Who's Got What Wrong?

[Sanya]

[...]

In truth, residential property is taxed much more heavily than the other investments with a capital appreciation component, because of the bright line and subdivision laws. If you buy a business and sell it in 3 years, no tax on the gain in value of that business. And no tax if you decide to split it in half and sell the bits separately for more, either. With a residential property, both are caught.

... Maybe I will write a post on this one for my website.

Thank you. Yes!

I further understand and please correct me if i'm wrong that from the the 2020-2021 year business owning commercial buildings get the added benefit of tax depreciation on all buildings.

I would also like to read your article once published.

[Perry]

Waffle?

Property is taxed no less than shares or direct business ownership, but significantly less than term deposits, which have no tax-free capital appreciation element.

Hang on?!

Aren't we discussing income tax rates, here?

(Rather than property, shares, term deposits or business ownership tax, whatever they may be?)

We've already got the CGT . . .

We have? From whence did that notion come from?

What statute are you relying on, with that assertion?

[Anthonyacat]

from the the 2020-2021 year business owning commercial buildings get the added benefit of tax depreciation on all buildings.

This is correct, depreciation on commercial buildings has been reinstated.

Hang on?! Aren't we discussing income tax rates, here?
(Rather than property, shares, term deposits or business ownership tax, whatever they may be?)

I saw this more as a discussion of the tax system as it relates to property, rather than specifically income tax rates. Your initial post:

The real problem with our tax system is the different tax treatment of property compared with other investments.

Hence went along the lines of discussing the tax treatment of property compared with other investments.

But really, the distinction between income and capital gain, and accordingly between income tax and capital gain tax, is an academic and administrative exercise anyway. Both rent coming in, and a property increasing in value are clearly an inflow of wealth to a person. Both certainly fit into the economic definition of income.

[McDuck]

That's cool McDuck.

The debate started because Geoff Simmons opined that "leveraged property investors determine house prices".

It seems we are in agreement that the determinants of house prices are broad and extend far beyond "leveraged property investors" and in fact "leveraged property investors" are incentivised to pay the lowest prices possible to acquire properties in order to meet investment return goals. Property investors are in search of yield.

Geoff is just extending the myth promoted by many low rent publications that property speculation is the cause of runaway house prices and poor housing affordability. This narrow focus is both lazy and careless.

In its Inquiry into Housing Affordability back in 2012, the Productivity Commission identified land scarcity, restrictive urban planning, and the time and costs associated with land development and construction as factors constraining the supply of new housing in New Zealand. My feeling is these observations are all still valid with some geographic variation.

You note "there are about five pull factors and two push factors" impact house pricing. I'd suggest there are a few more than that. I recently used the below model to explain to some interested friends how it is possible for house prices to markedly increase when the overall New Zealand economy is tanking.

Haha.

That is a very nice diagram!
I should study it for a few hours, and have a think.
I especially like the way it shows multiple causes.

I wonder if the boxes could be sized differently?
With the boxes getting bigger, as the contribution to the final price became larger.

That way you'd know where to put the least effort to get the greatest effect.

[McDuck]

Hang on?!

Aren't we discussing income tax rates, here?

(Rather than property, shares, term deposits or business ownership tax, whatever they may be?)
....

Tax is a way for a Govt to extract money from the population.

By saying " the problem with the tax system" the author allows himself to bring any other wealth related subject into the conversation.
As that inclusion may be a possible remedy.

So any activity related to the change in personal wealth could be considered part of that discussion.

That would include, sinking spare money into property, rater than shares or bank accounts.

[Perry]

Hang on?! Aren't we discussing income tax rates, here?
(Rather than property, shares, term deposits or business ownership tax, whatever they may be?)

I saw this more as a discussion of the tax system as it relates to property, rather than specifically income tax rates. Your initial post:

The real problem with our tax system is the different tax treatment of property compared with other investments.

Hence went along the lines of discussing the tax treatment of property compared with other investments.

Given the errors in the Stuff item, that's understandable. But there was a half-pie conclusion at the end that focussed on income and tax thereon . . .

If someone is earning more than $180,000, they would now pay 39c in the dollar on dividends from shares, for example. Whereas they will pay . . . . only half the returns from rental property.

As Sanya pointed out, there was a pseudo excuse / correction appended to that STUFFed item:

This article has been amended to recognise that property owners do currently pay some level of tax.

As I understand it, the reality is, "If someone is earning more than $180,000, they would now pay 39c in the dollar on" . . . . applies to all income from all sources over that $180k figure.

Given that last excerpt I've quoted, which was about income tax, how anyone could pay 50% less income tax on income from rental property was inexplicable. (Commercial or residential)

[McDuck]

Given that last excerpt I've quoted, which was about income tax, how anyone could pay 50% less income tax on income from rental property was inexplicable. (Commercial or residential)

I own a second house that's worth 2 million dollars. (for example)
It was worth 1.5 million dollars last year.
My wealth has increased by 500 thousand.
What tax have I paid on the 500 thousand dollars?

[Jeffa]

I own a second house that's worth 2 million dollars. (for example)
It was worth 1.5 million dollars last year.
My wealth has increased by 500 thousand.
What tax have I paid on the 500 thousand dollars?

You'll find out when you're council rates are reviewed.

[McDuck]

You'll find out when you're council rates are reviewed.

Ha!

Nice!

Yes, a council tax is still a tax.

Now , let's talk numbers.

Remember we need to get to the 30-ish % figure.

(We're gonna need about 66K worth of rates to be even).

[PC]

I own a second house that's worth 2 million dollars. (for example)
It was worth 1.5 million dollars last year.
My wealth has increased by 500 thousand.
What tax have I paid on the 500 thousand dollars?

No you are reading it wrong.
Your $1 has been debased by $500K.
The invisible tax has destroyed a quarter of your buying power.
Nothing has really changed with the real assets - but that funny paper money is being printed like mad.

[Sanya]

[...]
As I understand it, the reality is, "If someone is earning more than $180,000, they would now pay 39c in the dollar on" . . . . applies to all income from all sources over that $180k figure.

Correct.

[...]
Given that last excerpt I've quoted, which was about income tax, how anyone could pay 50% less income tax on income from rental property was inexplicable. (Commercial or residential)

The clue lies in the third sentence.

They are unaffected because they can use tax planning – trusts, family foundations and especially property investments – to reduce their taxable income.

To reduce their taxable income “the wealthy” have traditionally (though no longer) been able negative gear their property investments thereby reducing their taxable salaried income. “The wealthy” can however use a portfolio base rule to offset losses of one property against gains from another.


Do also carefully note the language change from “income” to “returns” in the following sentence

Increasing the top tax rate to 39c will make the problem worse. If someone is earning more than $180,000, they would now pay 39c in the dollar on dividends from shares, for example. Whereas they will pay no tax on the returns from owner-occupied property, and only half the returns from rental property. This is an even bigger incentive to pile into property investment.

The “returns” used here undoubtedly includes a capital gains component as McDuck as noted.


The idea that no tax is paid on the returns from owner occupied property is misleading too. As Jeffa notes all property owners pay council taxes which may not be apportioned according to “returns” but certainly are apportioned according to land or capital value.


Finally, economists have a very broad definition for “income”. Even for owner occupied homes economist’s impute an income value which is derived from what the house owner might reasonably expect to pay in rent to live in his/her own home. The rational is if you don’t own your own property you’d be paying someone else rent – so that rent is viewed as “income” from the economists perspective.

[McDuck]

No you are reading it wrong.
Your $1 has been debased by $500K.
The invisible tax has destroyed a quarter of your buying power.
Nothing has really changed with the real assets - but that funny paper money is being printed like mad.

Ha!

Nice!

Yes, so true.

But you've done a small error.

The new $500k would debase ALL the money in circulation.

So divide the $500k into the TOTAL MONEY SUPPLY (so many billion),
to get the effect on each individual dollar.

And it's an unbelievably small distortion.
(on that particular dollar).

But yes, top marks for that!!!
Every new dollar destroys value of everything existing before it was born.

* remember this distortion is only applied to a part of the population.
(As the inflation seems confined to housing).

[Perry]

The broadness of the income definition is one thing. The sense of it is another.

Coming from econ-o-mists, common sense is not expected, of course.

When mooted years ago, Comrade Commissar Cullen described the notion as an ideological burp.

Say my neighbour and I decide to mow one another's lawns for $20 each.

Econ-o-mists would allege that GDP went up by $40.

[artemis]

Last year Liam Hehir (journalist) requested IRD to provide revenue from the bright line tax. Refused as information not held. More at this link.

https://fyi.org.nz/request/9666-how-much-revenue-has-the-bright-line-tax-raised#incoming-33139