Manawatu Property Investors' Association

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Do property investors really have "tax benefits?"

As the government contemplates tax changes which would alter the tax rules for property investors, much of the commentary around perceived "tax benefits" has become misleading.

By Jenha White

The government is waiting for recommendations from the tax reform committee which will table a variety of alternatives the government may implement to curb the Kiwi enthusiasm for property investment and balance the budget deficit, in the wake of falling tax revenues.

Mark Withers from Withers Tsang & Co says the perceived benefits of claiming losses are not unique to property investment.

"Tax benefits are construed as unique to property, but any farmer or business person in New Zealand that makes a loss can offset this against their income, subject to the structuring of their affairs.

"The suggestion that this is somehow unique to property investment is completely false," he says.

If you lose $1 on property investment by incurring more costs than you earn in rent, the maximum tax benefit is 38% of the dollar lost.

To get that 0.38c from the government you have to lose the $1 first and even then, only if you have sufficient tax paid income to offset the loss.

"Where's the benefit in that?" Withers asks.

He says the "benefits" are only a by-product of circumstances where there's a genuine loss of money.

However, it needs to be acknowledged that property investors would only generally tolerate these arrangements if they had a long term expectation of capital growth in the property asset.

Withers says people do not invest in property to create losses.

Generally they are looking to reduce debt in order to become profitable and enjoy some capital growth over time as they work towards this. Ultimately they pay tax on their profit just like everyone else.

"Where do you draw the line? Is a farm a property investment?" he asks. Many farms return losses as a result of the high interest costs on debt to purchase land, just as property investors do.

Farming losses are tax-deductible and capital gains are also tax-free "but we don't demonise them".

Withers thinks the government will choose to implement a form of land tax.

"I believe land tax is the front-runner because the tax revenue collected by the government would be extremely predictable and regular which is in stark contrast to capital gains tax."

He says ring fencing tax losses would collect more tax now but less tax in the future when losses that are ring fenced get offset against rental profits.

The government's biggest challenge in introducing land tax would be dealing with the extent to which it applies.

"Would it apply to the farming community? How about Maori tribal interests which have received Treaty of Waitangi settlements of valuable but perhaps largely unproductive land?"

He says politically that would be a big problem, especially given the need to keep coalition partners on side.

Withers believes if the government introduced a land tax at the same time as a cut in the top marginal tax rate, this may be less politically damaging.

"Introducing a capital gains tax mid term at a time when the property market is essentially flat or declining seems mad.

"Not only would it collect virtually no tax in the immediate future, it could be extremely unpopular with much of National's middle New Zealand voter base."

Withers says that his preference is that we remain one of the few western countries free of hated tax regimes like capital gains tax, stamp duty, and death duties, "but we shall see".