Sunday, February 7, 2016

The Government's antithetic tax bill

Unless you live in a cave or under a rock, you will have noticed that Auckland has a housing crisis.  I don't think the word "crisis" is hyperbole.  Net migration flows are the strongest they have been in 20 years; and land restrictions are worse than they usually are.  The only bright side (pun intended - see below) to the market is interest rates are likely to stay very, very low for a while, and unemployment numbers are strong.  This means people in jobs being able to afford ridiculous Auckland house prices, or its even more obscene rents.

When these factors clash, you would expect a government that favours the market approach to solving economic and social issue to put that approach into practice.  The last thing we need in Auckland right now is more cost and regulation added to the mix.  The Auckland housing market isn't working, as Bill English noted.  I doubt the government has any real concern about resolving it, because if it did, it wouldn't have made Nick Smith the responsible Minister.

Instead of using market techniques and less regulation to try and solve the crisis, the Government has taken the opposite approach: It introduced silly rules as a political response. 

The bright-line test (a Capital Gains Tax that National said it wouldn't introduce), which was the second of those silly rules, is now being implemented through the Taxation (Residential Land Withholding Tax) Bill. This creates another withholding tax payable at point of land sales within two years.  Again, this Bill is merely a political response to the shrills of Winston Peters and Phil Twyford.  It won't have any affect on rising house prices, and it will actually have the opposite effect to its intent.

To explain how, I need to summarise the Bill.

The Bill creates a new withholding tax (Resident Land Withholding Tax or RLWT) which requires lawyers to calculate the correct amount of capital gains withholding tax payable by an offshore land developer at point of sale.  As a capital gains tax, it is ring-fenced against losses and other expenses.  In other words, unlike tax paid on profit which has allowable deductions, the capital gains RLWT doesn't allow these. 

Developers I have dealings with pay their tax in New Zealand.  But they do it in their annual income tax return, which have allowable deductions.  And this return is done many months after the income has accrued - by 1 April the following year as we all know.  The capital gains RLWT will overturn this and require at least 28% to be deducted by lawyers at point of sale.  There are many other complicated parts of it which will require lawyers involved in land developments to become accountants; and there are civil penalties proposed for wrongdoing.  Developers will be able to recover overpaid RLWT at year end in their annual return, but of course this just adds another layer of tax complication which is puzzling for a government of this persuasion, and very puzzling considering the McLeod Report recommended fewer taxes, and less complexity. 

The RLWT will have two initial effects: First, it will severely affect a developer's cashflow (because they are liable for the tax at point of sale); and second, it will add cost to all transactions from developments. 

The other main effect it will have is also counter-intuitive to what the Government says it wants, and certainly contrary to what the Productivity Commission (scarily) recommended: It will encourage land-banking.  It will do this because developers will not want their cashflow to be affected, and their costs to rise, by entering into sales within two years of the land being purchased.  So they will hold off on their developments.   

Of course the normal process for developers is to show their bank at least 80% of the development sold before bank lending is confirmed.  So developers enter into sales quickly based on draft plans; and usually certainly within two years of buying the land.  The Bill applies to subdivisions and, as mentioned, includes offshore developers.  Indeed, one major company affected by this will be Fletcher Residential, a wholly-owned company of Fletcher Building.  

If you don't believe me about the increased costs, then perhaps you should consider what Inland Revenue had to say:
This option creates an economic distortion as it creates a “lock-in” effect. In other words, it creates an incentive for people to hold property for longer than two years to avoid the bright-line test.  
For example, a person may avoid selling a property at the highest price, within two years to avoid the bright-line test. The person who is offering the highest price can presumably put the property to its most valuable use. This means that people may not undergo otherwise efficient transactions and put property to its most valuable use due to the bright-line test.
The other daft and disappointing aspect of this shambles was the way the government handled it.  Submissions went out for public input just before Christmas and closed on 26 January.  This Christmas timeframe gave no ability for anyone to oppose it, or write a decent submission pointing out the deficiencies.  The Minister simply described the Bill as "fair", bit he didn't say to whom it was fair.
The RLWT proposal in the bill, together with the new bright-line test and changes to collect better tax information about buyers and sellers of residential property will help to ensure that everyone pays their fair share of tax on gains from property sales,” says Mr McClay.

Bill English isn't stupid.  He sated the obvious - that the market isn't functioning properly.  The way to correct it is to address the supply issues resulting from the demand.  You cannot do it by adding taxes, cost, complexity and rewarding landbanking.  All of these will make the situation worse and to me are the antithesis of what this government should be doing.


Anonymous said...

The last thing you need is a free market as that is what made the current situation so bad. You are talking about Auckland's problems in isolation where in fact it is happening in the main cities in Australia, Canada and the UK. Wherever there is an open and free market the money goes looking for a safe haven.

Neither the Russians or Chinese trust their Govt. or their currency and with historically low interest rates money had been pouring into housing markets at the top resulting in a ripple effect downwards where local people can afford to buy two or three houses to let in smaller towns. The UK is particularly hard hit with Chinese investors owning thousands of rental houses through UK Companies.

There has been no house price inflation in those countries such as France and Germany
where the rental market is tightly regulated and part time and amateur landlords are discouraged. Rental and house prices prices have moved in line with inflation which means at the moment they are static.

In a sentence, you are selling the family silver.

Lord Egbut Nobacon

Tinman said...

An interesting bitch which I partially agree with but I question two sentences (one a part sentence).

"When these factors clash, you would expect a government that favours the market approach to solving economic and social issue to put that approach into practice."

"but of course this just adds another layer of tax complication which is puzzling for a government of this persuasion"

There is no evidence that this government favours a market approach. Indeed this government has made a habit of interfering with people's freedom and personal responsibility in almost every sphere of activity.

Therefore, of course, adding another layer of tax complication is exactly what is to be expected from a government of this persuasion.

Anonymous said...

Anonymous person 6.47 am Feb 8.
China doesn't have a free market. I was there every month last year and got to know developers well.
There market is incredibly controlled relying on favour to grant development rights.
Auckland is not a free market.
A free market would look at rental demand and , as my daughter found out having to pay $22k deposit to get a decent flat as a student, develop like crazy to until the demand dropped.

That's a free market , look it up ,its basics economics and seems to have been overlooked by the lefties running Auckland.

Not surprising when the intellectual powerhouse of the Labour Party , Jacinda Arden , thinks she and her party are free trade supporters

Anonymous said...

Sorry, I never said that China had a free market, its the money coming out of China that is causing the problem. The buy to let market fueled by trillions looking for a safe home is the problem.

NZ is just one of countries effected and unless you control the speculation based on rental incomes and rising house prices the problem will just get worse until something breaks.

Witness the countries with strict rental criteria....reasonable rents and no housing bubble.

A house is supposed to be a home not a bloody commodity.

Lord Egbut

Angry Tory said...

It's not a housing crisis. It's caused by benefits, the "accommodation supplement" and welfare-for-families. There are just too many people who don't deserve even to think about "owning" houses - all we would get us a US-style subprime crash. Probable the super too, as people without income can stay in large houses.

Get rid of those core drives and the problems will go away.

Anonymous said...

Post gone missing...again. Just pointing out I never mentioned China's market. Just the billions that it generates all trying to find a safe haven.

Angry Tory: Once again you talking about NZ as though it's problems are unique. Google Melbourne, Sydney, Vancouver, Toronto, UK in general and you will see they are all in the same boat as Auckland, CHC etc. House in London gone on the market for NZ$1,600,000. It is three and half metres wide. I can assure you the English are not buying these places as there is desperate rush to buy before the Rouble or Rimimbi heads south.

It's plain as a pike staff. All countries with strict rental conditions on residential property have stable housing markets and affordable rents.

Benefits my arse.

Lord Egbut

Angry Tory said...

Google Melbourne, Sydney, Vancouver, Toronto, UK in general and you will see they are all in the same boat as Auckland,

Yep. all in the "welfare west", and all with crazy crazy benefits.

All countries with strict rental conditions on residential property have stable housing markets and affordable rents.

Simply wrong. Look at NY or CA - huge benefits and "strict rental conditions" the same non-problems as NZ, Can, Aus, UK

But look at Texas or the south: no regulation, no benefits, no crisis!

Anonymous said...

I see, the federal welfare budget stops at the Texas border. Goodness, has anyone told the Texans that they are a country now?

You are making it up as you go along Mr Tory.

Current laws in most of Europe are that if you rent you must do it as professional that means you cannot decide to evict tenants unless you need the house to live in yourself, not because you took a speculative gamble on proper prices going up and now you want a new car. Nor can you evict tenants during the winter months. Rents are affordable and an accepted way of living so the incidences of wanton destruction that happen in NZ are very rare and when they do happen the perps are really hammered by the Justice system,

Lord Egbut Nobacon