bond) adjusted for inflation, implying tax of between 1 and 2 per cent on the value of the property.

But it presents several design issues, and is especially problematic for investment properties that are already cashflow negative.
By Brian Fallow | Email Brian

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