The tax base in NZ

[Kea]

Very interesting article on the tax base in NZ.


http://www.nzherald.co.nz/economy/ne...0621715&pnum=2

[James 1077]

I was at a tax conference a couple of months ago where the IRD's head of policy was talking about tax reform (I know - hugely exciting stuff!).

He mentioned that property investment was tax negative even with the billions invested in the sector and also the fact that we are relying on far too few people to pay the bulk of taxes in this country. Especially when he showed us why the government was worried about this - NZ has the highest percentage of citizens living abroad of all of the countries in the 1st world. And with a small population it doesn't take too many of these people to head overseas for the country to effectively run out of money.

The other interesting statistic was around well off individuals planning their income to take into account tax rate rises. He showed us a graph of taxable incomes per IRD statistics; the graph looks reasonably normal apart from a really big spike at around $60,000 (the spike is now at $70,000) which is almost entirely due to people structuring their tax affairs and income such that they avoid the top rate of tax. The man from the IRD's personal view was that by dropping the top rate of tax this spike woud reduce and make it less worthwhile to structure your income such that they actually get more tax in - even with the higher rate at, say, 30%.

My personal opinion is that something definitely needs to be done about the property sector - my favourite solution would be to ringfence rental losses so that they can only be set against future rental incomes (which is what they do in the UK). A capital gains tax / land tax is also necessary which should exempt the family home. This is due to the mobility of Kiwis and, as it is based on physical property in NZ, is less dependent on people staying in the country!

[Tia Maria]

It does seem that everybody realises what a sweet deal rental investments are compared to others, so I find it odd that people seem so horrified when its suggested this should be sorted out.

I think the 'ringfencing' idea sounds fair, as does CGT on second homes. I think if there is a real concern that everyone is going to sell up and destabilise things then they can just introduce things in stages etc.

I can see the appeal of having bricks and mortar, (or wood and tin), as your nest egg as opposed to watching share markets fluctuate but I also think if you are running a rental business it should genuinely work and not only be profitable because of tax breaks.

I was quite shocked by the '10% of taxpayers providing 75% of public services' figure but then I have nothing to compare it to, what are the figures like in other countries?

Just going to do another link JoolzR as the other one starts on page 2:

http://www.nzherald.co.nz/economy/ne...ectid=10621715

Interesting article - thanks.

Cheers

Tia

[Kea]

If I understand it correctly the current system seems to make property a risk free investment for individuals. But still doesn't provide decent housing stock. So the only people who benefit are already relatively rich. It makes me wonder how/why a labour government set this up or allowed it to continue.

Housing would seem to be one of the factors driving young kiwi's overseas. Lots seem to leave to earn a deposit, and inevitably a proportion of those will not return. I don't think NZ can afford to lose this talent for their most productive years.

[Tia Maria]

If I understand it correctly the current system seems to make property a risk free investment for individuals. But still doesn't provide decent housing stock. So the only people who benefit are already relatively rich. It makes me wonder how/why a labour government set this up or allowed it to continue.

Housing would seem to be one of the factors driving young kiwi's overseas. Lots seem to leave to earn a deposit, and inevitably a proportion of those will not return. I don't think NZ can afford to lose this talent for their most productive years.

I'm not sure property ownership is just by relatively rich people. I know lots of people who don't fall into that category who have a rental property - no idea how, but they do.

Cheers

Tia

[batgirl1001]

I do own a rental apartment here (which I am selling anyway) and don't see myself as one of the wealthy, property class who are taking advantage of the system.

In fact, we haven't even gotten on any benefits at all since we plainly see as we don't need it, so why take it.

But there are people I've met along the way who do rout the tax system and claim for depreciation costs on their investment properties. I don't think it is fair and it should be fixed. These are the people I find out- they have 6 to 10 properties on hold and none are being rented out for long.

They are just sitting on their investments and willing for the price to rise.

But the majority of property investors could be the moms-and-pops investing in their retirement and they could be badly hit by the changes as well.

[Super_BQ]

Quoted from the article:

This country, the group notes, has $200 billion invested in rental property (four times the value of stocks on the NZSE), and the sector as a whole not only contributes nothing to taxation

Other countries invest in a more diversified retirement scheme. I'm not surprised with NZ's stance. I've been pounding this issues for many many years in NZ, having a disproportionate investment in any asset class is unhealthy. What really amazes me is how difficult that 'working group tax think-tank' is having at fixing this tax issue. The simple solution it to open their eyes and look at what other nations have done. It's like they're trying to re-invent the wheel.

I have strongly question who this group of economic advisors are and their credentials. CGT is very clear and is NOT complicated like they say. You set the valuation at a date and the lawyers record the prices and report to IRD for all real estate transactions. My question is how can that be difficult? The real reason why gov't officials don't like it is because it doesn't generate instant revenue like how raising GST does.

Did anyone ever think that raising GST still does not address the problem with excessive investments in real estate?

Did anyone ever think that applying a land tax still does not address this real estate problem in the same way?

The only real way is to use CGT with the exemption on the principal residence.

In Canada, CGT is exempt if you run a real estate like rental flats, etc. Instead, the worse treatment is applied - TAXED AT FULL INCOME RATES ie. a $1 gain in value is a $1 at taxed at personal or corporate income rates. It's treated no different than a person running a retail store or any other business. CGT only applies to cases where you're not in the business and the asset value rises beyond your control (ie. rise in a stock market share value).

IRD should not be scared if an aggressive move is implemented. CGT would only level the playing field compared to other nations. If they want a bigger tax take, they should focus on higher income tax rates. It'll save all the waste in administration. Don't bet that a land tax comes with no strings attached. They all have some form of administration cost.

[Kea]

Just watching John Key on Breakfast. He said no to Capital Gains Tax. But that they will be looking at property. He said some New Zealanders are 'piggy backing' on others! So I guess that means things will probably change. Probably too late for it to impact house prices when I need to buy though.

[James 1077]

=In Canada, CGT is exempt if you run a real estate like rental flats, etc. Instead, the worse treatment is applied - TAXED AT FULL INCOME RATES ie. a $1 gain in value is a $1 at taxed at personal or corporate income rates. It's treated no different than a person running a retail store or any other business. CGT only applies to cases where you're not in the business and the asset value rises beyond your control (ie. rise in a stock market share value).

The same is partially true here - if you are trading in property then you are taxed on any gains as if they were income (which they are - it is your trade). But if you are not trading in property but, instead, holding them to generate income from the asset through rental then you are taxed on the income from the rental and the increase in property value is a capital gain (and so not taxed).

One of the problem is that you are allowed to depreciate the property for tax purposes even though it is unlikely to actually depreciate in value. This, and the set off of mortgage interest (which shouldn't change), means that the rental income becomes a taxable loss and you are able to offset this loss against your other income (so wages for example). The depreciation is recovered when you sell the property (up to the price you paid) so is a timing thing but is significant!

What should happen is that rental losses are ringfenced so that they can't be set against your normal income (ie the taxpayer shouldn't subsidise your loss).

I have strongly question who this group of economic advisors are and their credentials. CGT is very clear and is NOT complicated like they say.

Having worked in tax in the UK for one of the big four accounting firms I have to totally disagree with you here! Capital Gains Tax is one of the most complicated taxes there is and has been subject to more tax cases going to court than almost any other area of taxation!

It isn't lawyers alone who need to be involved as your example is the most simple one that there is; however you need to take time value of money into account (so adjust the gain for natural inflation) and also adjust for any improvements that the lawyers may not be aware of (so if you bought the house 10 years ago and insulated / extended it last year before selling then you should be allowed to take the money spent on the improvements into account.

Furthermore you get the questions as to what is capital and revenue (which admittedly you get now) but with the added complication of what is deductible capital and what is not.

Added to this you get the various reliefs that are available in order to encourage investment in certain areas so that you can delay the payment of your capital gain by investing in certain new capital assets.

All of this needs systems to be implemented to keep track of it - both from the IRD's side and, importantly, from investors and businesses.

And, as you say, you don't actually get any money in for a while. This is why the advisors recommended that one option would be for an annual payment on account of the expected capital gain in that year - but this gives cashflow issues as you are paying your capital gain in advance but haven't actually made the gain to fund the tax payment!

So I can see why CGT is likely to be ruled out as it doesn't make much money. But what it does do is change investment profiles - which can be necessary!

Did anyone ever think that raising GST still does not address the problem with excessive investments in real estate?

Did anyone ever think that applying a land tax still does not address this real estate problem in the same way?

The tax group wasn't looking at this real estate problem though - what they were looking at wasn't about raising taxes either (their recommendations needed to be tax neutral). What they were looking at was how to shift the tax burden away from mobile sources to immobile ones given the average Kiwi's propensity to travel. They also needed to look at ways to encourage investment in the country.

[ColeyNZ]

I was at a tax conference a couple of months ago where the IRD's head of policy was talking about tax reform (I know - hugely exciting stuff!).

He mentioned that property investment was tax negative even with the billions invested in the sector and also the fact that we are relying on far too few people to pay the bulk of taxes in this country. Especially when he showed us why the government was worried about this - NZ has the highest percentage of citizens living abroad of all of the countries in the 1st world. And with a small population it doesn't take too many of these people to head overseas for the country to effectively run out of money.

The other interesting statistic was around well off individuals planning their income to take into account tax rate rises. He showed us a graph of taxable incomes per IRD statistics; the graph looks reasonably normal apart from a really big spike at around $60,000 (the spike is now at $70,000) which is almost entirely due to people structuring their tax affairs and income such that they avoid the top rate of tax. The man from the IRD's personal view was that by dropping the top rate of tax this spike woud reduce and make it less worthwhile to structure your income such that they actually get more tax in - even with the higher rate at, say, 30%.

My personal opinion is that something definitely needs to be done about the property sector - my favourite solution would be to ringfence rental losses so that they can only be set against future rental incomes (which is what they do in the UK). A capital gains tax / land tax is also necessary which should exempt the family home. This is due to the mobility of Kiwis and, as it is based on physical property in NZ, is less dependent on people staying in the country!

It is about time they realised this. There are a number of wealthy immigrants like myself who only bring in the minimum of what is necessary and keep everything else in places like Malta or Nicarugua that charge only a nominal income tax percentage. I personally like Malta for it's flat 15% income bracket and that doesn't matter if you make €1,000 or €1,000,000, it's all the same.