A Thoughtful Response to the Recent Proposed Tax Changes and How They will impact on Property

A Thoughtful Response to the Recent Proposed Tax Changes and How They will impact on Property
an article by Gavin Hamilton – Manager Star Real Estate Ltd. Licensed Real Estate Agents – Howick,Auckland

There is a lot of talk, supposition and hypotheses whizzing around the atmosphere, scaring the cattle and causing discontent amongst the natives. I never believed it was fair to torment the chattering classes, especially for no good purpose.

Actually I cannot recall whether or not the Nats campaign for office included seeking a mandate for significant tax reprogramming and I am sure I would if they had. A committee of academic theorists and public serving beaurocrats deliberated on ways to broaden the tax base and to increase the perception of “fairness “ amongst those imposed on – an impossible task.

A problem is that the revenue collected comes from a serious minority of industrious strivers who are asked to support a number of well meaning and completely unaffordable programs and subsidies including ‘working for families ‘ the dole , sickness benefits ,odd ethnic and special interest programmes, interest free student loans etc. etc. Sooner or later you run out of willing drones to flog and nowadays they leave taking their brains , work ethics and capitol with them . The govt. is desperate to dissuade the flight of talent and capital and that will be a very significant consideration in any move they make .

Similarly , the govt is a stink and inefficient landlord and they know it. There are in excess of 400,000 tenants , tenancy is proportionally increasing and Govt. does not want to take over from private providers – in fact state owned homes are being offered for sale at CV in Glenn Innes / Panmure as at today – another significant consideration .

The Govt will not want to be seen to be responsible for increasing rents , they will be rising anyway as available homes become in short supply , its happening already in the eastern areas of Auckland . If the changes cause private investors to exit the market we will experience rental hardship a la Sydney and rents will seriously rise . A significant consideration for the govt.

There is a clear cut need for retirement saving and rental real estate has been a large part of private investment plans , given that these investors also relieve the govt responsibility to provide public with homes to live in and that these homes are in short supply today , the govt will not wish to exacerbate the situation . The NZ stock exchange is a very limited and poor offering with few companies you could safely invest in and with the poor track record ,unregulated ,undisciplined and unpunished bad behaviour the sector is really of limited interest except to gamblers . Not a perception that will be easily modified and a real issue for the govt.

On the other hand it is truly disgusting that people have been able to affect their taxable incomes to the extent that they can then also obtain extra monies in the form of working for family’s grants and benefits . It probably is a small number proportionally but indefensible and seriously bad press .

If the Govt does move , I think the most likely moves will be:-

* A small increase in GST . Probably the cheapest and most effective change to implement , largely balanced on an individual level by the reduction in tax rates .Minor tweaking could adjust anomalies but the structure is in place and it is quick and easy and I doubt the public would hate you forever .
* Ring fence investment losses. Won’t be popular especially amongst the seriously over geared and the cynical tax manipulators . Whether applied to shares , art , property or any other asset class losses can be accrued and once the investment generates profit , the profits are tax exempt . Probably see a decline in investment of a type that will never see profit in my lifetime . I think the govt. could almost get away with this course of action . Could lead to investor flight and increasing rents as the entry cost to this type of investment becomes quite unaffordable , some significant long term loathing possible here
* Remove building depreciation on investment property . Could see some likelihood of moves in this direction , I believe commercial and industrial property would be likely to be exempt , probably the level of loathing generated would allow this action to be politically possible . The effect to rents also probably would not be overly significant and I think it is unlikely to lead to significant investor flight.
* The tax department starts to police the provisions currently in place . A novel idea that could generate some money for them and may go to some lengths to appease the strident anti speculator/investor lobby – Interest.co.nz etc. No real downside for the govt there so quite on the cards. Anecdotal evidence indicates some level of untaxed speculative trading takes place and perpetrators are unlikely to generate any public sympathy.
* Land Tax / Capital Gains Tax. A sure fire way to become unelectable and to generate long term significant public antipathy and loathing. Expensive to administer and would create huge calls for exemption from Maori, farmers , forest owners and a queue of others with a special case to plead which in turn would add salt to the wounds of those not exempted . I think this would be a very unlikely option from a pragmatic, savvy govt seeking to be re-elected.

There is a big need for government to stimulate the building sector. Building for rental is a significant part of the housing market, particularly at the lower end. It is generally recognised that we are actually short of houses, whether for rent or to purchase. These discussions are not helpful in that uncertainty is an impediment to action and basically we will see little change in the status quo until after the budget. Given the govt is selling its own rental stock and private investors are selling stock in dribs and drabs, to avoid any possible downside to their holdings, the shortage can only get worse and rents will surely climb . Soon, the increased rents will be enough to cover the cash flow loss resulting from ring fencing/loss of depreciation /increase in GST and investors will return to the market. A new equilibrium will have been created, tenants will pay a large part of the tax rebalancing and life will go on.

It will be interesting to see what does happen ,what do I know ? I am only a real estate agent

Visit  http://bit.ly/a6QOSm to view other blogs by Gavin on real estate related articles