Political watchers around the world have been following the saga of the UK parliamentary expenses scandals. UK Labour has dropped to 22% in the latest poll, as the Telegraph reveals claims for mortgages that were paid off, moat cleaning and the like.
Most of these excesses are not possible in NZ, as MPs don’t get to claim accommodation expenses except rent and interest on mortgages. But even then, we have not been lily white.
Now many readers will remember the scams by Labour’s Marian Hobbs and Phillida Bunkle from the Alliance who were claiming such expenses, despite both being Wellington based MP with homes in Wellington. Bunkle did it by claiming her primary residence was a bach just north of the Wellington boundary, and Hobbs claimed her primary residence was in Christchurch, despite having stood for Wellington Central. This made the scam legal – but not ethical.
The point of such expense regimes, is that an MP is not left worse off for just doing their job. If an Auckland MP has to spend three nights a week in Wellington, then of course they should not pay personally for it. But the idea is not that an MP who normally lives in Wellington, can make some extra money.
But the Bunkle/Hobbs method is not the only way, an MP can benefit from the expenses claims.In the light of the UK revelations, I thought it would be useful to highlight other ways an MP can benefit.
Look at section 3.30(1)(b) of the expense directions and it states an MP can be reimbursed for actual and reasonable accommodation expenses in Wellington, if they live outside the Wellington commuting area for.
(i) accommodation owned by that member; or
(ii) accommodation rented by that member on a continuous basis for use in lieu of overnight accommodation; or
(iii) accommodation in commercial premises; or
(iv) other private accommodation.
Let us look at each of these in turn, and who benefits from what:
(iii) accommodation in commercial premises
This is where the MP stays in a Wellington hotel, as many do. They can claim up to $160 a night, up to a maximum of $24,000 a year. That means a maximum of 150 nights a year can be claimed – an average of three nights a week.
In this case the MP gains no benefit. It is nice and simple. Not that popular with some MPs though as it means they have to book in everytime, and have no permanent base where they can leave clothes etc.
(iii) other private accommodation
This is where the MP stays in a private residence not owned by them – probably owned by a friend. They can claim up to $50 a night, up to a maximum of $24,000 a year.
In this case the MP gains no benefit, but the home owner can benefit, and they may be related to the MP. Having said that I am not sure if any MP uses this option.
(i) accommodation owned by that member
This is a potential problem area, but note section 3.30(2) avoids most of the UK problems:
No principal component of any mortgage payment or any capital improvement to premises may be claimed under this clause.
So an MP can only claim the interest on their property. The maximum is again $24,000 a year, so if interest is at say 8%, then the maximum will be claimed if the principal is $300,000 or more.
This option does provide some potential benefits to the MP.
MPs can maximise benefits from this situation, so that the taxpayer pays the maximum$24,000. Let us say the MP buys two $500,000 houses with $600,000 of equity and $400,000 from the bank. House A is in Wellington and House B in the electorate.
Normally you may have House A and House B both with $300,000 of equity and $200,000 of mortgage. However at 8% interest it means the MP can only claim $16,000 from the taxpayer for House A. So the smart MP arranges their finances so that House A is $200,000 equity and $300,000 mortgage and House B is $400,000 equity and $100,000 mortgage. This means they get an extra $8,000 a year from the taxpayer.
Now to be fair to said MPs, there is an opportunity cost of them living at their own place – it means they are not renting it out to someone else. They may be able to rent it out for $24,000 a year – or even more, if they did not use it at their second home.
But nevertheless they do have an incentive to keep the mortgage high on their Wellington home, so they get paid the maximum $24,000. One could arrange it so one is getting $24,000 a year on a $350,000 apartment. Not many landlords would be able to rent out a $350,000 apartment for $460 a week, so the MP does make a significant profit, plus they have a guaranteed tenant – themselves.
So a question to be pondered, is should an MP not be eligible to claim their interest payments as an accommodation expense? Otherwise you have an incentive for them to keep the interest payments high to maximise the expense they can claim.
Maybe a journalist could ask how many MPs are living in a place they own in Wellington, and what proportion of them are claiming the maximum $24,000 in interest payments? The Parliamentary Service won’t release individual details, but they might release summary information.
But for the really smart MP, there is an even better way to maximise your profits from the taxpayer. You see eventually the house you own will have the principal repaid, meaning the interest you can claim falls to under $24,000 a year. How do you ensure you keep it at $24,000 a year?
(ii) accommodation rented by that member on a continuous basis for use in lieu of overnight accommodation
This is where the MP either rents an apartment outright for their exclusive use, or is a flatmate in an apartment. The maximum you can claim is $24,000 a year, which is $460 a week. Many MPs do this, as it gives them a permanent base where they can leave clothes, have some food stocked up etc. The owner of the property benefits as they get a tenant, who generally will not cause any problems in terms of non payment, damage etc – and they will often be a guaranteed tenant for three years. MPs don’t tend to change apartments in Wellington a lot, as it is mainly just a place to sleep three nights a week.
On the face of it, the MP doesn’t benefit from such an arrangement – the landlord does. But what if the MP is effectively a landlord? How – you set up your own personalised superannuation scheme, and get your super scheme to buy the apartment, and rent it to you for the maximum $24,000 a year.
This way you can get $24,000 a year from the taxpayer, even long after the mortgage has been paid off. Now some will say, but if the MP was not renting it to themselves, they could rent it to someone else. Yes – but see above about the massive benefits of renting to an MP – guaranteed income with no breaks for three years. No having to pay a property manager to manage the property etc.
Now the Parliamentary Service will tell you that when an MP rents their own house through their Super Fund, they get an independent market valuation. This is true, but valuations are not a precise science. That would stop an absolute hovel being rented out for $460 a week, but really you know the difference between a $400 and $450 a week apartment is very subjective. And MPs will buy apartments that they know they can get the maximum allowance for.
No matter how much one tries to mitigate, there is a fundamental conflict in my opinion between the MP effectively owning the property through their Super Scheme, and being the tenant with the taxpayer paying the tenancy.
It is all within the rules, but so were most of the rorts in the UK. As David Cameron said, the issue is not the rules, but whether the behaviour is ethical and correct. And most of all, it is about whether the rules should allow an MP to maximise profit from their Wellington accommodation.
The Greens have been doing this for years, and they claimed a while back:
This is also what we are trying to do in the Green Futures Superannuation Fund, set up in 1997 by the Green MPs to invest our own savings. We started by investing in housing for MPs to live in that was close to Parliament so we can all walk to work.
Now this is just nonsense. They did not set up the super scheme to so they could live close to Parliament. There are hundreds of houses and apartments available for lease near Parliament. They set up the scheme so they could maximise the income from the taxpayer for renting the property to themselves. They almost admit this later:
With the security of the property market as a base we have now also invested in NZ’s only locally owned and made wind generation company … All very small stuff, as befits the amount we have to invest, but it has still outperformed larger funds over the last year.
Or maybe it outperformed the larger funds because it had a guaranteed taxpayer funded tenant – themselves.
How much can an MP benefit from the Super Scheme owning the rental property rort? Well here’s a typical example. Take this apartment in Thorndon which has rent set for $460 a week. Its GV is $340,000.
Now an MP’s salary is $131,000 a year. They get a super scheme subsidy of 2.5:1 up to a maximum 20%. This means they put in 8% and the subsidy is 20%, so 28% of $131,000 is paid into their super scheme every year – that is $36,680.
Now let us say the MP (through the super scheme) borrows the entire $340,000 to buy the property (we’ll ignore deposits for now and assume they have property elsewhere to guarantee this mortgage).The MP gets a 5.99% mortgage from Kiwibank. This means the interest in year one is $340,000 x 5.99% = $20,366. However their Super Fund puts in $36,680 plus the taxpayer again puts in $24,000 through the $460 a week rent. That means the interest of $20,366 is matched three times over with the $60,680 of repayments.
If you repeat this each year, then within seven years that MP’s Super Fund owns that $340,000 property outright (plus any increase in valuation).
This is not a new development. The Greens have been doing this since at least 2001. So do many other MPs. I’ll be honest – if I was an MP I would probably do exactly the same – why wouldn’t you?
It is all within the rules, but it is a loophole. If you own the property yourself, you can claim interest only. If you own it through a corporate shell such as your Super Fund, then you can get the taxpayer to pay rent on your behalf to yourself.
So the question we should be asking, in the wake of the UK experience, is should the rules be changed? Should we ban MPs from claiming accommodation expenses for properties they own (directly or indirectly), or have a beneficial interest in?
If an MP wants to have their Super Fund invest in property, then they still can. But they, like any other landlord, should have to go out and find tenants for it who are willing to pay the market price. For example let the “Green Futures Superannuation Fund” find its own tenants, rather than the guaranteed income of the Parliamentary Service!
While I have used the Greens Fund as an example, this is because it is in the public domain. This is not a criticism of the Greens only. I am sure MPs from all parties take advantage of the current rules, and this should not be surprising. Again the issue for me, is whether the rules should be changed to prevent MPs claiming accommodation expenses for any property they own – either directly or through a Super Fund. At the end of the day you should not be both landlord and tenant, when the taxpayer pays the bill.