Sunday, March 21, 2010

Cutting Off Labour's Knees

The Sunday Times's Greg Ninness is speculating that Bill English will change the rules concerning LAQCs and PAYE write offs. He is suggesting such a move in addition to the removal of a deduction for depreciation.

THE GOVERNMENT looks likely to escalate its tax attack on investment property by clamping down on the way losses can be offset against other income.

There is already a wide expectation the May Budget will axe depreciation on buildings, one of the tax reform options raised by the Tax Working Group (TWG) in January, along with cutting income tax and raising GST.

Adolf has long considered such a move fair but in past conversations with Gooner, my co-author has maintained it is not possible to separate a taxpayers PAYE liabilities from his business related tax liabilities and therefore the move is not possible. Gooner also suggests that one does not need an LAQC to arrange these tax write offs and Adolf is not sufficiently versed in accounting law to argue one way or the other. The figures would suggest otherwise.

According to IRD, the number of LAQCs filing returns more than doubled between 2003 and 2008, from 63,400 to 129,900, and the total tax losses relating to residential property investments owned by LAQCs increased nearly 800% over the same period, rising from $105m to $812m.

However, I'm inclined to think he is right on the latter point, so the Gummint will need to simply focus on PAYE payments and forget about LAQCs..

It really appears quite simple to me.

All Blenglish has to do is to tweak the law so as to require (a) all PAYE to be deducted at source and (b) those seeking tax deductibility for rental property expenses to declare their salaried income on their tax returns along with the amount of tax already paid on that income and (c) disallow return of PAYE to the tax payer.

If a tax payer incurs a loss on his rental property, then he will simply need to increase the rent or sell the property. No more taxpayer subsidies distortion of property rental and sale values. What's so hard about that? Just have a thought for all those people currently renting who suddenly will be able to buy these properties as their values decline due to the removal of taxpayer subsidies. That's got to be good for lower income people.

The political ramifications are delicious. Can you imagine Phil Goff trying to spin this package as a gift to rich pricks? Can you imaging how much this would cost the Bilious Bitch via her rental property empire?


Anonymous said...

Yep, ring fence the losses and can the ability to offset those losses against personal income and its over.
Oh and the market sets rents, not landlords....

Gerrit said...

Simply will affect only PAYE payers and knock them out of the rental housing market.

Wont make a dent in those of us self employed business owners who can offset losses from one company (the rental property owing one) to a income producing profitable one.

It strengthens the business sector and lets them buy up the rental housing from the mom and pop investors at a cheap rate.

Government tax take wont change one iota, but ownership of rental housing stock will fall into the hands of business (at knockdown prices).

Current tenants wont have the savings (banks now require 20% deposit) to put in a bid to buy the property they are renting.

No, what the government is proposing is to take away housing investment from mom and pop and into corporate ownership.

Expect rents to rise when this happens.

And corporate New Zealand will benefit at the expense of mom and pop who will invest where?

Anonymous said...

Gooner was right Adolf.
When we had a rental property back in 2004-06 to claim the loss against my income all I had to do was fill in a normal IR3 return and it has a section asking if I was claiming a loss against my income. I would put the loss in there and it was calculated through and produced a healthy refund each year. ( Had to supply a copy of our records as well)

The depreciation deduction is not a big deal (unless you are planning on owning the house for ever)as the only benefit of depreciating is use -of-money benefits until you sell the property and have to refund the recovered depreciation. By cancelling this it will simply knock the use-of-money opportunity on the head.

I would expect that possibly the R&M amounts claimed may increase significantly as landlords try to push the R&M provisions to the hilt to try and disguise capital improvements as regular maintenance.


Anonymous said...

English has the problem that the figures the TWG were using were hugely inflated as to the value of rental housing stock (200 billion as opposed to the real figure of around 55). Also 0nly twice in the last 28 years has the IRD lost money in property. 2008 neatly coincides with sky high interest rates, the write offs in the property development/finance company debacle.
The TWG basically used incorrect stats to exaggerate their point and treasury now have done more correct figures and 1.3 billion is out by a huge factor.

Anonymous said...

people resorted to property investment because they were sick and tired of getting ripped off by Hulun's theft of their hard earned coin.The fact thayt it is easier to borrow money against property than against shares is why the distortion occured.
The truth is the sharemarket amd the professionals in the TWG don't like Mum And Dad investors making as much as them, and out of sheer jealousy want the rights associated with business ownership denied to an entire class of investment.
there will be ramifications for any tinkering, and it will involve renters spending more on their housing needs.
The Nat govt is weak, and will run from any negative publinity at breakneck pace. Look at what happened with the farcicle Waiheke island jaunts.

Anonymous said...

Gerrit, if the losses are ring fenced and you cant offset then you are fucked too.
Oh and some Banks still do 90%.
There is no empirical evidence showing rents would rise under this scenario. They rise for other reasons, like the shortage of stock we seem to have in Auckland is causing them to firm at the moment.

Psycho Milt said...

Can you imagine Phil Goff trying to spin this package as a gift to rich pricks?

Very easily. Low income earners don't have rental property or an LAQC and have no idea what any of it means. They do pay income tax though, and they understand immediately and perfectly what a cut to the top rate means.

If there's anyone facing a hard time pitching this to voters in a politically-beneficial way, it's National.

Gerrit said...


Everyone keeps going on about "ringfencing" rental property investment.

How? Think of a scheme and I will loophole it in two seconds flat.

Would be a taxation nightmare to differentiate every property type with a different taxation structure.

I have a residential rental property that is also used as a commercial office by the tenant.

Is that residential or commercial.

Same for those live in commercial studio units. Are they residential or commercial?

Think of all the companies that are property owners (most NZL companies would own property of some sort or another).

Does the IRD really want to trawl through those and find "residential" property owners?

Everything is possible but some things are not practical.

No, this is nothing more then a transfer of ownership from mom and pop to the corporates.

Barnsley Bill said...

PM. National really need to explain themselves better. if they cannot sell a tax cut for a few to the many who effectively pay no income tax at all then they do not deserve to be in power.

Psycho Milt said...

BB - it's that "explain themselves better" that's the problem. Every govt finds that a perfectly sensible plan is easy meat for the Opposition if the benefit to society as a whole is abstract but the downside for a significant block of voters is concrete. Classic example of it right here and my money's on Labour making a 3-course meal out of it.

Lou Taylor said...

Long term politics is going to do nothing to stop Kiwi investor's appetite for property. Whilst it may no longer be the bearer of high capital gains it has some advantages.
Investor's can drive past it, noone can steal it and someone will always buy it from them.
Whatever government tinkering occurs with tax scenerios you can bet that prices will not collapse and investment will continue.
The high cost of land and building will ensure that anyway.

The longterm trend will be for less home ownership and more renting. Much the same way as good small farms and businesses get taken over by larger ones. Cash will always be king.

Anonymous said...

Be careful what you wish for!.
NZ has about 88000 SME's most of which have almost survived the financial meltdown of the last couple of years. Now most of those SME's are funded by using the collateral that is their property ownership.
If the Govt. interferes with the rpoperty market and that causes loss of confidence in prices there is a major problem for NZ business and NZ employee's along with their funders.
Lower the property values that those SME's are financed from and then we have the banks looking to shore up. their position. What happens next is a huge number of bankruptcies and people unemployed and all that goes with that scenario.
Those who think attacking the property market is a good idea better make sure their own future is secure and not dependent on the owner of a SME who needs his bank to have confidence in his property portfolio.

Anonymous said...

The supposed argument for attacking property investors is that the Govt. needs the cash to offset other tax reductions. That may be true but the net return after all the negative effect will for the Govt. be a sound thrashing at the next poll. There are 340000 private rentals in NZ with each of those being owned by one or more , most likely National voting person. So if we consider say 500,000 votes against the Nats. I'd suggest that they should think a bit more. Not that they really seem to value these votes. After all they ignored an 86% referendum and passed an ETS that is now shite as it was always going to be.
If they really want to sort out the tax problem then the answer is much closer to home. Indeed right in their won living rooms. BUT, because it will attack their and their mates privilege it a certainty that its is a sacred cow.
Its the use of TRUSTS to shelter incomes because of the tax rate that is attached to trusts. All of us know people who are wealthy but whose wealt is run within trusts. The money is available to spend but the income declared is done in such a way as to minise the tax payments. There are plenty who are earning in the hundreds of thousands in their trusts but are declaring a taxable income in the 28K bracket. Its allowed and its tax effective but when those same claim WFF and all sorts of other benefits including for their off spring at unis etc then its time we nailed the trust versus personal tax rates to the wall.

The problem with this for the Nats. is that they cannot raise the Trust Tax Rate to 39%, which is what Helen should have done but she goofed.
What they do need to do is lower the personal tax rate to 25%. Leave the company at 30 and trusts at 33%. Do that and watch the tax money flow and the state handouts come to s grinding halt.

Its not hard and a win win for all NZer'sd and NZ paye taxpayers.

Anonymous said...

Told ya so

Anonymous said...

"I have a residential rental property that is also used as a commercial office by the tenant.

Is that residential or commercial."

Depends. What is the zoning of the building and what use is the building rated for?
If its residential and hes doing commercial then hes breaking the rules. If its mixed (like Business Zone 4 Ponsonby) then the GST component will tell the story as commercial rents have to have GST (which is how the IRD will get you)
You have really alluded to how people are ignoring some of the permitted use and building ratings to run businesses in residential. You often see this with investors who run serviced and managed apartments (shortstay) in what are really residential only buildings. (fire ratings etc)