NZ Tax Reform Report: Our Response
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Articles by Matthew Gilligan
The Tax Working Group report was publicly released at a press conference yesterday, 20 January 2010. Please read our summary including our response of interest to property investors.
The highlights of the report seem to be:
- The lowering of personal tax rates in favour of alignment of rates
- An increase in GST
- More support for land tax, than CGT or risk free rate of return
- The denial of depreciation deductions on buildings - if empirical evidence shows they don't drop in value.
- Empirical evidence will show denial of deduction will affect values, and therefore whether this should or will be done is questionable. As well as that, it is problematic to draw the line between residential and commercial assets, etc.
Ring-Fencing of Losses
At a glance, there has not been much attention paid (if any) attention to the ring-fencing of losses, thank goodness. Our opinion is that the tone of report is not very prescriptive. It is full of pros and cons, if's and but's.
The potential of ring-fencing losses was our concern. That would have truly killed property values and affected the average investor as the Westpac commentary highlighted.
Wholesale denial of depreciation deductions for all property investors (or just residential) will affect liquidity of investors and cause mortgagee sales and huge hardship in the investing community.
It's also not fair because people invest based on an assumed return (that includes the depreciation tax rebate) and when this is taken away, the government are taking wealth away from the average investor.
After all, the value of the property is a function of the cash flow, and when you reduce the cash flow by denying the depreciation reduction, you reduce in turn the value of the investment.
The potential of ring-fencing losses was our concern. That would have truly killed property values and affected the average investor as the Westpac commentary highlighted.
Wholesale denial of depreciation deductions for all property investors (or just residential) will affect liquidity of investors and cause mortgagee sales and huge hardship in the investing community.
It's also not fair because people invest based on an assumed return (that includes the depreciation tax rebate) and when this is taken away, the government are taking wealth away from the average investor.
After all, the value of the property is a function of the cash flow, and when you reduce the cash flow by denying the depreciation reduction, you reduce in turn the value of the investment.
Targeting of Existing Property Investors
Targeting existing property investors in this way (taking their wealth) is not fair, neither is it in the public interest in the writer's view. I hope the government works this out and decides not to change the depreciation regime. Trailing it and hurting average mum and dad investors that make up the bulk of the investment base in residential property. These are ordinary (voting) public trying to get ahead.
Perhaps the government should consider the political popularity as it will certainly impact voting. This will not be an election winner for them; hundreds of thousands of investors will be affected.
Also consider the banks' position. Many investors are geared (borrow) 80% of the property value. If property prices drop 10-20%, banks will be in breach of their banking covenants and be obliged to call up loans and mortgagee sell investors. This will destabilise the banking industry - totally unacceptable one would think.
Consumer Spending
Reduced house prices and reduced disposable income from investors will also dampen consumption. Not good at time when the government is trying to re-activate consumption.
However, if the depreciation regime is grand-fathered (affecting new investors, leaving existing investors as they are with current rates until they sell existing property), the impact would be less of an issue.
This addresses the 'level the playing field' argument between property and shares (an argument I don't agree with, that is driven by people with vested interests in shares like Brash (a shareholder in Huljich Wealth Management) and Weldon ( NZSE CEO)).
These people have huge upside in attacking property, and personally I do not believe this issue has been addressed by the media.
Summary
In summary, my primary concern surrounds the depreciation rate changes: if the rates are to be changed, or to be set to zero, grand-fathering the old rates would be the middle ground and more sensible in my view, to protect existing investors, the banks and the economy in general.
Would you like assistance with a review or understanding how your affairs may be impacted by any possible changes in tax legislation? If so, please contact us for an interview. We can work NZ-wide and globally by phone, email or Zoom.
Matthew Gilligan
Managing Director and Property Services Partner
© Gilligan Rowe & Associates LP
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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
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