Andrew King: Income tax cuts admirable, but let's look again at winners and losers

[One]

What? He earns 25 million a year and donates it to charity and you're calling it spoilt boy behaviour??

Get real - this kind of attitude doesn't help landpeople's cause one iota.

[Bob Kane]

What? He earns 25 million a year and donates it to charity and you're calling it spoilt boy behaviour??

Get real - this kind of attitude doesn't help landpeople's cause one iota.

"Now I've got no income effectively, because I don't have a proper job, so the tax that I pay is minimal."

He doesn't earn 25 million from a job.

I throw money into my charitable foundation.

Hmmmm. He doesn't donate it to charity. He has his own personal charity.

[CJ]

Bob - not sure what your point is. He earns money, whether through job or investment and gives it to a charity from which he cannot personally benefit.

[Viking]

Landlords heading for a skate?



By CATHERINE HARRIS - The Dominion Post Last updated 05:00 01/05/2010


A rental housing shortage if unpalatable tax changes occur in this month's Budget?
Seems unlikely at present. Despite the warnings of property investors, figures out recently show rents are flat, and, in Wellington at least, rentals are in good supply.
So predictions that tax changes will prompt an exodus of landlords out of the market and a shortage of rental properties are premature, Jono Ingerson, research director at PropertyIQ, believes.
"It's really difficult to pick what's going to happen ... A lot of what we see happening in the property market is emotionally driven as to how people feel about things, rather than the hard facts."
Property investors have suggested landlords will either raise rents or sell off properties if the Government does away with their ability to claim building depreciation or to offset rental losses against personal tax in this month's Budget.
As well as that, there's the looming spectre of interest rate rises and record low levels of new house building in the last year or so.
Add to that figures from Trade Me that suggest there are more renters out there and you've got what some believe is the makings of a housing and/or rental property shortage.
Dean Letfus, who owns 38 rentals and writes a blog on property investment, says he would sell all his properties and invest in Australia if the tax changes are unduly harsh.
But he reflects a growing feeling that the Government will be kinder.
"If they attack property investors to the extent they originally talked about, lots of people would exit the property market as an investment.
"If they do leave the market in any sort of number, where will people live? We've got rents increasing pretty much nationwide at the moment because there's a growing shortage of housing and because building consents have been so low for the last 18 months.
"If you, on top of that, have a whole lot of investors selling – obviously they have to find someone to buy [their houses] – I could just see growing pressure on the housing market, and all that will do is force the Government to have to try and provide greater levels of housing than they do now."
Mr Letfus says there is also evidence that similar tax changes on rentals in Ireland and Sweden sent rents soaring.
To remove both depreciation and impose ring-fencing would reduce rental properties to cash-flow plays "which I think ultimately would drive rents up through the roof".
Those arguments don't wash with others such as Infometrics managing director Gareth Kiernan.

He does not believe a shortage of rentals is looming, at least in the short-term, because exiting landlords will either sell to other landlords – keeping the properties in the rental pool – or to new home buyers, thus shrinking the pool of renters.
"So the idea that New Zealand will suddenly find itself desperately short of houses is ridiculous."
Moreover, he dispels the idea that rents will rise much in the near term.
Rents have been flat for two years as a hangover of the recession and a surplus of rentals caused by "accidental landlords" who are biding their time because of the low property prices.
While rents might well increase 5 to 8 per cent over the next couple of years as the economy improves, Mr Kiernan believes rents cannot rise above what people can afford to pay.
The cost of having untenanted properties "can easily undo the positive effect of any rent increases on income," he says.
It appears New Zealand's love of property investment is on the wane. A Rabobank survey this month showed confidence in property had fallen from a net minus 16 per cent in August last year to minus 47 per cent in February, in line with other investments.
No longer able to bank on capital gains, many property investors are feeling squeezed because rents are not covering costs. Property commentator Martin Hawes calculates that landlords need a minimum yield of 7 per cent to make rentals worthwhile, but at present were getting less than 3.95 per cent on the average-priced three-bedroom house.
"That means that either rents have to rise or values fall. I suspect both may happen to some degree as yields gradually come into line with what they should be but this will take some years."
Last month there appeared to be good news for landlords worried about capital gain. The Real Estate Institute said the national median house price had recovered to a record high of $360,500, $10,500 higher than February.
But the figures were distorted by the small number of sales. Mike Pero Mortgages noted this week that sales volumes in March were down 8 per cent from a year ago as uncertainty dogs the market. The backlog of houses on the market would now take almost a year to clear.
Mr Letfus says properties are selling 30 per cent below their 2007 peak all over the country, and in a recent Quoteable Value survey, more than half the respondents believed house prices will fall in the next six months.
That's good news for renters wanting to buy, but not everyone is convinced house prices will get more affordable.
"Our feeling is property prices are unlikely to fall much further," says Mr Ingerson.
"If you look at a lot of other factors ... a lot of it is pointing towards stability or slight increase but the tea leaves don't line up and say this market should crash in value."
So with home building still in a slump and home ownership on the general decline, many people believe demand for rental accommodation will only increase.
"I think first home buyers now will probably be in the rental market for longer than they would have been if they were in that position five or six years ago," said Trade Me's head of property Brendon Skipper.
Trade Me's rental listings data indicates there are fewer rentals on the market and higher demand. Listings shrank nationally by 20 per cent in the March quarter – over 10,000 fewer rental listings than at the same time last year.
At the same time, email inquiries to prospective landlords have risen 24 per cent, and the number of days a listing is on the site has dropped from 19 to 15 since December.
"It really shows that demand is there," Mr Skipper says. Wellington is the exception, with a 15 per cent increase in listings but days on site have shrunk from 17 to 12 days.
Mr Skipper thinks tenants are sitting as tight as their landlords until the Budget. No-one's moving. "Rents have remained relatively flat ... and supply and demand is a little bit skewed at the moment.
"You'd normally start to see that pricing starting to lift and we haven't seen that yet."
The supply of rentals appears to a fluid one, according to Andrew King, vice-president of the Property Investors Federation.
RENTAL listings have improved substantially since Trade Me's March data, he says, which could indicate that landlords have tried to sell in between tenants and are now returning to the rental pool.
"If they sell now before the Budget, I think many of them are hoping they will actually be able to sell, whereas after the Budget there may be a flood of properties on the market – even more than now – and they may not have the opportunity to sell."
In Wellington, property manager Matt Watson of Quinovic Kent Terrace has noticed a marked increase in reluctant landlords.
"I wouldn't say it's significant, but there's certainly been an upturn in the number as a percentage of our new managements, of people who would prefer to sell but are now renting ... That has been happening in the last two or three months."
So for now, supply does not seem to be a problem but some commentators believe rents must still rise.
"Everyone I know has raised their rents by between 10 and 15 per cent in the last quarter," Mr Letfus says.
"At the moment there's a $6000 difference between the cost of owning the average New Zealand house and renting the average New Zealand house, so it's much cheaper to rent and that means there is potential for rents to rise if costs increase," Mr King adds.
According to the Property Investors Federation, landlords would lose an average $1750 a year if the Government wipes depreciation, and $100 a week if it imposes ringfencing – meaning rental losses can only be claimed against future rental income instead of personal tax.
"(Losing) depreciation would be bad, ringfencing – disaster," Mr King says.
Because wages have remained static, he estimates people will react to rental rises in various ways.
They will move further out, to a lower quality home, to a smaller home, or take in a boarder. The kids won't leave home so quickly.
Some landlords, he says, will try to delay raising rents, so maintenance and insurance will probably be the first thing to go, lowering the quality of the available rental stock and the standard of living for renters.
A rent rise is logical, Neil Russ, head of tax with Buddle Findlay, agrees.
He believes it is "pretty much a certainty depreciation will go" and as a result, some landlords unable to exit will have little alternative.
"They can't do much about interest costs which are actually more likely to rise so it seems to me that a possible response to any announcement that the Government makes is that returns from rental properties will rise."
He also admits that questions still remain as to whether targeting property investment will deliver much benefit in the end. If, as the Government has suggested, beneficiaries are compensated to cope with rising rents and GST, the billion-dollar benefits from wiping out the likely tax changes are greatly diminished.
What is the point of the changes then? He says it's about sending messages about savings and rebalancing investment.
"It's about getting a level playing field."
NO SPECIAL ADVANTAGES IN PROPERTY
THE enduring question in the property tax debate is whether property investors are being "villainised" or have had it good for too long.
Neil Russ, a tax expert with law firm Buddle Findlay, agrees with property investors that they do not receive any special tax advantages.
However, because those rules are being applied to a sector with different value drivers, the result isn't necessarily equitable and fair when you compare landlords with other business sectors, "because the gains made on sale of a business in other business sectors are far more related to the actual output of the business itself than underlying property value movements".
Investor Dean Letfus does not deny that landlords can do very well if they hang in long enough, but apart from some early tax relief, "it's no more profitable than many other types of business".
While depreciation can be claimed, it must be paid back. Interest on mortgages and rental losses can be claimed against overall tax bills, but so can any other business that borrows money or makes a loss.
For some reason, Mr Letfus says, housing "has been singled out as being completely different from any other investment and it's not. It just happens to be more emotional because people live in them."
PARTY URGES GST REBATE
A suggestion to help kick-start new building has come from the fledgling Kiwi Party, which is calling for the Government to ease the GST burden on new home builders.
Gordon Copeland, party president and finance spokesman, says raising GST to 15 per cent would add $10,000 to the average cost of building a new home and buying a section.
He is calling for a 50 per cent refund on GST for new home builds with a combined value of $300,000 or less. This would give such owners a maximum refund of $19,565.
Mr Copeland dismisses the argument that a fall in income tax will compensate for higher building costs.
"New home builders may in a general sense receive income tax breaks to offset the increase in GST, but that will not enable them to meet the extra cost of a new home and section, not to mention soft furnishings etc."

Ok, so houses will cost 10k more to build from new. That's good Second hand houses will reflect that in time.
Ecomomists should not comment on stuff they know nothing about.
Wellington is getting its turn now that Govt. is doing some housekeeping and starting to weed out the unnecessary. More to come.
Property has no special advantages, which we all knew.

[Wayne]

He doesn't earn 25 million from a job.


Hmmmm. He doesn't donate it to charity. He has his own personal charity.

That is a bit harsh. He donates far more than I do - I suspect even as a percentage of what he nets from 'working' or investing. He can probably afford it but he doesn't have to and doesn't make a lot of noise about it either.

His own personal charity - not for his personal benefit otherwise it wouldn't meet the rules to be a charity.!

[wildwest]

Its such a shame that this interesting debate has been marred by personal attacks and nasty comments. I'd like to see us get back to looking at what options are available rather than attacking others opinions.

Property investment is a business as well, and we do generate business growth and income for supporting industries such as accountants, property managers, and other small business. The assumption that all property investors are highly geared is not correct in many instances. My portfolio is at 60% LVR and all on P & I payments.

My feeling is that the intent of the proposed tax changes at the highest level are to incentivise diversified investment, especially business investment to encourage the growth of NZ.

As a generalisation I feel the growth of the property investment market is in no small part due to the fact that a lot of New Zealanders are comfortable with property, and perceive it as less risky than other types of investments, its tangible, and we can see that at retirement we can live in one home and earn an income off the others should pension not be available by the time we get there. Not dependant on tax payers support.

But I can see that as NZer's we also need to invest more in our business's to help the country grow. We also need to make it more affordable for young families to achieve the dream of owning their own home.

Andrew's article was very good as the main point was to show that it would not be fair to isolate are target property investors. That a fair tax structure should be applied across all investments.

I'd like to go back to Andrew's initial article and ask you all...what positive, fair pro-active suggestions do you have for the tax working group, on how to look at a fair, balanced tax regime across all investments, to help NZ to grow as a country and reduce its debt levels.

[Viking]

Well have a look at what the Aussies are about to do for small businesses even though they pay less tax than us now.
Stop taxing us and wasting the collection proceeds and then people will invest better.
Fix the rorts and ripoffs that are perpetrated within the finance industry and the share market and they might invest there.
Fix the tax rorts that are allowed via Trusts and companies because the personal tax rates are so high.

Property isn't the problem, its the answer.

Its really so simple.
Like most things.

Small businesses to score tax breaks
* By Phillip Hudson
* From: Herald Sun
* May 01, 2010 12:42AM
ALMOST two million small businesses will receive faster tax breaks under a shake-up of the tax system to be unveiled on Sunday.
The Rudd Government will allow small firms to claim the full value of some assets as a tax deduction over one year instead of several.
Treasurer Wayne Swan is expected to outline a package of sweeteners to make small businesses one of the big long-term winners from the Henry tax review. It will include tax cuts over time, and investment allowances to buy cars, computers and machinery.
Small business employs five million people and the Government wants to encourage its growth as the backbone of the economy with a pledge to slash red tape so owners can spend less time on paperwork.
Mr Swan said he would not be pre-empting tomorrow’s announcements.
“Small businesses have been a crucial part of our economic success during the global recession and they deserve to be the big long-term winner in our plans for the tax system,” he said.
Australia has 125 taxes ranging from those on income and companies to the obscure 10c Queen Bee levy, specific to the bee industry. The top 10 taxes raise 90 per cent of the revenue collected.
Mr Swan will release the 1000-page review by Treasury Secretary Ken Henry at 2.30pm tomorrow, as well as a government response.
It is expected to:
ABOLISH tax returns for ordinary workers with straightforward tax affairs;
OVERHAUL superannuation tax;
SHAKE-UP alcohol tax;
CONSIDER radical ideas to introduce a congestion charge where motorists pay more for driving in the city at peak hour;
SIMPLIFY childcare benefits.
Prime Minister Kevin Rudd promised a “stronger, simpler and fairer” tax system but said there would be winners and losers.
“Some people will celebrate, others will complain and complain loudly,” he said.
One of Australia’s richest men, mining chief Andrew “Twiggy” Forrest, blasted reports there would be a new tax on the super profits of resources companies.
“What you shouldn’t do is kill the golden goose,” he said.

Some goood starters for comrade Bill.