Tax Working Group Report & Related Matters

[roseneath_rat]

From whence cometh the wherewithal to save, never mind the incentive?

Getting all Shakespearean on us now eh Perry??

It would be a good start to start spending within one's means. A recent economist summarised to me that the average NZ consumer is spending $1.14 for every $1.00 earned. Though this is likely to improve in the near future to only $1.08 for every $1.00.

While incentivised schemes like Kiwisaver are a start, we need a more fundamental shift in our spending, earning & borrowing profiles.

[Perry]

Getting all Shakespearean on us now eh Perry??

Just watch out for my poetic phase . . . .

It would be a good start to start spending within one's means. A recent economist summarised to me that the average NZ consumer is spending $1.14 for every $1.00 earned. Though this is likely to improve in the near future to only $1.08 for every $1.00.

"Average NZ consumer?" What's one of those?
I can't disagree with the spend within one's means,
but that's not 'saving,' either, is it?

While incentivised schemes like Kiwisaver are a start, we need a more fundamental shift in our spending, earning & borrowing profiles.

I don't disagree, but I still see lots of symptom-
chasing and very little remedying of causes.

[roseneath_rat]

Obviously the 'average' figure is a one that includes some kiwis who save, and some who spend more than they earn. An improvement in the statistic implies that there are more savers relative to spenders.

I've also heard the phrase "Saving is what every kiwi thinks every OTHER kiwi should be doing." We are quick to diagnose the issue but not so quick to actually do something about it ourselves. Personally I save around 15% of what I earn on top of accelerated debt repayment.

[jadelotus]

Rental owners expect not to pay capital gains tax....
You make money in NZ, you should pay tax on it like all other sectors.

Property investors are no different from shares or bond investors in respect of capital gains.
If we trade any of those 3 asset class, we pay tax on the gains as the gains will be deemed as income. if we buy again, any of those three asset class, with the intention of holding but subsequent events caused the sale, then no tax is due on the gain.

We pay tax where tax is due, to suggest otherwise, would imply PIs are tax evaders and we are not.

the major difference between property and shares/bonds is that of gearing. Most PI need to borrow to purchase because of the level of the outlay involved. The cost of borrowing is tax deductible.
Again anyone choosing to borrow to buy bonds and shares will also be able to claim the interest as an expense. that they choose in most instances not to do so, is not a fault of PIs.

We don't ask for special treatment. We ask for fairness and for a stoppage to the demonisation of PIs.

[JohnJackson]

We pay tax where tax is due, to suggest otherwise, would imply PIs are tax evaders and we are not.

Thats why the entire trend has been about a "hole" in the system not about PI's operating illegally which no ones saying they (as a group, overall) are.

Holes allow things to be done legally that are not right or were not intended by the original policy.

If you purchase shares for the dividends (cashflow), paying tax on all of those dividends, then any increase in share price does not need to be taxed. If PI's purchase rentals for the positive cash flow of rent each week and pay tax on these earnings then there wouldn't be a problem. The problem is under current law, PI's can say they are purchasing for the cashflow, yet records clearly show overall the cashflow is NEGATIVE meaning they (as a group, overall) don't pay any tax at all and infact get tax refunded as losses carry over to personal earnings/company earnings.

[JohnJackson]

I agree with Jadelotus, its the leverage that makes PI 'special' and why using the same tax rules as other forms of investing has led to this idea of a 'hole' in the system.

[tricky]

The problem is under current law, PI's can say they are purchasing for the cashflow, yet records clearly show overall the cashflow is NEGATIVE meaning they (as a group, overall) don't pay any tax at all and infact get tax refunded as losses carry over to personal earnings/company earnings.

I think this is where your approach is flawed.
There's nothing wrong with a property that has negative cashflow in the initial years - this is quite normal given the current prices/rental returns.
Us PIs are in it for the long term and we are very confident that the rents will rise (in time) to push the property into positive cashflow.
So the temporary tax refund in the initial years should continue as in later years there will be tax payable.
This is no different than any other business with initial start up costs.


I have noticed a tendency amongst some to claim a negative cashflow property is proof of 'cheating' or 'milking the system' or claim that this is a 'hole' in the system. I disagree with this view.

[Perry]

I think this is where your approach is flawed.
---------------quoted post content snipped-----------------
This is no different than any other business with initial start up costs.

Another aspect of skewed thinking is the simplistic
comparison of shares with PI. That's narrow and
far too restrictive. IMNSHO, the comparison needs
to be this business with that business.

There are any number of businesses that start with
a negative cash flow and/or zero profit, in the early
stages. The failure rate of start-up businesses in NZ
is testimony to that!

Let's suppose you were to start a goldmine from
scratch. What sort of start-up costs would there be?

• Land purchase
• Resource consents
• Machinery purchase
• Staff hiring and training
• Negotiating sales
• On and on and on.

It may well be 5 or ten years before a profit is made.

PI is not, and should not be treated as, any different.

[tricky]

Follow on with this point:
If restrictions are imposed on the expenses that can be claimed in the initial setup of the investment property then I'd expect some compensation later on when the property becomes positive cashflow.
If no expenses allowed when negative cashflow then no tax payable when it becomes positive cashflow.

[PC]

Why all these biased tax laws for different people/entities?
Why should businesses and the rich get special tax deductions when normal PAYE workers get screwed?

One tax law for all - regardless of entity - problem solved.

[drelly]

One tax law for all - regardless of entity - problem solved.

I think there would be many ways to justify lower rates of tax for businesses compared to individual workers. Not least is the added contribution they make to the economy over and above simply "doing a job".

[tricky]

One tax law for all - regardless of entity - problem solved.

Would you change anything in the current tax system?
If so, what?

I'm not sure what you are saying.

[JohnJackson]

Let's suppose you were to start a goldmine from
scratch. What sort of start-up costs would there be?

• Land purchase
• Resource consents
• Machinery purchase
• Staff hiring and training
• Negotiating sales
• On and on and on.

It may well be 5 or ten years before a profit is made.

PI is not, and should not be treated as, any different.

Yup but Goldmines are not a necessity that everyday people also aspire to own. I also doubt I could roll up to a bank with 40k and ask for a $250k loan for my new Goldmine business. The fact that the majority of homes sold are between people who are not PI's keeps the game safe, and the security high which allows banks to lend so much.

So the temporary tax refund in the initial years should continue as in later years there will be tax payable.
This is no different than any other business with initial start up costs.

Yea in a few years time older rentals will become cash positive, and the PI's income becomes larger, with equity rising. So they buy a whole lot more rentals and reset equity back to initial levels and once again recieve tax refunds.

If banks are happy to lend at an equity ratio that allows negative gearing of portfolio now, why would that change? Its the low equity ratio that determines the tax refund, and so long as the PI is doing his job and expanding his holdings while maintaining minimum required equity ratios (in the PI company),then they will always be getting tax refunds.

[tricky]

Yea in a few years time older rentals will become cash positive, and the PI's income becomes larger, with equity rising. So they buy a whole lot more rentals and reset equity back to initial levels and once again recieve tax refunds.

If banks are happy to lend at an equity ratio that allows negative gearing of portfolio now, why would that change? Its the low equity ratio that determines the tax refund, and so long as the PI is doing his job and expanding his holdings while maintaining minimum required equity ratios (in the PI company),then they will always be getting tax refunds.

If the above actually happened then the PIs would quickly run out of houses to buy....
The reality is most PIs only own a few properties and try to get them cash positive as soon as possible.
Then they can retire.

[PC]

PAYE worker makes $1 and pays $0.38 tax. Almost no options.
Then GST & other hidden taxes on anything he buys.

Smarter & richer runs a business/trust makes $1 and pays $0.10
tax after expenses/deductions. Many are doing even better than this.

The laws have deliberately evolved to confuse and exclude the hoi poloi and benefit the powerful/rich.
Unfortunately for the taxman - more people are starting to catch on and structure their affairs

I'd argue enough of this nonsense - one simple law for all.
eg You or your business/trust make $1 - then pay $0.10 tax.

Life isn't fair (especially for poor & powerless) so will never happen.
I'd also argue governments need to live within their means.
Oh well... back to Fantasyland for me.