Cactus forgets about use of money
January 25th, 2010 at 2:15 pm by David FarrarCactus Kate blogs on the recommendations of the Tax Working Group. With respect, I disagree with her on one aspect. She says:
Much has been made of building depreciation. Those who still think this is a starter should read up on the IRD website about “depreciation recovered” . It is erroneous to say that the current system doesn’t already have a clawback on sale where depreciation has been overclaimed. As it does for other fixed assets depreciated in business as well.
Now it is true that when a building is sold, you have to pay back the cost of the tax on the claimed depreciation. Everyone knows this. But Cactus misses the point – you get to have interest free use of that money in the interim – this is like interest free student loans, but even better.
It is effectively lending landlords taxpayers money for free. Residential buildings do not generally depreciate – they appreciate (along with the ladn they are on).
Let me give an example. Say you purchase a house and the building is deemed to be worth $200,000 of the total price. You can claim 3% depreciation diminishing value. In year one that is $6,000. Now if you pay 38% tax, then you effectively end up with $2,280 extra cash.
Now even if you are the worst investor in the world, let us assume you can at least earn the risk free rate of return of 6.29%. So you earn $143.41 of your $2,280.
Now that doesn’t sound much. However in year two you then have $2,423.41 of money to invest plus you claim $5,820 off your income as depreciation, which at 38% which is a further $2,212 to invest. So then your return courtesy of the taxpayer is $291.54.
If you sell your property after ten years, you will have claimed $52,515 off your income, resulting in reduced taxation of $19,956. But you will by then have $28,774 of extra money (at the conservative risk free rate of return), so after paying back the claimed depreciation you still have $8,818 left over.
If you keep your property for 30 years, then after paying back the depreciation you will have $106,639 surplus from being able to use that money interest free. Now this is in nominal terms, so won’t be as much in real terms. But it is still money for nothing and bad economics – just like interest free student loans are bad.
Depreciation is a necessary tax loss, when the asset really does depreciate, as it allows you to fund the cost of replacement. But when we have decades of evidence that residential buildings appreciate, not depreciate, I’d rather not give out interest free loans to property owners to claim a depreciation that doesn’t exist.
Related posts:
- Making money from interest free loans
- Making money from student loans
- Tax Working Group
- Is it bye bye to LAQCs?
January 25th, 2010 at 2:21 pm
It seems to me that Landlords are having it all ways. They can claim depreciation and R & M. Why??? It seems to me they should be able to claim either but not both.
Vote:January 25th, 2010 at 2:34 pm
It is land that has appreciated in value, thats where the increase has come from (and you can blame ludicrous council policies for that), houses do depreciate which is backed up by the price differential between a 30 year old brick and tile place compared with a 2 year old property, all other things remaining equal.
Vote:Depreciation is always at best a guesstimate, anyone who depreciates their car, computer, work tools etc. knows its not a precise science so why single out landlords ? Its the daftly generous WFF and the even dafter raising of the top tax rate, although there is a good case for not being able to access WFF because of depreciation unless you have actually realized the loss.
John Key wasnt elected to find new ways of taxing people as far as I can remember.
January 25th, 2010 at 2:45 pm
Pongo is right. National was elected on an election promise to lower taxes.
Interest-free student loans was a daft idea. But if DPF wants to equate them with building depreciation, then let’s get rid of interest-free student loans first!
(Disclaimer: I benefit from neither.)
Vote:January 25th, 2010 at 2:46 pm
Pongo, depreciation rates are not a best guesstimate, they are stipulated rates based on the expected life of the asset. So why shouldn’t property depreciation rates be the same – it makes sense that if generally values don’t decrease then depreciation shouldn’t be used.
Are you are a property investor concerned about losing some of your perks? If a government said they wouldn’t drop WFF because it was an established perk would you be happy with that?
Vote:January 25th, 2010 at 3:07 pm
The perk is the tax free capital gain. That is what they should be taxing. Share Holders receive the same perk. Commercial landlords are allowed to claim depreciation, why not residential ones?
Vote:January 25th, 2010 at 3:12 pm
Get rid of all this complex unnecessary rubbish and replace it all with one tax. A poll tax.
Vote:January 25th, 2010 at 3:15 pm
so no rental property has ever needed a new roof or kitchen?
buildings do depreciate, its just that unlike a replacing a business computer, vehicle etc, you do it in stages.
when you replace the roof (not repair) or kitchen, you cannot claim it as an expense, its a captial expenditure and needs to be depreciated.
changing any of this distorts the tax system so that property is different to any other business.
Why does National want to screw over the people providing for their own retirement by owing some rental properties?
Vote:January 25th, 2010 at 3:20 pm
Instead of generously allowing the property owner to write down the value of the property each year with the taxpayers-at-large footing the timing bill why not let the building owner claim the write-down on sale or demolition. That would turn the timing round.
Vote:January 25th, 2010 at 3:28 pm
A number of observations.
1. This post was obviously written by a renter who has not spent much time in a mitre 10, up a ladder or with a paintbrush in hand.
2. Pretty much anything proposed by the Mark Weldon fan club (MWFC) is going to be A. Good for Mark Weldon. B Unlikely to be good for us.
3. I am surprised at the amount of response you managed to muster in reply to the prickly ones well thought out effort when you consider the one line glib post you wrote in response to the actual report. Did you have some help?
4. Agreeing with redbaiters comment at 3.12pm has made me feel dirty but it would make life much easier for everybody and see quite a few accountants in the countdown trolly wally vacancy line.
This continual push by the MWFC to try and get us to shit all our cash down our legs on the stock market has to end. Forget the sound economic reasons and the national good for a moment and wake up to the fact that our market is wild west at best and a lemon farm at worst.
[DPF: I have owned my own home for nine years and plan to invest in residential property if the Govt does not change the law, so your assumptions are wrong. I often argue against my own self interest in preference for what I believe is good for NZ.
You would be better placed to try arguing facts rather than make assumptions.
My original post was short and to the point because the TWG made their case well. I did a longer post in responding to Cactus, because I know from debating Cactus that she responds robustly and often with examples, so that if why I did some calculations.
And of course no one helped me with the post. I means for fucks sake you are sounding like The Standard. Do you think I have Treasury staff on call to write posts for me?]
Vote:January 25th, 2010 at 3:46 pm
David
That’s a typical left-wing argument (so much so that Trevor Mallard has made it first on Red Alert) regarding this apparent “loan”.
The real beef with rental property is those owners who heavily leverage and “flip” property for capital gain – that is within a year or two and make profits not those who hold it for 30 years. These are the sorts that policy changes are designed to target. After all who else is going to own private rental housing stocks? The Government can’t provide housing to all those who have to rent can it?
Many of these “flip” owners don’t even claim depreciation on buildings because they know they have to return the depreciation recovered. The valuation of land and buildings can also be manipulated in a deal with a good accountant.
P.S: “Now even if you are the worst investor in the world, let us assume you can at least earn the risk free rate of return of 6.29%”. (cough) – may wish to look at the current risk free rate of return around the world…
P.P.S: When is National removing the interest-free loans to students policy?
I think the general point is that made by Pongo – National were not elected to dream up new taxes or disadvantaging current taxpayers were they?
[DPF: Roger Douglas removed lots of tax breaks, allowing him to drop the top personal tax rate from 66% to 33%. If you want the 38% rate to come down, then just as Sir Roger did, you need to plus some of the loopholes, and that includes allowing depreciation on appreciating assets.
It may not make a big difference to those buying and selling every couple of years, but it will mean the Govt is not having to borrow so much money because of the depreciation on buildings expense.
If a building really is worth less when it is sold, then let them claim a loss on sale!]
Vote:January 25th, 2010 at 3:50 pm
The IRD calculates and publishes tables of depreciation rates each year, for various types of assets.
Vote:They revise the rates as necessary to reflect reality.
Surely there is no need for a law change?
January 25th, 2010 at 3:53 pm
The McLeod Tax Review back in 2001 (?) was a much more comprehensive review with “radical” recommendations. Cullen spent a million dollars on that and then dumped it because it proved ACT policy.
The main point of this Tax Working Group report was to be “revenue neutral”, wasn’t it? This suggests the current tax burden on the economy is to be kept largely intact. That’s pure poison to our country’s future. There are no recommendations for anything dramatic or that’s a real game changer for the nation e.g. a special low company tax for exporters. (This is something I don’t advocate, as I’d rather have the company rate lowered for all companies. It’d be better than nothing, though!)
I predict National will just tinker with tax rates by a few percent and New Zealand will continue its relative decline. Maybe John “Mr. Nice Guy” Key will surprise us.
Vote:January 25th, 2010 at 3:58 pm
Maybe in some rare cases, but generally buildings do depreciate. Stop all repairs, maintenance and renovations and see what happens. The appreciation on real estate is in the land (and the potential value of the “improved” property).
Buildings depreciate, as with most other assets, and therefore depreciation should be claimable.
Vote:January 25th, 2010 at 4:03 pm
Cactus Kate @3:46 was far too kind, DPF.
Apart from your astounding risk free rate of return, you omit a) the income tax on that, b) the depreciation of your principal over the period it is earned. That won’t leave you much.
Vote:January 25th, 2010 at 4:03 pm
“Now even if you are the worst investor in the world, let us assume you can at least earn the risk free rate of return of 6.29%. So you earn $143.41 of your $2,280″.
Well assuming the 6.29% is correct as a risk free rate, the NZ government steals another 38 cents in the dollar off you on that in RWT so $143.41 becomes $88.92 as a base for your extrapolation calculations.
As I explained at length in my post they hit you once in tax then they hit you again in tax and then if you are still moving you get hit again….and now National are thinking about hitting you again just for good sport.
[DPF: The risk free rate of return is from the NZ Super Fund site. Good point on the double taxation. But removing depreciation on residential property is not about an extra tax. It is about removing an expense deducation which does not exist.]
Vote:January 25th, 2010 at 4:06 pm
I think the “revenue neutral” requirement of the review was sensible – get advise on how to restructure, and let the government decide on how much to reduce (or not increase).
What if some taxpayers have an unfair tax advantage, therefore disadvantaging other taxpayers? Tough? So those legally rorting now should be able to continuing rorting indefinitely?
Unless they have arranged their finances to minimise their taxable income, as many seem to be able to do.
Vote:January 25th, 2010 at 4:09 pm
National looks to be wanting to be remembered as the new tax party. As an aside, David can you pass along the details for where I may deposit some cash into a risk free after tax rate in the low sixes account.
Thanks in advance, not holding my breath.
[DPF: Treasury bonds generally.]
Vote:January 25th, 2010 at 4:31 pm
“What if some taxpayers have an unfair tax advantage, therefore disadvantaging other taxpayers? Tough? So those legally rorting now should be able to continuing rorting indefinitely?”
Pete – I am arguing they don’t. Read the section in my post on CGT. The TWG threw CGT out as it was deemed too hard. the largest rort in distortion that was found by the TWG was in fact WFF (welfare for families) and they didn’t even have welfare in the scope of the report but made many references to it throughout the report.
Are National going to focus on rolling WFF back? I haven’t heard they are considering it but if they take the TWG’s report on board I cannot see how they can keep WFF.
DPF – removing depreciation isn’t an extra tax but it potentially increases the burden of an existing tax where in my first comment I stated “new taxes or disadvantaging current taxpayers were they”.
“If you want the 38% rate to come down, then just as Sir Roger did, you need to plus some of the loopholes, and that includes allowing depreciation on appreciating assets”.
Or government spending to be cut. We don’t disagree on that.
Depreciation is at best – tinkering with the margins, at worse, fiddling while Rome is burning.
[DPF: But they are not an either or. Absolutely government spending should come down - as a proportion of GDP, if not in absolute terms.]
Vote:January 25th, 2010 at 4:35 pm
I’m on Cactus Kate side on this one. The others are defending the indefensible.
I said before and will say it again: the spin starts here!
Vote:January 25th, 2010 at 4:39 pm
Mr Farrar missed a clanger when attacking the lovely Cactus Kate in the form of discounted cashflows
Vote:January 25th, 2010 at 4:41 pm
I’m not sure how much the depreciation side of it amounts to but because it is just deferring tax it presumably isn’t a major.
I agree that flippers need to be dealt with – IRD has a unit that is trying to address that.
And I agree that WFF is a major – I hope that National has an internal unit deciding on how to undo that monster in their next term (I accept they have committed to not touching it this term).
Vote:January 25th, 2010 at 4:49 pm
Ten year treasury bonds are touching 6%. That’s a long time to lock up your money and bet on low inflation for that duration.
But in any case, tax eats 2% of that and historic inflation another 3% leaving the happy building owner with a massive best case 1% annual profit. And shorter term treasury bonds return significantly less.
So for the building owner’s total investment, the profit on supposedly unwarranted 3% depreciation will generate a staggering and undeserved 0.03% annual return on capital.
And for this we “reform” the tax system?
Vote:January 25th, 2010 at 5:11 pm
Is there a special class of treasury bonds only available to mandarins and propagandists David?
[DPF: I don't know. I prefer much higher returns than 6%. If I can't get at least a 10% return I'm pissed off]
Vote:January 25th, 2010 at 5:58 pm
“hope that National has an internal unit deciding on how to undo that monster in their next term (I accept they have committed to not touching it this term).”
So, if you got a growing tumor, you would decide to delay surgery on “image” grounds?
English should muster the intestinal fortitude to call WFF for what it is: “middle class welfare”, or as Key himself called it: “communism by stealth”, and remove this aberration.
Only then the thinking population will be able to trust the National Party “leaders”.
Vote:January 25th, 2010 at 6:25 pm
I just love it when the government says they must tinker at the tax system to make it “fairer”. So how many years do these clowns need to define fair. I guess my idea of fair is incorrect but then again I should know better then question my betters.
Vote:January 25th, 2010 at 6:54 pm
I am posting these in full so you can all read them.
23 January 2010
Less tax not new tax was the election pledge
The Tax Working Group released its report on proposed changes to our tax system on Wednesday to a respectful response from the government. This is in sharp contrast to the dismissive reaction the 2025 Taskforce received to their report on ways for New Zealand to catch up with Australia.
The difference of course, is that while the terms of reference of the Tax Working Group were tightly controlled by the government, those of the 2025 Taskforce were not. This enabled the 2025 Taskforce to take a comprehensive approach and recommend some game changing options. Prime amongst these was their suggestion that government spending should be reduced back to 2004 levels so that taxes could be cut to 20 percent: “Cutting core Crown expenses to 29 percent of GDP would, for example, allow the maximum personal tax rate, and the company and trust tax rates, all to be reduced to 20 percent”.[1]
This suggestion, which would transform New Zealand’s future, did not go down well with the Key Government, which seems inexplicably wedded to the former Labour Government’s reckless spending programme. Even the Secretary of the Treasury, John Whitehead, has criticised the present level of government spending, estimating that an astonishing 65 percent – some $40 billion – of the government’s $62 billion budget is of a questionable quality. What this means is that those who are critical of a reduction in government spending should be reminded that according to the expert, more than two-thirds of all taxpayers’ money is being spent in an inefficient and wasteful manner.
When the Tax Working Group was set up last May to undertake a strategic review of the tax system, a strong caveat was imposed. The Group was tasked with finding sufficient alternative sources of tax to compensate the government for the revenue loss associated with aligning the top income taxes, corporate taxes and trust taxes at 30 percent. In other words, the whole exercise had to be “revenue neutral”. And that’s the rub. This was not a “blue skies” review of our tax system in the sense of a panel being free to examine the way our taxes are structured, collected and spent. Instead they were constrained by the need to find more cash. Any analysis of how our taxes are being spent, or indeed how much too much the government is spending, was completely off limits.
The Tax Working Group concluded that our tax system, which back in 1989 was heralded as one of the least distortionary in the OECD – with internationally competitive tax rates – has now become “incoherent, unfair, lacks integrity, unduly discourages work participation and biases investment decisions”.[2] The question is how on earth has the situation deteriorated so quickly?
The answer, as explained by this week’s NZCPR Guest Commentator Roger Kerr of the Business Roundtable, is “Michael Cullen”!
“The rot began with the first decision to raise the top personal income tax rate from 33% to 39%. This move was unnecessary (the government did not need the extra revenue), it increased economic costs (high marginal tax rates are most damaging to growth), and an apparently simple move increased the complexity of the system (some 50 pages of new tax legislation were needed to implement it).
“Subsequent moves by the Clark-Cullen government had similar effects. The Working for Families scheme increased effective marginal tax rates, with the abatement rate of 30% (now 20%) being added to the 33% and 39% personal tax rates. Several new distortionary tax concessions were introduced, ranging from KiwiSaver subsidies to racing industry tax concessions. The Portfolio Investment Entity (PIE) schemes further fragmented the income tax system. And while the cut in company tax to 30% was a positive move, the top personal rates were not reduced at the same time, which increased incentives to shelter personal income in company structures.”
With most of Dr Cullen’s changes to the tax system contrary to the advice of tax experts at the time, Roger Kerr has found the criticism of them by the Tax Working Group unsurprising. In fact, he concludes that the report itself is “over-hyped”. To read Roger Kerr’s excellent analysis of the report, click the sidebar link>>>
The point is that whichever way you slice and dice it, the New Zealand Government is spending too much money and New Zealanders are paying too much tax. In other words, the government sector has grown so big it is impoverishing the country.
The numbers tell the story.
In 2004, core government spending amounted to 28.9 percent of all economic activity in New Zealand (GDP). However, as a result of a spending spree by Labour, as well as the effects of the recession and the decision by National to continue on with much of that wasteful spending, core government spending in 2010 has now reached 36.7 percent of GDP.
If local government activity is factored the outlook is increasingly bleak. In 2004, the combined spending of local and central government in New Zealand added up to 38.6 percent of GDP, while in Australia it was lower at 35.1 percent of GDP. In 2010, spending by the New Zealand government sector has blown out to 45.1 percent of GDP, while in Australia it has dropped back to 35 percent!
It is a clear point of difference between our two countries that across the Tasman, the government sector is being held in check, while in New Zealand, the government sector is growing like topsy, dominating almost half of all of the country’s economic activity. We tend to forget that governments don’t create wealth – they consume it! That means that every dollar they spend is a dollar that must be collected from those who create wealth. With big government squeezing private sector wealth creators, it is little wonder that our economy is so fragile, growth so slow, and prosperity so elusive – not to mention the steady stream of Kiwis leaving our shores for more benign tax environments overseas.
Whether National likes it or not, the massive rate of expansion of government in New Zealand and the inextricably linked rise in taxation, is the root cause of our economic problems. And since the Tax Working Group was prevented from exploring this point, the tax debate has been forced to focus on new ways of plundering taxpayers. Surely it is time we collectively said enough is enough and supported the introduction of a cap on government spending like they have in Hong Kong. There, government spending is capped at 20 percent – by convention – and the country prospers as wealth creators dominate the economy.
While introducing such a cap on government spending would clearly need to be a staged process, the fact that National – which argued vehemently against excessive government spending during the nine years it was in opposition – is now failing to cut spending sufficiently to stimulate the economy, but is instead searching for new taxation avenues, means that they cannot be trusted to constrain spending voluntarily. That means a cap on spending may be the only way to protect taxpayers and ensure our economic progress.
There is also something extremely distasteful about the slippery politics being employed in this debate about tax. When the public vote for a government that is promising tax cuts, they believe that it signals a lowering of the total tax burden. National certainly didn’t explain on the campaign trail that they were promising income tax cuts on the one hand, and new property taxes on the other.
What is especially disappointing is the way in which National has starting to use the old socialist “divide and conquer” trick to try to demonise property investors so they can justify penalising them with new tax increases. But it doesn’t wash.
If the Tax Working Group had included property experts on their panel, they could have put the record straight on a number of misapprehensions about property investment. Firstly, there already is a capital gains tax on property for any investor who buys with the intention of selling for a quick profit. Secondly, the debate about depreciation fails to mention that it is a timing issue. Should the asset appreciate in value not depreciate, then the depreciation expense deductions are reclaimed by the IRD at the time the asset is sold. Thirdly, claims have been made that New Zealand investors are over-indulging in property solely for tax advantages. Again, this argument does not hold water.
As property expert Frank Newman wrote for the NZCPR in Taxing Matters, “While tax undoubtedly plays a part, property investment is popular for a number of other reasons. Firstly, it has provided better long-run returns than the alternatives! According to the Real Estate Institute housing price index, residential prices have returned 11.8% a year over the last 17 years, compared with a 7% for New Zealand shares. Secondly, and most critically, people will only invest in things they trust. The Sunday Star Times recently reported the findings of a survey of 1200 people who were asked to rate the level of trust they have in sharebrokers, financial advisers, fund managers, mortgage brokers, insurance advisers, and banks. Only banks scored in positive territory which points to a confidence crisis in the funds management and sharebroking industries. These issues are never factored into the comments of the central bankers, politicians, fund managers and academics who so frequently scold us for “over-investing” in property, and for these reasons property is likely to remain the most preferred long-term investment for New Zealanders.”
There are around 340,000 private rental dwellings in New Zealand, many owned by mum and dad investors who have put their savings into rental property as part of their retirement plan. Any decision by John Key and National to punitively punish these people – because the government can’t get its own spending under control – is contemptible. As is any further attempt to politically portray them as pariahs.
All in all, the Tax Working Group report has served a useful purpose of pointing out that too much of the tax collected in this country is of a form that discourages growth and wealth creation. And while correcting that is a laudable goal, the real answer to our tax problem is that we simply pay too much. Lowering and flattening the tax system in conjunction with the government’s elimination of wasteful and inefficient spending, is the way to prosperity in New Zealand – not introducing land taxes nor any of the other devious suggestions being touted.
http://www.nzcpr.com/weekly213.htm
Vote:January 25th, 2010 at 6:55 pm
NZCPR Guest Forum
Roger Kerr
23 January 2010
Tax Working Group Report Over-Hyped
Following the tax reforms of the 1980s, New Zealand ’s tax system was widely regarded as one of the least distortionary in the OECD. It remained largely that way through the 1990s (although under National the personal income tax scale was widened rather than flattened with cuts to lower rates not being accompanied by cuts to the top rate, contrary to the efforts of finance minister Bill Birch). The 2001 (McLeod) Tax Review found that the tax system was in good shape.
Now, however, last week’s Tax Working Group report states that the current tax system is “incoherent, unfair, lacks integrity, unduly discourages work participation and biases investment decisions.”
What happened in the course of a decade? The answer can be summed up in two words: Michael Cullen.
The rot began with the first decision to raise the top personal income tax rate from 33% to 39%. This move was unnecessary (the government did not need the extra revenue), it increased economic costs (high marginal tax rates are most damaging to growth), and an apparently simple move increased the complexity of the system (some 50 pages of new tax legislation were needed to implement it).
Subsequent moves by the Clark-Cullen government had similar effects. The Working for Families scheme increased effective marginal tax rates, with the abatement rate of 30% (now 20%) being added to the 33% and 39% personal tax rates. Several new distortionary tax concessions were introduced, ranging from KiwiSaver subsidies to racing industry tax concessions. The Portfolio Investment Entity (PIE) schemes further fragmented the income tax system. And while the cut in company tax to 30% was a positive move, the top personal rates were not reduced at the same time, which increased incentives to shelter personal income in company structures.
Most of Dr Cullen’s moves were contrary to the advice of tax experts at the time. The criticism of them by the TWG is therefore unsurprising.
Having said that, the tenor of the TWG report is over-hyped. The structure of New Zealand ’s tax system still compares favourably with many others. Australia ’s tax arrangements, for example, are disfigured by an even wider range of tax rates, an inefficient capital gains tax, a large tax-free threshold and a GST with distorting exemptions such as food. Some of the TWG comments reflect ‘nirvana’ thinking rather than the realities of real-world tax policy. Certainly the suggestion that we have a “once-in-a-generation opportunity” to redesign the tax system is over the top.
This conclusion is even more apparent when one considers the thrust of the report’s recommendations. Only three were unanimous: the proposals to remove the 20% depreciation loading on new plant and equipment; the removal of tax depreciation on buildings if empirical evidence shows they do not depreciate in value; and changes to the thin capitalisation rules. These are not large changes.
The TWG was split on all the other main options it considered, namely a capital gains tax, the taxation of rental property investment, a land tax and a GST/income tax switch, suggesting at the very least that whether such changes would improve the tax system is debateable.
Some of the analysis underlying the report is also dubious.
For example, the Treasury has rightly pointed to the high economic costs (in the form of damage to growth) of taxing mobile capital income in an era of globalisation. It is therefore curious that the Treasury is one of the strongest advocates of extending taxation of capital gains, which are a form of capital income. Moreover, the Treasury has failed to show that any conceptual arguments for broader tax treatment of capital gains outweigh the practical difficulties.
Another example is the view expressed in several places in the report that a disadvantage (on equity grounds) of moves towards a lower, flatter tax structure is that they reduce progressivity. However, the McLeod Review pointed out that a flatter tax scale does not involve much less redistribution of income than a progressive scale, and that most redistribution of income occurs through government spending.
Moreover, the fundamental arguments for a progressive scale are weak and more inspired by envy than equity, as Buchanan and Hartley show in their book Equity as a Social Goal published by the Business Roundtable.
In terms of analytical quality and depth, the McLeod Review remains the benchmark for tax policy.
Arguably the TWG should have made more of its finding that, with reductions in the lower tax rates and Working for Families, the top 10% of taxpayers now pay 76% of net tax. This is a highly skewed situation; it encourages lobbying for more government spending by large numbers of people who do not face the tax consequences of decisions that would benefit them. There is a strong democratic and constitutional argument for a single rate of income tax that requires most people to pay some amount of tax, however small, to fund any level of spending.
It should also be noted that the options considered by the TWG are not exhaustive. In considering its budget package this year, the government could look at the merits of a low, revenue-neutral carbon tax for implementation if and when trading partners such as Australia and the United States adopt comparable climate change policies. Such a measure would be simpler than the current emissions trading scheme, which in any case may not be viable if no legally binding treaty supersedes the Kyoto Protocol in 2012.
At a broader level, the TWG’s work has a limited bearing on the government’s top priority goal of increasing productivity and economic growth. The 2025 goal of catching up to per capita income levels in Australia is not even mentioned in the report. The group’s terms of reference required its proposals to be fiscally neutral, which meant by definition that it could not make a large contribution to a growth agenda. Reshuffling the deck of cards that makes up the tax system without reducing the overall tax burden is not a game-changing project.
Jean-Pierre de Raad, chief executive of the New Zealand Institute for Economic Research, has made the same point: “Anyone who seriously thinks the TWG recommendations are radical needs a reality check.” He described the report as insightful but ultimately meek and its proposals too limited to do much to close the income gap with Australia .
Nevertheless, the TWG report is a useful exercise for a number of reasons.
First, it has confirmed the merits of the board-base, low-rate tax strategy that New Zealand has pursued since the 1980s.
Second, it supports the government’s medium-term goal of aligning the personal, trustee and company income tax rates at 30%, in line with the thrust of the McLeod report.
Third, it has set aside proposals for tax reforms that are not worth considering. One is the idea of a dual income tax system (with different rates for capital and labour income) which was proposed in the 2025 Taskforce report. Another is the idea of income splitting, which is still being promoted by revenue minister Peter Dunne.
Fourth, it calls for a comprehensive review of welfare policy and how it interacts with the tax system, with an objective being to reduce high effective marginal tax rates.
Fifth, and perhaps most important, it has in effect signalled to the government that not much can be done in practical and political terms through revenue-neutral tax changes to resolve the serious economic and fiscal challenges it is facing.
On the one hand, imposing new or increased taxes will not help close the income gap with Australia .
On the other hand, taxes will have to rise to reduce prospective budget deficits and levels of public debt if spending is not cut.
The unstated but implicit bottom-line message in the TWG report is, ‘It’s the spending, stupid’. Only by focusing on reducing the government spending share in the economy (which is well above that in Australia, let alone the much lower levels in higher income countries such as Hong Kong and Singapore), can New Zealand simultaneously achieve sound public finances, meaningful tax reform and strong economic growth.
http://www.nzcpr.com/guest178.htm
Vote:January 25th, 2010 at 6:57 pm
And if you go here http://www.propertytalk.com/forum/showthread.php?t=24403&page=6 and read the posts forward you will see that property investors are not waiting for govt. to think up ways around the systems imposed. We are smarter than beneficiaries and they figure out the systems soon enough.
Vote:January 25th, 2010 at 7:00 pm
And in case you missed it or couldn’t be bothered reading property investors as a group are the biggest suppliers of houses in NZ. There are 340000 + houses owned by investors and thats a fucking lot of votes. (more than students who get free money to waste.)
Vote:So National attack us at your peril.
Do what you orta, reduce spending and reduce taxes.
January 25th, 2010 at 7:15 pm
Bottom line if you screw property owners, the big ones adapt, carry on and pass on their costs.
so the poor poor people (read Labour voters) pay higher rents.
The small property owners do the same or get out.
Why do they get into property in the first place?
They don’t trust Finance companies or the Stock Exchange and certainly not a Govt which doesn’t protect the little person as has been proved by all in Parliament over the last decade.
At the end of the day they will still own the property!
Moreover those same people voted for National to get rid of Labour not because they trust John Key or National as I hope National finds out at the next election.
Vote:Why should they trust a man who has made his bundle on the % he got from currency trades not real business?
A man who hasn’t listened to the common people about govt intefering in family life, but seems to continue along the path of Labour.
January 25th, 2010 at 7:16 pm
sorry should have added, Vote Party Vote ACT, you know it makes sense
Vote:January 25th, 2010 at 7:17 pm
DPF keeps saying that property does not depreciate. I am not sure why this obstinate refusal to understand. Maybe the following explanation will help.
Land does not depreciate–and we cannot claim depreciation on the land value at present. No problem with that. Unless of course your land starts to slip downhill due to Matata style drains or the 100 year flood keps happening every 2 years.
Buildings ALWAYS depreciate. Depreciation allows costs of maintaining a building value to be accounted for using accepted accounting principles. Expenses can be written off in full in the same year if they are small or simply returning an amenity back to use ie. repairs. If the expense is large replacing a crappy bathroom with a fancy redesigned one (i.e. seen to be addding value) the expense gets captalised (expense is added to the capital value) and then depreciated (at a glacial pace)
The perception that “…have decades of evidence that residential buildings appreciate, not depreciate..” that DPF seems to be labouring under is wrong. It is a perception created by inflation–’nominal’ value increases, plus the the increasing cost of replacing a building with new. Replacement cost increases are created by rapacious councils and their ever increasing development fees, and building companies inflating prices (try comparing NZ building costs with the Aussie equivalent). You canot say the building has not depreciated because of these two factors.
Over a long term– property prices (nominal not real) simply maintain purchasing power.
Vote:January 25th, 2010 at 7:18 pm
So Viking, you are saying that National should buy (or save) as many votes as possible rather than doing the best sort of restructuring they can for the country?
Vote:January 25th, 2010 at 7:20 pm
The house I live in was built about 100 years ago. So after a century of depreciation what value should it be now?
Vote:January 25th, 2010 at 7:32 pm
To Peter George :
If you did not spend anything on its maintenance–very little or probably zero. The depreciation accumulated should simply help fund the replacement (if there was no inflation, or increase in replacement cost).
If you kept it well maintained, the value of your house would reflect that increased input cost and there would be a higher depreciation accumulated reflecting the additional cost input since purchase, with the total depreciated over a period of time as provided by accounting requirements.
Vote:January 25th, 2010 at 7:44 pm
In any case Viking, you should wait to see the whole package. If investors have to pay a bit extra on the property side that could be offset by paying less income tax, which has to come down.
Vote:January 25th, 2010 at 8:26 pm
Clearly Pete you, like the National Govt. fail at go. The requirement is to lower taxes as promised and that requires lower spending or greater GDP. Neither has been enacted . Shifting the tax burden around using false premise will not solve NZ’s problems.
Vote:Perhaps you think we should be like Fiji and find another gold deposit to tax to fill the coffers. This seems to be Brownlees idea.
January 25th, 2010 at 8:26 pm
can i buy a depreciated house.
yea right.
Vote:January 25th, 2010 at 8:56 pm
tvb – Buildings last a long time and so the depreciation rate is low. The rate has also been set on the basis that a building is regularly maintained, hence both are legitimately tax deductable (assuming no ‘gain’ in the value of the premises).
I partially disagree with DPF. If a building gains in value over and above inflation, then there is some justification to limit the depreciation claimed by that amount which effectively means no depreciation is claimable in most cases. There will be some cases eg a declining town or a specialised commercial building with ‘market’ value less than cost and it would seem unfair to cut off depreciation in these cases.
I do not think that enough thought has been given to possible housing market dynamics. There are two factors:
1. the transient effect of any tax regime changes. This could some property owners very hard, perhaps any ‘blow’ to them could be phased in rather than giving them a big hit.
2. the whole housing market will find a somewhat different sweet spot and I do not think that enough attention has been paid to this. For example if a changed regime drives private residential landlords out, their houses will be taken over by owner-occupiers (who will for a while get bargains). This will soften the demand for new housing, so fewer will be built. Rents will rise and tenants on benefits will go banging on WINZ’s door for accommodation supplements which the Government will probably screw down by Ministerial directives to the Chief Executive (yes, the Social Security Act does allow this – the directives must be tabled in the House though). Effectively tenants will be paying a higher portion of their income as rent. Splitting of houses into flats and apartment conversions of trash commercial real estate may however help reduce rents but only for a limited time. It is tenants who will effectively end up paying any extra taxes imposed on landlords, and that means tenants will be effectively taxed twice on their rental payments as they do not have the inherent tax break that owner occupiers have.
Smart landlords will start quietly selling off their rental properties, these are the landlords who purchased wisely in the first place and therefore the recession has had little impact on the value of these properties. They will then buy up again when they have assessed where the new ‘sweet spot’ will be. Those who have purchased ‘shoe box’ apartments or other undesirable property will take a real bath.
Vote:January 25th, 2010 at 9:36 pm
The tax system taxes nominal income and buildings almost never depreciate in nominal terms if maintained. There are good reasons for this including the fact that it takes a lot of labour to build a building and the cost of this labour tends to rise faster than inflation. You can’t import the labour for a building from China so building costs rise while the cost of the material things to go in the building tends to fall, at least in real terms.
Landlords therefore almost always have their depreciation claimed recovered on sale. As David says it is an interest free loan to the landlord. Real estate investment promoters often include the depreciation in their tax loss calculations and forget to mention that it has to be paid back on sale.
Vote:January 25th, 2010 at 10:02 pm
David – please, please don’t start investing in rental properties as you suggest you are contemplating. You don’t know enough about the asset class yet to make safe or worthwhile investments. You seem to have listened to much of the misleading hype from the boom and bubble period, but you have not actually experienced the real costs and miscellaneous horrors of being a landlord.
As you have been told many times above, houses do depreciate – especially if you take inflation into account. By being diligent with maintenance, you can slow depreciation, but you can’t eliminate it. There are two principal options for the long-term owner:
a) as others have mentioned, keep undertaking significant renewals or upgrades from time to time as required (replace roof, re-wire, re-clad, etc), but you have to capitalise most such work (i.e. you can’t expense it and claim it as a tax deduction, and you also suffer the negative cashflow implications of the cost); and / or
b) wait until the rental building reaches the end of its useful life (which happens eventually to almost all rental-type housing) and demolish it for replacement or sell it for removal. True value is in the land, which is not subject to depreciation.
Residential rentals are a specialised business that most people simply don’t understand. The residential landlords demographic itself is worth researching. Apart from conspicuous “wide boys” who have been investing during the recent boom, there are huge numbers of older people with their retirement money invested in rental flats, apartments and houses, often with little or no gearing. The voting backlash from that group will astonish John Key and his government.
Equally important, if the government puts the skids under the rental market with poorly-thought-through tax moves, watch residential rentals go up for the less-well-off, and watch the pressure on government to build many more state houses. Under the proposed new tax regime, the private sector will be less likely to be there with 10-year rental agreements to enable the Housing Corp itself to avoid the state housing capital outlay.
Cancelling building depreciation could be a very costly policy option, politically and fiscally. Using the politics of envy to target “rich pricks” usually is.
Vote:January 25th, 2010 at 10:46 pm
A 10% return! My mates won’t invest in things unless they get a 100% return, a bad deal is something that only gives them a 50% return.
Vote:January 25th, 2010 at 11:48 pm
How many times do I have to say it – landlords don’t increase the supply of housing! Almost all those mum and dad landlords buy older existing properties from another landlord or an owner-occupier. Making buying rental properties less attractive won’t do anything to the overall supply of housing as landlords aren’t the ones building new housing stock!
We have idiots saying more affordable housing needs to be built. There are plenty of older, smaller houses suitable for first home owners that should be affordable – but often they are now owned by landlords! If those landlords got out the business then those homes would once again be affordable. Leave the new building of new homes to people who want a newer, bigger home and can afford it – and make things easier for them by cutting red tape.
Why give a deduction for depreciation that has to be paid back??? With maintenance a building lasts indefinitely and re-roofing, etc is all deductible when you are merely replacing a worn item. I say again – the tax system taxes nominal income – not real income so nominal depreciation has to be expected before depreciation should be given!
Vote:January 26th, 2010 at 12:09 am
What a bunch of whining socialists, all saying that others taxpayers owe us.
Want to fuck up a lot residential landlords, it’s easy, just dump the accommodation supplements, why should one group of the unemployed etc get more than others ?
Yes,yes, I can here the whining now, but we only did it to help house the unfortunate poor.
So just give them a choice English, and you will find that those who rent to the unfortunate will be happy to see the depreciation dumped, any thing to keep that tax payer money rolling in.
Vote:Who are the bludging welfare types ?
January 26th, 2010 at 12:14 am
I largely agree with you grumpy – I find residential landlords such a self righteous, arrogant bunch.
Cut their depreciation and let them do their worst I say – will do the country a favour if they get the pip and sell up!
Vote:January 26th, 2010 at 8:01 am
Saying you need lower taxes doesnt mean you cant rearange the tax system – that is like saying if you are hungry you can’t drink, stupid talk. Obviously you try to do both – infact it should be possible to combine the two if, as the experts say, this rearangement is more efficient.
Anthony,
good point – also building new low quality houses seems to just lower the average quality of housing.
Calendar girl/viking2,
Vote:“The voting backlash from that group will astonish John Key and his government”
So do the number of people with one or two investment properties outnumber the number of people with no or one property? lets see less than 340000 vs um… somthing like 2 million. Hopefully the government will realise that at some point and stop listening to your idle threats and desperate attempts to defend your bludging.
Besides – who else are you going to vote for?
January 26th, 2010 at 8:35 am
GNZ. When oyou give up all your state sponsored incomes, loans, tax deductions, assistance with medical, education and start paying the FU:LL costs of living in this country then you can criticize the rest of us. Piss off back to the RED Square.
Vote:January 26th, 2010 at 9:15 am
How does one allocate the cost of an income producing asset over its useful life ?
Are we suggesting that a building does not produce income and there is no nexus for any expenditure ?
Vote:January 26th, 2010 at 11:03 am
If buildings do not depreciate then Local councils must stop depreciating the improvements on their rating bills – just wonder if this is done because the rate portion on the land is higher? If the use of money benefit garnered by the depreciation is unreasonable then IRD need to make equivalent adjustments in refunds due to secondary tax being in excess of actual liability and also adjust the effect of recovered depreciation taking the taxpayer into a higher tax bracket – perhaps dividing the recovered depreciation by the number of years the property was held and using this figure to determine the tax rate with the actual tax being multiplied by this? Bugger the bloody lot, the problem is government overspending – defer all tax issues until government spending is under 30% of GDP!!
Vote:January 26th, 2010 at 11:07 am
There’s an exhibition of financial cluelessness here to rival John Minto.
Financial ignorance, stupid beliefs and prejudices are exactly what make New Zealanders poor.
Strange, isn’t it, that the very same people who rant about landlords want to make the State a bigger landlord?
Vote:January 26th, 2010 at 12:22 pm
Viking,
You are leaping to a lot of conclusions there regarding my position on the political spectrum. FWIW I would be happy to see cuts in government spending and I don’t benefit significantly from anything you mentioned.
I also prima face support Anthony’s point above that we could cut or axe the accomidation supliment how do you feel about that?.. OH wait you probably want that doubled because it lines your pocket…
my hypocrisy radar is going crazy, you share far too much with those you obviously dispise.
Alan,
there are three groups,
one is the uninformed landless people who envy land owners,
two is the uninformed landowners who want to squeeze any money they can get out of everyone else
and three is anyone who knows about economics and understands that creating a distortion in the market that encourages investment in non productive assets is a bad idea for all the same reasons why free market is generally a good idea.
Dont let the existance of the first two prevent you from listening to the third group.
Vote:January 26th, 2010 at 2:17 pm
GNZ2, I have listened to all those groups as well as some others and added in my own experiences. The second group are merely competitive suppliers in the free market you claim to support.
So exactly what are the market distortions you dislike? It appears to me on analysis that the depreciation issue is a non-issue. No-one makes an investment decision on the basis of a 0.03% variation in returns.
Wrt capital gains, property is on exactly the same footing as the stockmarket or any other investment. If the IRD has had an historic enforcement lapse then it should fix that – and apparently is so doing.
Are you also complaining about social welfare payments in support of housing needs? Is it more or less costly than providing State housing?
The distortions I object to are the building and land use constraints and bureaucracy which are a direct constraint on supply and input to excessive costs.
Vote:January 26th, 2010 at 7:02 pm
All gains from business activities should be taxed just as the revenue from selling a forest after 25 years of growing is taxable!
Vote:January 27th, 2010 at 2:48 am
All this playful squabbling would be over if we got some balls and implemented flat tax.
Vote:January 27th, 2010 at 7:58 am
I suppose I have no problem with them and i dont have any problem with the first group either they are both acting as one would expect – I just don’t plan on taking their arguments seriously.
Well puting the wider dispute on the backburner, in that case I guess we can at least agree that you are willing to axe the depreciation right? since it doesnt matter.
Also what percentage of the money they should have recieved will the IRD recoup and what sort of compliance level will they achieve? I’m not sure but somehow I suspect a poor performance.
Accomidation suppliment depends on where you live and your accomidation costs etc. You are therefore encouraging some people to live in more expensive areas and locations than you would otherwise. It also can apply to home owners where their home is excluded in the calculations of assets which is a little odd and is one of many areas where proterties are favoured as assets in law. Similarly the standard model of state housing is flawed because rents should not be dependant on the occupants income. FWIW if you then set the prices right (and exclude some people) state housing should be a profit making enterprise.
Vote:January 27th, 2010 at 10:44 am
Anthony, they are all treated the same. Go talk to a tax lawyer and learn. However what is taxed is net gain which requires fair offset of all costs involved. Properly it must also allow for inflation over the applicable period but usually the Government creates inflation and then profits from it.
GNZ, what is irrelevantly small is the “use of money” profit. Depreciation is important. It doesn’t stand alone, it is part of a total package. If it is abolished, then capital investments and replacements must also be allowable expenses at the time of expenditure. Use of money cuts both ways.
“state housing should be a profit making enterprise”. When is the state ever a more efficient provider than the private sector? Only when there are monopoly or free-rider factors. Housing has no such issues.
Vote:January 27th, 2010 at 3:02 pm
I suppose if it is one or the other then whichever discourages the non productive behaviour – some economist can make that call… speaking of which lets bring on the land tax to further discourage poeple letting their farms go to weed and so we can lower income taxes.
Your confusing the decision to have state housing with how it is run. If you have them you should run them efficiently it is inefficient to confuse your social welfare department with all your other departments. Whether it is more efficient than the private sector is a empirical question which is easily answered by whether the private sector is willing to purchase those buildings at a suitably high price (or contract the services at a suitably low price).
Vote:January 27th, 2010 at 8:10 pm
Alan I know property and shares are currently taxed the same, more or less, but I think both should have any gain taxed. And don’t run that old inflation bogey – nothing else in tax system is adjusted for inflation so property shouldn’t get special treatment.
I do agree with you about state housing though. I understand that Housing New Zealand is now making a very low return on its assets – after doing not too badly under the last National government.
The government owning billions of dollars worth of houses to enable a select few to get cheaper rents – that’s plain crazy!
Vote:February 8th, 2010 at 1:37 pm
I agree with Cactus Kates basic assertion that claiming depreciation on an appreciating asset is a rort that is well overdue for a big kick out the door.
[DPF: Actually that is my assertion - Kate disagrees with me]
Vote: