Tax Working Group Report & Related Matters

[Baron Silas Greenback]

We need more money in our pockets, we are not out of the woods yet. Increasing tax now is like looking for a safe place to keep the umbrella dry when its raining.

oh good good.. I am sure they will get rid of the extra taxes as soon as we are out of the woods... unless of course we just keep walking deeper and deeper into the woods... what then aye? These tax increases are a band aid on a virus.

[Perry]

Only PIs, eh?

"We are mindful that the corporate costs of an expanding global business are presently largely being carried by the New Zealand entity, in accordance with our current domicile and tax legislation. Unfortunately, these costs generally offset operating profits generated by New Zealand domiciled businesses, eroding the profit base with the consequence of zero or minimal New Zealand tax payments and hence an absence of imputation credits," he said.

"Clearly, this is not in the best interests of the majority of our shareholders if it can be avoided. For this and other reasons, the board is therefore undertaking a review on the merits or otherwise of a domicile change with the aim of optimising value."

See how tax credits morphed into 'optimising value?'
Nuplex were not concerned about minimal tax payments,
rather the lack of tax (imputation) credits.

So all you negatively-geared PIs move over a bit, OK?
Nuplex wants some more of the tax refund pie.

[Austrokiwi]

Who was the retard ( I am using the stongest terms possible) who wrote that quote of yours Perry. Obviously that person has an intelligence level of more than 1 standard deviation below the average. Its fairly obvious that they are retarded as they are using the principle that the more complicated they write the more intelligent they will appear to other people:

What an intelligent person would have said. Our New Zealand Branch has been carrying most of the costs of our business. As a result we can not issue imputation credits. We believe the only way to rectify this situation is to bugger off to Australia.

[Perry]

Most of the 'corporate' costs, wasn't it? But your precis
is far more pithy.

Quoted from the company's (Annual Report?) presented
by chairman Rob Aitken wherein he told shareholders at
the annual meeting in Auckland that the company was
looking at shifting its base out of New Zealand as this
could prove beneficial for shareholders.

More here.

[essence]

'Unfair' tax system due for change

The Dominion Post - 26/11/2009

Top personal tax rates could fall but homeowners may pay higher rates under the latest proposals from the Government's advisory group on changes to the tax system.

In its final deliberations before reporting to the Government, the Tax Working Group says the current system is "not sustainable" and there are "major growth, fairness, and integrity issues".

The group's latest report says it has considered a range of scenarios including a mix of tax cuts and base-broadening options such as land taxes, changes to the taxation of investment property, and raising GST.

The working group will stage a public conference in Wellington on Monday, but has already agreed that the tax base needed to be broadened.

The article doesn't say where or when.

Among the proposals is a cut in the top personal tax rate from 38c in the dollar to align it with the corporate rate, currently 30c, combined with changes to property taxes.

That option is supported in a paper by the Treasury, which says that distortions in the system by people trying to avoid paying the top rate could be ended by either cutting the rate, or raising the income threshold, or legislating to close loopholes.

The Inland Revenue Department estimates the Government misses out on $300 million a year because wage earners divert income into trust accounts or use tax shelters.

This year the Government lowered the top rate from 39c to 38c on income over $70,000, but it has placed proposals to lower taxes further on hold.

Though Finance Minister Bill English and Prime Minister John Key have voiced doubts about imposing a capital gains tax on property or raising GST, both options remain in the working group's final report. So does a proposal to ring-fence losses on rental properties so that taxpayers cannot offset them against their wage or salary income.

A Reserve Bank submission to the group makes a series of potentially controversial proposals including increasing rates to drive down house prices and lower the gains to be made from investing in property.

The bank says a capital gains tax is an obvious solution but if "administrative and other difficulties make this approach unattractive" options include cutting taxes on investments such as shares or cash deposits.

The working group is also considering a proposal that would create KiwiSaver-style tax havens for investors, to help wean Kiwis off property. Under the proposal, an employee would be able to put a portion of earnings into the schemes without paying any tax on the income.

Come on Government, get it right!! Remove taxes on Bank deposits and reduce personal income tax rates. This situation began in the first place when the Labour Government increased tax on over $60K to 39c/$. Why wouldn't Joe Public try and find a better way to save taxes?? Each and every one of us have to be fiscally responsible.

A spokesman for Mr English said the Government had made no decisions about the mix on offer. But Mr English had made it clear he would take convincing that either raising GST or introducing a capital gains tax on property was a good idea.

There was no plan to raise extra tax revenue overall. "It's not about raising taxes or cutting taxes."

Okay, I'm choking in disbelief!!!

Labour's finance spokesman, David Cunliffe, said Labour agreed the current tax system was unfair.

They created this farce!!!

The party was opposed to a capital gains tax on a first home but would enter in "good faith" discussions on any other proposals.

Good faith my *cough*!!!

TAXING TIMES: THE OPTIONS

* Cut top personal tax rate in line with corporate and trust tax rates
* Cut taxes on capital income and remove ability to offset wage and salary income
* Close tax shelter loopholes
* Raise property taxes and/or GST
* Adjust tax rates on interest payments for inflation
* Increase rates to push down property prices and ring-fence losses on rental properties
* Make income on capital investments tax-free until money is withdrawn

From a Speech to Parliament by MP John Boscawen -

When Dr Cullen introduced the bill in 1999 to increase the top marginal tax rate, he said that 95 percent of people would not be asked to pay more tax; instead, only the top 5 percent of income earners would pay more. That has never been the case, and over the last 9 years more and more New Zealanders have moved into the top income threshold of $60,000. More and more New Zealanders have been penalised for working hard and making sacrifices in order to get on and improve their lives. They have been penalised for doing that with the “envy tax” of 39c in the dollar. That overtaxation has cost New Zealand families hundreds of millions of dollars. It has cost New Zealanders jobs, growth, and lost opportunities. Why is that the case? It is because the taxation system has sent a message to all New Zealanders that we do not recognise hard work. It tells them we do not recognise hard work, thrift, and enterprise. It says we want to have a regime in New Zealand that penalises people who want to study, go into higher paying jobs, work hard, and try to provide a higher standard of living for their families.

This is what will happen if (when?) they change the tax accessibility for private investors -

- those PI's who can no longer access tax refunds for property, will vacate the market. They will not be able to carry losses against their income. Result - lots of houses on the market - price goes down. Mortgagee sales perhaps as well.
- those PI's who are structured correctly - it won't make any difference to them. They'll wait for the cheap houses, purchase, put up rents and sit pretty. EXACTLY what the Government doesn't want to have happen.
- Sale of houses means less private rentals available, pushing weekly rental prices up.
- longer waiting lists for HNZ houses.
- builders will re-enter market and start another housing boom. Lag time between buying sections and actual built house between 6months to 2 years.
- House prices rocket, making it even harder for FHB to buy.

Beeping bureaucrats!!! Can they not see this???

[Rosco]

I never understand why they can't just leave things alone!

The whole reason the company rate dropped to 30%, was to enable PIE's and therefore Kiwisaver to seem more attractive. Imagine the hours in government and IRD setting all this up. And then guess where our tax dollars go!

If they want to do something for property, why not make it simple. Something like, if you buy and sell within 5 years its taxable at 30%. Shouldn't matter if its your personal house, rental, holiday home or anything. This would only affect the bad investors anyway, as most good investors hold long term (note traders already taxable, so no affect there either).


Ross

[muppet]

Now that the government will be collecting billions because of ETS there will be no need to bring in a capital gains tax.hahahahahaha
Let's see....a huge increase in electricity prices and petrol prices.

[lissie]

I never understand why they can't just leave things alone!

The whole reason the company rate dropped to 30%, was to enable PIE's and therefore Kiwisaver to seem more attractive. Imagine the hours in government and IRD setting all this up. And then guess where our tax dollars go!

If they want to do something for property, why not make it simple. Something like, if you buy and sell within 5 years its taxable at 30%. Shouldn't matter if its your personal house, rental, holiday home or anything. This would only affect the bad investors anyway, as most good investors hold long term (note traders already taxable, so no affect there either).


Ross

Having had to deal with the Australian tax system for the last couple of years I couldn't agree more! On paper you may pay less than in NZ but in practice -who knows - even accountants can't agree on the legit deductions - and if you or your accountant get it wrong then the ATO can come after you for huge penalties!

I am not looking forward to moving back to NZ for weather - but certainly the tax system will be a breath of fresh air! And you can't even file a final tax return here when you leave the country -have to wait until the following June- because they haven't printed the forms yet :-)

[foss]

Tax Changes - be prepared

Have you caught up with the proposed tax changes from the tax working group? Don’t care because you think nothing will change?

If you are a property investor you need to take some serious notice as the one thing you can be certain of … there will be change of some kind and it will affect us BIG TIME as investors. How can I be so sure?
3 Nov 2009 ... Finance Minister Bill English is continuing to signal changes to the tax regime covering investment properties. ...


Almost every proposal is negative to property investors. Why? Because the group was loaded with accountants, economists, pro share lobby, basically groups that are largely anti property. Some proposals are far worse than others and several have an extremely high chance of happening in my opinion. Read on …

Main proposals:
1. Align tax rates to 30% company, trust and top personal tax rate - likely, vote winner
2. GST increase to eg. 15% - simple to do, unpopular politically, unlikely to happen
3. Depreciation rate reductions very likely and can be changed quickly by regulation
4. LAQC restrictions - won’t happen as distortionary, LAQCs used for other purposes and can get around it thru other structures. #5 below will happen first
5. Rental income no personal income offset (regardless of structure held in LAQC, individual, trust) – very simple and occurs in others countries already. Very possible
6. Land tax 0.8% (capital value x 0.8%) – unpopular politically, unlikely to happen
7. Capital gains tax - ruled out by Key previously as perceived as unpopular. Still possible with exclusions of family home and may have 10 yr rule exception
8. Deemed rate of return @6% on Investment properties - extremely likely and huge impact on property investors see below. Accountants will love it. A variation is already used for overseas share investments.

Most of the proposals are self explanatory. In my opinion depreciation rates (#3 above) will definitely go lower. That will hurt us. That will not be the only change though. I suspect one of the proposals (5, 7 or will end up coming in. Which would you prefer? Which is the lesser of the evils?


Deemed Rate of Return @6%
Don’t understand this one? It is basically a capital gains tax by another name! It will be very painful and worse than a capital gains tax. Why? Because you pay even if you still hold the property! Plus there’s more, it captures any properties bought and sold in the year too. You pay at your tax rate EVERY YEAR the lesser of :
(a) 6% on capital value of the property you hold; or
(b) combined net rental income (excl depreciation) + actual capital value change in the year.

What’s the value of property you hold?

It is an Accountants special, recommended by John Sherwin Pricewaterhouse tax expert. He is the key proponent who recommended the exact same regime to supposedly simplify taxation of overseas share investments. Because it already applies to part of the tax base it has an extremely high chance of being applied.

Arguments will be put forward that this method already applies to shares. However that is not true. It does not apply to NZ shares, they only tax dividends at 33% and ignore any capital gain unless you are a trader (like property). Even overseas income has an exemption for the first $50k value of shares, if held individually, so no tax to pay. Interestingly is currently only 5% (not 6%) deemed rate on overseas shares.

How does it work? Taxed at lesser of:
a) FDR deemed return method (max to pay):
capital value x 6% x tax rate - eg. $450k property x 6% x 33% = $8910 tax
This method ignores the rental returns. How much property do you own?
b) Actual comparative method:
Closing capital value – Opening capital value + net rental returns excluding depreciation x tax rate.
Eg. 450k property, held full year, increased in value by say 4% in current year, 7% yield, 80% leveraged at 7%, less $3k other expenses (rates + insur)
468k – 450k + 3.3k rental profit = 21.3k x 33% = $7,029 tax (for one property)

• How does this get valued? Probably by Valuation or GV or actual value (if sold)
• What if you buy or sell during the year? Then there are part year adjustments made
• What if loss in current year before depreciation, then no tax (can’t claim any loss).

Sound too complex it won’t happen? You’re correct on the first one, it’s complex and a nightmare to work out but it already applies to overseas shares (with exceptions). It stands a high chance of coming in as it will only apply to property investors, not mum & dads

The impact of these changes will likely be a significant drop in property values (which is what the politicians want) when it comes in and/or an increase in rents. But wait a minute, that could push tenants to buy their own homes. Which ever way you look at it a lot of change is coming and it’s not pretty. We need to prepare ourselves, decide which change we want (the lesser of the evils) and begin lobbying.

Don’t forget the associated person tax changes snuck in recently. One or more of these further proposals will come next year.

[steven anderson]

Possible Tax Changes

Fascinating questions raised. However there are a lot of consideration given to the effects of what is suggested. Deemed rate of return hmmm, in the short all that is going to do is effect renters not property owners. Sure, over the longer term it will flatten prices, they are not going to go lower. The perverse effect will be to increase rents, possibly even more importantly increase the rental "black market". Politically this is dumb.

However the one area that is not considered is the effect on the numbers of rentals in the market. Currently government policy is not really engage in the market by providing housing, it rents from the private market, and relies on the private sector to build and operate. Are they seriously considering entering this market - I highly doubt with the associated costs. Sure prices might "fall", but there is still a lot of people for whatever reason are not going to own their home. Should the government introduce some changes they have to be prepared for a shortage in the rental market as investors are not going to provide rental housing for less than 6%. This creates artificially a "floor" on rentals. I doubt a 6% deemed rent will occur. There maybe a deemed rent, but 6% is high, you can imagine that flowing into interest rates and savings in the banks as well.

[foss]

Tax changes be prepared

To expect that property investors can merely pass the cost of tax changes onto renters is hopeful, in short term at least. Rental market dynamics don't work that way. If rents get too expensive tenants will likely buy their own houses (one of the desired outcomes) or stay longer with their parents or variations thereof. Not all can though.

The lay of the land is about to change, there may be a rush to the exit by property investors if changes are horrible enough, this will drive house prices down (another desired outcome).

Yes Housing NZ might need to step up and potentially provide more housing, but equally there are other proposals on the back pages to assist first home buyers with cheaper long term loans (10 yrs at 6%). Govt is looking to private enterpirse for this.

A Deemed Rate of return might sneak in with a lower rate promised at say 3% or 4%, but once in at a low level very easy to increase that rate. And in $ terms that 3% or 4% can still be big to shell out every year. We should not accept even with low rates. DRR you pay tax on retained properties + sold properties

Dare I say it a simple CGT tax might be lesser of evils in so far as you have the cash to pay it when selling (as opposed to Deemed Rate of Return) and might dampen the speculation that started perceptions of rorting the tax system in the first place. And if you deliberately buy and sell in the short term and make a profit then it is fair that tax is payable. Buy and hold investors should not be penalised for this.

This is not scare mongering. In the new year this will start to grow legs in one form or another I fear.

[Mark_B]

I can't see a DRR type tax coming in.

Imho the Government can't afford it - politically or financially.

[steven anderson]

Tax Changes Be Prepared

I'm not known for naivety but thank you for the comments. If you are an accountant you would know that rental dynamics do not change overnight. There is a big market in NZ who for whatever reason will not own a property and hence have to rent. Finance and the availability of owning is simply not in some people's plans.

As for "horrible changes" you imply that investment property owners are also not voters. Interestingly the demographic of those owners might be skewed towards National (not an unreasonable assumption). National would have skads of research on this and they will know the effects.

The real issue here is that for too long people have been able to get away without paying enough tax. Speculators have been able to get through under radar and not having to pay tax on gains.

Negative gearing is a Government subsidy for them not having to be involved in the private sector. Housing NZ might get involved, however they are not going to lend the money. Bank's lending criteria will still ultimately select who gets funding. The Government through HNZC is not going to write a blank cheque to the banks to "underwrite" the system through low or no deposit loans. It will not matter whether the loans are 6% or not.

I have no issue with a "deemed rate of return" it will actually force commercial decision to be made by investors as opposed to the assumptions "houses always appreciate in value".

I have no trouble with this issue growing legs. It is high time that the NZ Government and the NZ people look at the crap allocation of capital. There is a serious role to be played by private investors, but the allocation of capital via dumb domestic policy especially in relation to no capital gains tax is ludicrous. People are making rational micro decisions (based on their own situation) which have huge macro effects. One being NZ does not save enough.

Perhaps you could look at an example which happened in Australia about 20 years ago. Paul Keating when treasurer removed negative gearing which lead to a slump in property prices. It also led to a massive shortage of rental properties. Sure prices fell, but rental prices increased rapidly and stayed high. The people who toughed it out were so far ahead of the game even before the Government relented and reversed their decision one year later. Rental prices stayed high.

I think your final paragraph is the most inciteful. I suspect the Government is running the options up the flagpole. See which one flies. I allows Key to reverse a view on capital gains "after having reviewed" the options. Capital gains is easily the most sellable - the answer to every question is "if you don't sell it, you don't pay tax".

[Mark_B]

National would have skads of research on this and they will know the effects.

Ordinarily I would agree but Government's still get it patently wrong on occasion.

* Keating's scrapping of negative gearing in 1985, only to backtrack and reintroduce it more generously in 1987 (as you noted).

* Howard's First Home Owners Grant which only served to fuel the flames of the boom.

* Bob Carr's short-lived vendor tax (NSW) which helped stall the property market (and not only did it not generate the revenues it was supposed to, by causing people to hold off selling it also affected stamp duty reciepts).

* The Carr Government's draconian attitude towards developers (Developers are bastards so we'll make it really hard for them -> further helped restrict supply -> higher prices).

(I am Australian but have lived in NZ for the past few years, hence the Australian examples)

[steven anderson]

Mark,

All valid comments. First Home Owners grant did more harm than good. I'm in Queensland and the low to middle end of the market has kept up. The NSW taxes were nothing short of dumb, killing a market already dead. However the supply issue is the same pretty much in all states in Australia.