Fallow on tax

February 28th, 2014 at 1:00 pm by David Farrar

writes in NZ Herald:

Large chunks of the base resemble icebergs, drifting north into the warm waters of the global and digital economy.

Policymakers have a term for this: “base erosion and profit shifting” – BEPS for short.

They are grappling with the changing nature of international commerce, where the eternal desire to minimise the tax you pay is assisted by the rapid growth of e-commerce, and by the opportunities presented by countries’ different tax laws and the ability of multinational firms to locate debt funding and intellectual property wherever will maximise the bottom line.

As part of that effort, finance ministers from 20 major economies, meeting in Sydney last Sunday, agreed to adopt a regime for automatic information sharing among tax authorities.

The Organisation for Economic Co-operation and Development (OECD) calls it the Common Reporting and Due Diligence Standard. You can translate that as: “We are going to make your banks tell on you.”

The erosion of the tax base globally is a problem, but so is erosion at home.

Let me give you an example of how you can erode the tax base locally, and legally.

  1. Set up an incorporated society. It can be any sort of incorporated society.
  2. The society doesn’t have to pay income tax but it does have to deduct tax from its employees and pay GST.
  3. Now if you don’t pay that tax, then the IRD can come and liquidate you, which means the society gets wound up.
  4. So set up a limited liability company, and have some of your transactions go through that company instead of the society. You can have the lease assigned to it, and charge management fees. You can also charge your salary through it also, as that then allows you to deduct stuff off tax.
  5. Have the limited liability company spend all its money on behalf of the society, and not pay any tax to the IRD. This means you have more money to spend.
  6. IRD liquidates the company, leaving the society untouched and the IRD ends up out of pocket by say $150,000 – while the society carries on unscathed.

This is all totally legal, using a crafty mixture of corporate tax structures and non payments.

I look forward to political parties putting forward policies on how to stop the erosion of the tax base in this way.

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58 Responses to “Fallow on tax”

  1. nickb (3,687 comments) says:

    This is all totally legal

    Please….don’t ever give tax advice again DPF!!!

    Online shopping GST leakage is an absolute drop in the bucket compared to the black economy, cashies and the biggest of all, the taxation of rental property. Have a look at MP’s pecuniary interests register to see why nothing will ever happen about the latter.

    We’re talking tens, maybe hundreds of millions for the former, tens of billions for the latter.

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  2. Nigel Kearney (1,019 comments) says:

    The tax code has a general anti-avoidance provision which allows the IRD to recalculate your tax liability after ignoring any transactions whose only purpose is tax reduction. There doesn’t have to be anything illegal going on for them to do this. That means there is no need for Parliament to make specific law changes to deal with any scheme such as the above one that people may come up with.

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  3. nickb (3,687 comments) says:

    Here’s an article from someone very clued up in this area:

    http://www.nzherald.co.nz/opinion/news/article.cfm?c_id=466&objectid=11211052

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  4. KiwiGreg (3,255 comments) says:

    Trading while insolvent is not without its risks for directors as well.

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  5. labrator (1,850 comments) says:

    The answer is flat tax. The problem is convincing the voters that they don’t deserve a greater percentage of other peoples money.

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  6. Ed Snack (1,883 comments) says:

    Nickb, can you explain the “tens of billions” and how that arises from the “taxation of rental property” (or presumably the non-taxation of some aspect of the property rental business) ? Thanks.

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  7. Harriet (4,988 comments) says:

    “…..As part of that effort, finance ministers from 20 major economies, meeting in Sydney last Sunday, agreed to adopt a regime for automatic information sharing among tax authorities….”

    WTF?

    No one is ripping off tax by sending money around the globe!

    These governments are just making excuses for selling to their voters tax policy that doesn’t work for their individual counrtries!

    Tax policy is just like any other product in the market place – some people buy one at election time – and other people buy one by sending money to other countries.

    And that IS what both Key and Cunliffe say is good for the economy – foreign investment!

    They just can’t sell good tax policy! idiots.

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  8. nickb (3,687 comments) says:

    Sure Ed. I’ll be back on in an hour or so.

    I own rentals myself and am not a screeching anti-property person like Bernard Hickey (quite the opposite in fact). But the tax treatment of rental property currently is a rort. It doesn’t have more favourable treatment than other investments, necessarily, but because property is so popular in NZ and can be geared highly unlike shares etc it is a huge black hole in the tax base.

    I’ll explain later

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  9. Hamish_NZ (46 comments) says:

    Isn’t what Dpf suggesting just what a certain Matt Mccarten did?

    Can’t believe no one else has picked up on it yet.

    Will probably become retrospectively legal for all unions if Labour win the election!

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  10. Jack5 (5,137 comments) says:

    What about the charities loophole?

    Ngai Tahu’s group registration as a charity means its many businesses in fishing, tourism, property development, and so on operate tax free. So does the Seventh Day Adventists’Sanitarium Corporation.

    it will be interesting whether Ngai Tahu’s suggested marine farming businesses in partnership with minor northern South Island tribes will also be tax free?

    Tax-free status for charities should be wiped. It’s unfair to those who compete with charity owned businesses such as with those competing businesses owned by Ngai Tahu and the Seventh Day Adventists.

    They could pay dividends to their tribal members or church owners with tax credits attached to prevent double taxation. That would put them on an equal footing with other businesses.

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  11. flipper (4,084 comments) says:

    Soooooo….

    Is that how “Rich Prick” McCarten diddled the IRD out of $150,000 PAYE that he should have paid to IRD, but still struts around town ???????

    EDIT Hamish_NZ – snap :-)

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  12. Ed Snack (1,883 comments) says:

    Thanks Nick, I’ve been a landlord myself, must of been incompetent as I never did get my billions. I did get tax relief for actual losses, but it still cost me cash only prtially offset by the gain on the ultimate sale.

    I read that Herald item; she may be a PhD student, but seems completely to be unaware of “Tax Incidence” and I don’t think she sounds terribly knowledgeable, sorry.

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  13. KiwiGreg (3,255 comments) says:

    Not sure about your theory on rental property – in fact the Nats significantly increased the tax by eliminating depreciation deductions.

    The ability to get a tax deduction for leverage is no different for rentals then it is for any other investment.

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  14. Jack5 (5,137 comments) says:

    DPF says above that setting up any sort of incorporated society is a way of eroding the tax base.

    Not sure about that. According to the Companies Office an incorporated society cannot make money to be distributed amongst its members.

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  15. Ed Snack (1,883 comments) says:

    Jack5, you can’t (easily) do it by way of dividend style distributions of cash, correct. There are, however, many other ways to achieve the same effective ends, from salaries and expenses to contracts offering fees for some “service”. It does depend on how scrupulous you wish to be, and you do need a compliant membership, whoever they are.

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  16. burt (8,275 comments) says:

    That sort of manipulation of tax structures is disgraceful and the left will pass legislation to make sure that non Labour party people can’t do it !

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  17. nickb (3,687 comments) says:

    Thanks Nick, I’ve been a landlord myself, must of been incompetent as I never did get my billions.

    That’s because you weren’t buying in the right places! :)

    The ability to get a tax deduction for leverage is no different for rentals then it is for any other investment.

    100% correct.

    At the risk of writing a novel (tax policy interests me greatly) here is why (in my opinion) the taxation of rental property is a risk to the NZ tax base. I should start by saying I don’t think the lack of a capital gains tax per se is the only problem. The main problem as things stand is being able to get tax deductions in the production of a tax free capital gain. There is asymmetry and risk to the tax base where you can get tax writeoffs for something that you won’t ever be taxed on.

    Firstly, we need to consider what the average NZ property investor buys property for. I think its not hard to argue that the main reason is generally the hope of a capital gain. Buying in the main centres generally gives pretty poor cash returns on cost, say 5-6% at best, unless you are buying apartments, adding value somehow (or buying in crap towns). So, because our return on capital from rent alone is not that great many (most?) investors make losses when you factor in interest, or gear higher as values increase to buy more property, fund personal expenses etc so they are perpetually in a higly geared state. So, I think it’s fair to say capital gain is a very big factor in most investors’ decisions and generally much more so than rental income.

    I’ve acted for hundreds of investors over the last few years so feel quite comfortable reaching the above conclusion.

    There’s nothing wrong with investing for capital gain, obviously. It might be for a hedge against inflation, planning for retirement, or indeed the fact that capital gains are tax free.

    But here is why I think it poses risk to the tax base. When you buy a rental property and gear it up, you can often be in a perpetual loss or break-even position (obviously depending on the investor’s particular circumstances). Removing depreciation has changed this somewhat but I think it’s still valid and from what I’ve seen there aren’t as many people as you’d think now profitable because of depreciation removal. So still lots of loss-making investors.

    For the period of ownership, you can claim expenses for interest, rates, R & M, etc etc. Then, if you are investing personally or using an LTC, you can offset any losses against your personal income and get tax refunds on your PAYE.

    You could conceivably by a property when interest rates are high (or even low), hold it for 6-7 years then sell without ever having made a profit, and so getting 6-7 years of tax refunds.

    So here’s the gist of it (again, in my opinion only): A person in this situation has had 6-7 years of tax refunds and write-offs for expenditure that may primarily have been incurred in the pursuit of a tax-free capital gain. So you are receiving tax deductions and tax refunds to make a profit from capital gains that is not taxable. So you take money out of the tax pot during ownership and put nothing back in the pot on sale.

    In this respect I think property investors effectively get subsidised by other taxpayers. When you consider Treasury has said there is $200b of rental stock in NZ that is an annual $200m loss to the kiwi tax base (i.e. the entire NZ rental stock is a net drain on the tax base) this suggests the same. This is likely to have changed with the removal of depreciation but not a huge amount I’d say.

    Even if you are making a profit the sentiment is still the same, as the tax writeoffs are reducing the tax you would otherwise be paying on the profit. Then when you sell, tax free capital gain.

    I completely accept that property is no different to any other investment in this respect. However, a key difference is that property is more attractive to kiwis (and so attracts more funds and therefore more capital gains) because it is safer, bricks and mortar. And it can be geared more highly than passive investments. The NZX market capitalisation is dwarfed by the NZ rental property market. And this is why it’s a risk to the tax base.

    If we are not going to have a capital gains tax then in my opinion a minimum step should be to ringfence tax losses from property and only allow them to be used against future profit from that property. Tax refunds against other personal income should be stopped.

    Otherwise a capital gains tax will eliminate the asymmetry. Sure, you can have tax refunds and deductions during the period of ownership, because the resulting gain will be taxed on the way out.

    Bored the crap out of all of you? Would be interested to see what other people think. I should reiterate I’m not a property hater, but I just don’t see how anyone can argue that the current taxation of rental property is sustainable.

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  18. PaulL (5,987 comments) says:

    @all: some of you are slow. This is a dig at Matt McCarten, not serious tax advice.

    If you want serious tax advice, take a close look at the Australian taxation of NZers. Sure, we’re all upset that Howard took away the rights of NZers to the dole. But look carefully at how he did it. He made all NZers into temporary residents (no access to benefits) whilst keeping the rule that you could stay as long as you like. He also passed a law aimed at attracting rich Asians – temporary residents are only taxed on Australian-sourced income.

    Result: as a NZer living in Australia, any income earned outside Australia is tax free. Nice loophole. :-)

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  19. nickb (3,687 comments) says:

    @all: some of you are slow. This is a dig at Matt McCarten, not serious tax advice.

    I admit to missing that :)

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  20. KiwiGreg (3,255 comments) says:

    The preference for capital gains is also not unique to rental property – it exists for all investment classes (with the exception of financial arrangements which have their own rules). People may well be investing for capital gains – that doesn’t mean they will achieve them.

    A CGT has been looked at a number of times and been rejected by governments of both hues. Issues of complexity, inflation accounting, and the fact that it wouldn’t actually raise much money come to play.

    In fact, from a policy standpoint, the interest deduction should be given whether or not the gain is taxed (even if you thought the correct answer was to tax the gain) – you should read the Valabh report on interest deductibility if you are really interested in the policy. There’s a good case that ALL interest payments should be allowed as a deduction, but there are obvious fiscal implications.

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  21. nickb (3,687 comments) says:

    I read that Herald item; she may be a PhD student, but seems completely to be unaware of “Tax Incidence” and I don’t think she sounds terribly knowledgeable, sorry.

    Former tax litigator at EY and a PHD student?? It’s a tough crowd!

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  22. In Vino Veritas (139 comments) says:

    Hmm, what I want to know is how McCarten escaped prosecution under Section 143A(8) of the TAA 1994. He would by definition, have committed a offence under s 143A (1), and whilst he could have escaped prison if full reparation had been made before sentencing, but he should still have been fined at minimum!

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  23. peterwn (3,277 comments) says:

    Jacj5 – Setting up an incorporated society is not necessary for this dodge, setting up a company is quite sufficient. However in the particular circumstances an incorporated society had to be set up anyway to gain recognition under the Employment Relations Act. The IRD does go after directors and employees of companies which are liquidated owing PAYE and employees’ deductions (like student loan repayments and Kiwisaver) to IRD. Home detention or jail is quite on the cards where a director or employee deliberately delayed paying such amounts because of more pressing creditor priorities.

    In the ‘Unite Support Services Ltd’ case it appears that IRD could not ‘finger’ any particular individual and it appears that Matt was too crafty to leave a trail that could implicate him despite being sole director and shareholder. Possibly too IRD may have wanted to stay away from a potentially political hot potato. Such a company could hire a foreigner on a temporary work visa or a terminal cancer patient to be book-keeper or pay clerk with that person shouldering the blame for unpaid PAYE etc.

    Incorporated Societies are not completely tax exempt, unless they also have charity status. Hence a RSA or football club needs to pay tax on bar profits and interest/ dividends from investments with a $1000 deduction.

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  24. gazzmaniac (2,307 comments) says:

    In this respect I think property investors effectively get subsidised by other taxpayers.

    In this respect I think most renters are effectively getting subsidised by landlords.

    Fixed it for you.

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  25. gazzmaniac (2,307 comments) says:

    NZer living in Australia, any income earned outside Australia is tax free. Nice loophole

    Really?
    Can you post a link to somewhere on the ATO’s website confirming this? I am very interested!

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  26. nickb (3,687 comments) says:

    Jeez, even with my political views I’ve never been able to understand the “poor under siege landlord performing a public service for the poor and ungrateful” angle that seems to pop up whenever capital gains tax does….

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  27. nickb (3,687 comments) says:

    Really?
    Can you post a link to somewhere on the ATO’s website confirming this? I am very interested!

    NZ has the same rule. Try looking up “transitional resident” or similar on the ATO website

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  28. gazzmaniac (2,307 comments) says:

    BTW Kiwis have been temporary Australian residents since 1994 (the subclass 444 visa has always been a temporary visa), prior to that they were Exempt Non Citizens.

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  29. JeffW (327 comments) says:

    On the serious side of the post rather than the Matt McCarten side, it needs to be realised that no matter how much money government take from us, it won’t be enough. Therefore, the key issue is not erosion of the tax base, rather it is controlling spending. I suspect that if spending were controlled such that government only did things that only government can do, then there would be plenty of tax income, tax rates would be far lower so tax erosion wold occur to a much lesser extent, as people/organizations would feel that tax was fairer than it is today.

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  30. PaulL (5,987 comments) says:

    NZers fall under SCV – special category visa. I actually did a private binding ruling to get confirmation because it sounded so dodgy. They pointed me to a public ruling – TD 2012/18, which you can find via google (the link is ugly).

    It’s not exactly the question I asked, but they appear to think that it is also relevant to pretty much anything. The really really funny bit is their example:
    “Example
    3. Murray is a citizen of New Zealand and holds a current New Zealand passport .”

    Apparently everyone in NZ is called Murray. Not just my father in law. :-)

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  31. Andrew M (51 comments) says:

    Nick B “NZ has the same rule. Try looking up “transitional resident” or similar on the ATO website”

    But that income is still taxable in the source country, isn’t it?

    In fact, would the double tax agreement between NZ and Aus apply ahead of the transitional resident rule, thus rendering it moot.

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  32. Ed Snack (1,883 comments) says:

    Nickb, if in acting for property investors you mean professionally, I do hope that you advise them that if they are investing in the hope of making a capital gain, then that gain is taxable as income when it occurs. One has to go through the facade of being a long term investor only interested in returns who only sells because of circumstances or whatever to gain tax free status. Our current tax law does define transactions undertaken with the intent of making a profit as taxable.

    Of course it’s a loop hole that many drive through, but not all, anyone “churning” properties to take out the capital gain risks being charged income tax on the sales.

    Oddly enough I thought that the Depreciation change was oversold. To the extent that one profited from a capital gain, any depreciation claimed as an expense had to be written back at the time of sale, and if appropriate tax paid on that. Oh, and BTW I was investing in the Auckland market, it’s just that the gains were incommensurate with the costs.

    One also needs to have the cash available to pay the losses as well, remember that you only reclaim the tax part of the outgoings, so if you lose $30K a year (say) your relief is $10K approx.

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  33. davidp (3,581 comments) says:

    Labour allege Facebook are tax cheats. Labour threatens them.

    Matt McCarten is an actual tax cheat. Labour rewards him with an influential job.

    Conclusion? Whether a Labour government threatens you or rewards you will depend not on your behaviour, but on your political influence. It is just like the Greens promising not to extradite Dotcom as long as he does them political favours.

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  34. PaulL (5,987 comments) says:

    @Andrew M: in the case of shares held in the USA (the matter I put to the ATO), it would appear that the ATO are happy to give me a “tax resident in Australia” certificate. Which I can give to the US, and prevents them deducting tax at source. Effectively US don’t want to tax, and nor do Australia. I’m pretty sure it’s a genuine loophole. I’m pretty sure it’s not the only one.

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  35. david (2,557 comments) says:

    @Andrew M 3:06

    If you have a “permanent establishment” in NZ like retaining ownership of the family home or similar then NZtax dept will classify you as a resident for Income earned in NZ and will tax you accordingly. If you have no PE, then you can have investements that are taxed at the non-resident withholding tax rate of 15% (that’s what it used to be anyway) and there is no further tax liability in NZ. Being the settlor or beneficiary of a NZ Trust also leaves you vulnerable to being declared a resident I think.

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  36. Jack5 (5,137 comments) says:

    Thank you NickB for your 2.08 post, that makes thoughtful comments on potential capital gains tax.

    I agree.

    Also, in share investing I understand there is a mild form of capital gains tax, if the investor concedes he or she was investing for the purpose of capital growth, but I’ve never heard of anyone paying such tax.

    This has distorted investing by downplaying the worth of profit and cash flow in favour of long term capital growth. Because we have few growth stocks in NZ of the Xero type, this means over the last half century or so absence of a capital gains tax biased investment towards the old Brierley-raider type companies, who made capital gains by eating up old profitable companies. I understand the main target and mission of Brierley type raiders was snapping up companies whose balance-sheet values, locked in the past by historic-cost valuations, were well under, even vastly under, current valuation. Much of their subsequent gains, and these were often theoretical, paper profits, came from asset revaluations.

    These raiders performed only the garbage collector role of capitalism’s non-Marxist, Schumpeter-style creative destruction. The phoenixes that were supposed to spring from the ashes left by the Brierleys have been few. Sky Tower, and what else?

    In NZ we have been big on creative destruction and weak on the efficiency and dynamism that supposedly result from this. Privatised Telecom was funded largely by Americans, the Fletcher international empire shrank, and our breweries were sold overseas. Promising international firms like Carter Holt Harvey faded away. The Bank of New Zealand was flogged off to Australians, and the promising network of demutualised savings banks (except for Taranaki and Auckland) were merged then flogged off into some bigger overseas controlled bank.

    It’s no surprise that our biggest business – Fonterra – is a co-operative.

    Perhaps a capital-gains tax would balance the economic dynamism and rebirth with what is supposed to be its mirror twin, creative destruction.

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  37. nickb (3,687 comments) says:

    Also, in share investing I understand there is a mild form of capital gains tax, if the investor concedes he or she was investing for the purpose of capital growth, but I’ve never heard of anyone paying such tax.

    If there becomes a frequency to your buys and sells such that it becomes your “business” then you have to pay tax on gains, be it on property, shares etc.

    Similarly if you buy an asset with the intention of resale you are taxed. These provisions are what Michael Cullen was talking about when he said that NZ already had a capital gains tax and he could basically just ask IRD to enforce the rules harder. The position at the moment seems to be that rental properties held for the medium to long term aren’t caught by such provisions, most likely because an argument can be made they are being brought for rental returns (as tenuous as that is IMO).

    When you get to buying and selling every couple of years you have a problem.

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  38. seanmaitland (501 comments) says:

    I’ve got a couple of rental properties and when LAQCs were stopped, I didn’t bother converting to a LTC as I’m more or less breaking even (-$50 per week).

    I think it would be brilliant if a government committed to getting rid of LTCs – I know people earning six figure salaries who haven’t paid any tax in over a decade. Its a bit of a joke that people are running companies perpetually making losses being covered by their taxes.

    It would be a massive shakeup to the property and banking sectors if suddenly all these highly leveraged companies had to get their noses above water or start selling off properties.

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  39. Ed Snack (1,883 comments) says:

    Seanmaitland, but you only get approx 1/3rd of your cash loss back in tax refunds, especially as you can’t claim depreciation (except on fixtures and fittings I think). So if you have a salary of $300K (say) and have rentals that lose $300K in cash a year you would get a tax credit of $100K approx which is all your tax back. But you’ve also paid out $300K to get that loss.

    Isn’t that about right ?

    Nickb, I think that is how the IRD currently interprets the law, it does seem to me though that a serious attempt to enforce that part of the tax code could work like a super-effective laxative for most in the property rental game. How about changing the definition of intention to resell for a profit to encompass anyone who isn’t covering their capital invested at a reasonable rate of return on the basis that this implies that you are relying on the capital appreciation and hence any such appreciation is taxable. May not happen soon, but certainly could be applied.

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  40. thedavincimode (6,803 comments) says:

    capital gains tax + home exemption = sky-rocketing house prices. Why invest in equities when capital gains are taxable? Bung it all into the family home.

    Piggy tried his property speculation tax. Dismal failure.

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  41. nickb (3,687 comments) says:

    Yep agree it won’t control house prices. If anything it will make them worse due to deferring sale to defer tax = decreased supply

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  42. Jack5 (5,137 comments) says:

    Re thedavincimode’s 4.55:

    … capital gains tax + home exemption = sky-rocketing house prices.

    Just about every where else in the world has a capital gains tax, and yet we have one of the highest ratios of house prices to incomes.

    Are you saying that it is the home exemption that would cause rocketing prices?

    If a CGT dampened demand, shouldn’t that restrain prices, other factors being equal?

    Can someone please enlighten us on capital losses? Does a CGT on houses and shares mean that when prices drop, can the loss on realisation of the asset be offset against other income for tax purposes? Or perhaps offset against only other capital gains?

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  43. Keeping Stock (10,342 comments) says:

    I can’t wait until Parliament reconvenes next week, and some daft Labour MP accuses John Key’s Rich Prick Mates of being tax avoiders :D

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  44. nickb (3,687 comments) says:

    Jack – my understanding was that Labour’s policy didn’t allow for capital losses to be offset against other income, only future capital gains. Australia’s CGT is the same I believe

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  45. thedavincimode (6,803 comments) says:

    Jack 5

    In other jurisdictions the introduction of CGT has had a short term price hike effect and then the inflation path continues (slightly higher rate as I recall).

    The measure that you refer to – the relationship between prices and incomes – is (I think anyway) flawed because not only is it a macro level statistic it doesn’t take account of geographic, infrastructural and social influences between jurisdictions. Simple example a house in central Auckland will, all other things being equal, be much more expensive than one where it takes and hour of sitting in traffic to get into town. Sydney – same, London – same etc. Auckland is becoming a victim of its critical mass in this respect (albeit that there are economic benefits that flow from critical mass). The problem for Auckland where the real issue lies (which is one thing that everyone at least appears to agree on) is partly geographical by virtue of the harbour, and the accessibility of the harbour for both residing and recreation.

    The other point to bear in mind is that as someone said the other day, Government has a vested interest in keeping wages down, like housing, because of inflation goals. Housing is more of a challenge, so I think that when the ratio of house price to incomes is addressed, it is important to keep in mind that an increase in the ratio doesn’t mean that houses are intrinsically over-valued for that reason, but rather it can also reflect a lack of wage growth by virtue of insufficient productivity gains in either absolute terms or measured against the productivity of overseas economies.

    Whether you agree with that analysis or not, my point that such indices do not reveal the true picture remains valid I think.

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  46. Jack5 (5,137 comments) says:

    Thanks for that thedavincimode (5.55)

    The point about the harbour constraint is interesting, and makes relevant suggestions about completing the last of the rail link to the good deepwater port at Marsden Point and setting up an “inland port” in west Auckland.

    Would moving most of the container port operations away from Auckland’s waterfront help much?

    As a non-Aucklander, on TV etc weather maps I see great chunks of hilly land to the south-east of Auckland, and it doesn’t look to be first-class arable land. Would designating much of this land for housing help much with Auckland’s supply housing supply problems?

    Otherwise, is the geographical constraint of the harbour going to limit Auckland’s size?

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  47. thedavincimode (6,803 comments) says:

    Jack

    Auckland’s port is about the piss poor return on investment. That’s without even considering the current value of the land for say other commercial)/residential. But I expect that you are right it would make some difference but Auckland has high population pressure so it might not be significant.

    I should have added that tax rates are also an import, consideration in the housing issue. Low tax rates reduce pressure on wages by increasing purchasing power. We need to get rates down.

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  48. Viking2 (11,491 comments) says:

    I think it would be brilliant if a government committed to getting rid of LTCs – I know people earning six figure salaries who haven’t paid any tax in over a decade. Its a bit of a joke that people are running companies perpetually making losses being covered by their taxes.

    Really! the govt of NZ has plenty of companies that have/do behave that way.
    Solid energy anyone.
    TVNZ etc etc
    and all the others that bget subsidies by way of grants, sweetners etc.

    The basic issue remains that much more should be user pays relieving the taxpayer of the tax to pay.

    simple as.

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  49. gazzmaniac (2,307 comments) says:

    Just about every where else in the world has a capital gains tax, and yet we have one of the highest ratios of house prices to incomes.

    Except for Australia.

    Are you saying that it is the home exemption that would cause rocketing prices?

    Yes. If a primary place of residence is eligible for an exemption, it will attract more investment.

    If a CGT dampened demand, shouldn’t that restrain prices, other factors being equal?

    It won’t dampen demand. Everyone still needs a place to live. Because investors now need to pay a tax, they will demand a higher return on their investments before they sell them.

    Can someone please enlighten us on capital losses? Does a CGT on houses and shares mean that when prices drop, can the loss on realisation of the asset be offset against other income for tax purposes? Or perhaps offset against only other capital gains?

    In Australia you can only offset capital losses against capital gains in the year that the capital loss event occurs or in any subsequent year. You cannot offset a capital loss against a previous capital gain even if you haven’t paid that tax yet (and have no money – a coworker found this out the hard way trading shares on margin), and you cannot offset against regular income.

    I still maintain that a capital gains tax on property is really a tax on inflation, and therefore it suits the government have a loose fiscal policy.

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  50. gazzmaniac (2,307 comments) says:

    Would moving most of the container port operations away from Auckland’s waterfront help much?

    There is a container handling facility (an “inland port”) at Wiri.

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  51. slijmbal (1,236 comments) says:

    @nickb

    not sure I agree with you on rental tax advantages. As Ed Snack points out most of the depreciation ends up being treated as income when the property is sold. It is as most an interest free loan. The depreciation rules are reasonably accurate for fittings e.g. carpets and curtains as they have to be replaced. They are a cost that is incurred as part of the ownership of the property. Similarly, interest is a true cost and probably the largest.

    However, the depreciation of the building value is probably overstated i.e. it is depreciated too quickly as the building value probably increases relating to increased building costs despite the loss of expected life of the house itself. They should use something like the capital value on our rates bill as that would be more accurate and be closer to market value.

    There is no ability to claim depreciation on the land costs.

    I disagree that housing receives a tax benefit (other than house values being depreciated too quickly) compared to other investments. I think this is a bit of Orwellian crap that has been repeated so often it has become the ‘truth’.

    I would point out that the oxymoronically named Fair Dividend Return (FDR) approach applied to investment in foreign shares is immensely unfair when compared to other investments. The difficulties with the uneven treatment of imputations courtesy of the Australian government leading to excessive taxation etc. etc.

    The major benefit of rental housing is the ability to leverage and allow every day investors access to tax advantages any normal business receives.

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  52. nickb (3,687 comments) says:

    I don’t think rental property has any tax advantages either.

    I just think because it is by far our most popular and costly national investment the issues I outlined are a risk to the tax base. Even with depreciation gone, investors are still getting tax deductions in the production of a tax free gain. Even though they are now cash losses, you can still get up to a third back as a refund against personal income and put nothing back in the pot on sale, even if your dominant intention at purchase was capital gains and not rental income.

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  53. slijmbal (1,236 comments) says:

    @nickb

    Investing in a productive asset (housing is a productive asset despite the bollocks spoken about it not being one as it provides a necessary service ie somewhere to live) and using standard approaches where ongoing costs can be claimed and capital gains are untaxed is somehow not good if done for rental properties but fine for farms and other businesses? I don’t get that.

    I owned a 1/3rd of a decent business – did all the usual about tax and costs and sold at a substantial tax free capital gain – that is no different to rental ownership.

    A major point about our current tax system is that it encourages continual investment, which seems to me a good thing.

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  54. nickb (3,687 comments) says:

    Agree with your comment re farms, I think the difference between rentals and ordinary businesses is the massive proportion of rental properties that never turn a profit because of gearing, or if so don’t make one for many years.

    It’s non-property businesses that pay the bills from a tax perspective. The rental sector is a net drain, which is amazing given it makes up far more of NZ’s wealth than interests in businesses.

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  55. lolitasbrother (703 comments) says:

    good post Farrar

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  56. Viking2 (11,491 comments) says:

    nickb; most of the loss comes either from to high interest rates (a govt. created problem because it spends too much), and from the issues tenants cause.
    Issues such as lack of tenants with pride, (caused by too much govt. giving too much of other peoples money to people who don’t bother to earn their own), tenants that leave Landlords with horrendous expenses when they leave, like the $35k I have had to spend this last year with nary a hope of recovery. All by tenants who are encouraged by the Govt. to be wayward because we have Tenancy Law that allows them to tell the landlord to get stuffed, aided and abetted by the National Govt.’s changes to the manner in which the Tenancy Tribunal operates. (currently 7 weeks for a Tribunal in many area’s and then you have to try to prize the money out of those that are deemed to owe you. That, like most govt. imposed fines doesn’t work)

    The pandering to the poor and the constant harping of the Sallies is getting up a lot of landlords noses. The tenant goes to the Sallies, who have been given lots of free stuff so in the goodness of the souls then give/ sell cheap stuff to the tenant. The tenant decides to move on (either voluntary or by order), but takes only what they really need and then leaves all the rest for the Landlord to cart to the tip, just so they can pay the local Council thieves a great fee to get rid of someone else’s rubbish.

    Being a landlord ain’t for the faint hearted, oh one is easy peasy but try having a few.

    Add all that and the depressed rents of the last 6 years and unless something changes there will be a shortage of rental accommodation in most area’s within the next 12 months. ( Except maybe Tauramanui.)

    And for those that think their is a relationship between wages and rents, you gotta be thicker than a sack of hammers, especially in NZ. There are plenty of household income variables that make that relationship a joke as it was based on poor stats a long time ago.

    Anyway the new bubble coming up is in sections and subdivisions. Contractors are booked up and soon there will be enough sections in Tauranga to supply us for the next 5 years.

    Trouble is that there is a lot of retirement villages being built as well (Ryman here have just done 500 dwellings and in Auck. Summerset are about to build 2000. and that’s just them, add Ryman and Metliffe and all the others and they will account for nearly all the new houses Auckland and other centres need.)
    That’s happening everywhere. Now for someone to go into there they need to sell their home, so, either there will be a surplus of houses or Retirement housing. Take your pick. And don’t forget there is a turnover in the villages. As Ryman only take over 70’s there’s will be the highest and so 10% in not inconceivable. all housing to be sold.

    So unless the number of immigrants grows to about 80k per year we don’t need many new houses.

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  57. Viking2 (11,491 comments) says:

    nickb (3,601 comments) says:
    February 28th, 2014 at 7:55 pm

    It’s non-property businesses that pay the bills from a tax perspective. The rental sector is a net drain, which is amazing given it makes up far more of NZ’s wealth than interests in businesses.

    Except that many of those with businesses have rentals as a backup. Try borrowing from a bank with no property assets to sign up to. Its better to lose a rental than lose your own house.
    The interest may be deducted against the property but in essence it is related to the business but essentially the end result is the same.

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  58. wrightingright (143 comments) says:

    > “Result: as a NZer living in Australia, any income earned outside Australia is tax free. Nice loophole. :-)

    @PaulL, does that mean if I live in Australia working remotely doing work sourced and paid from NZ I could live tax free!!! :-o

    Although, not all work can be done remotely like that. But still, I could have my Australian company being paid by clients in NZ, and I spend half the year holidaying in Australia (to qualify as resident over there) and the other half flying into NZ to do the work which is getting paid to me over in Australia. Bingo, tax free lifestyle???

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