Guest Post: IRD asleep at the wheel while property market overheats?

A guest post by a reader:

Working in the public sector I hear much of the management-speak employees are meant to listen to like ‘customer focused’, ‘intelligence led’, ‘pro-active’, ‘focus on the greatest harm’, etc, etc. The public sector is also meant to be making it as easy as possible for the population to comply with the various rules and regulations they are subject to.

You would pretty much have to be a hermit not to have noticed that there has been much debate recently about ever increasing house prices and who is responsible. You might have noticed that investors make up a high proportion of property buyers in some areas like Auckland, where the average house price has topped $1 million – which makes for a very hefty mortgage and large tax deductions. You might also have noticed that the Reserve Bank is imposing a 60% limit on the amount investors may borrow against a property. However, that won’t stop investors borrowing 100% of the purchase price by also using equity they have in another property.

Does have any problem with property investors borrowing 100% of a property’s purchase price and claiming all the interest payments, even when they are paying $1 million for a property returning only about $600 a week in rent? This strongly suggests the property has been purchased with the intention of resale as I pointed out previously

We don’t know if IRD has any concerns about negative gearing because they haven’t made any comment about investors borrowing heavily to buy into the overheated property market. There is little on IRD’s website to give investors guidance apart from the simplistic advice that it all depends on intention at the time of purchase – was the property purchased with an intention of resale? Surely pointing to something more concrete and verifiable would make it easier to ensure property tax provisions are compiled with?

Intention by itself is exceptionally difficult to prove. The property tax ‘intention provision’ is therefore very difficult to enforce. IRD spends a lot of money in ‘an ambulance at the bottom of the cliff’ sort of fashion trying to police it. The Minister of Revenue informed me a few months ago that Budget 2015 provided IRD with a further $29 million for property tax compliance and enforcement, taking its total budget for work in this area to $62 million. This was expected to generate around $420 million of additional tax assessed over the following five years.

While the payback on IRD’s property tax policing seems reasonable, the fact so much money has to be spent on enforcement and compliance with a few, very short property tax provisions should ring alarm bells! The huge spending suggests particularly poor guidance is being provided to taxpayers and/or the law itself fails nearly all the tests of good tax policy. Ideally, tax law should be simple, certain and equitable.

While the property tax intention provision is certainly simple – it contains only a few words – it is certainly not certain or equitable. There is no certainty at all that a property purchased with the intention of resale will actually be taxed on the likely gain on sale – particularly if it was purchased by a property investor and rented out for a while. How would IRD ever prove the intention?

The intention provision is certainly not equitable because only the unlucky and silly are likely to ever be caught by it. Meanwhile, many other property investors buying expensive real estate with borrowed money will claim large tax losses to reduce their tax bill only to sell the property a few years later for a tax-free capital gain!

I wonder if IRD is too scared to limit the losses that can be claimed by negatively geared property investors or at least give some guidance that the negative gearing will be taken as an intention of resale? Or is IRD just not paying any attention to what is going on in the real world because it is asleep at the wheel?

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