Client update: Tax Working Group report

Please find below my initial observations a few comments on the Tax Working Group’s report and ‘recommendations’.

From my experience, once the politicians take over, the watering down process will begin in earnest and these ‘recommedations’ will become a mere shadow of themselves.

Olly Newland 22/1/10
omn@ollynewland.co.nz
0800 66 22 80
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Effects of Suggested Tax Reform on the Property Market

The Tax Working Group’s report on reforms to the tax has just been released to widespread reaction and some considerable irritation. Its smorgasbord of ‘recommendations’ has already been widely reported and, no doubt, we will hear much more about the proposals in the weeks and months ahead.

It is not my intention to litigate all the recommendations they made, but rather to point out what I see as some major flaws in the report — which go to show how out of touch with reality parts of it are.

The problems that would arise, if some of the report recommendations were adopted without amendment, could have unintended and adverse affects on the property market in particular — as well as the whole economy in general.

This Working Group, being mainly academics, completely failed to understand that property investors, as landlords, heavily subsidise their tenants. There is nothing new in this. It has always been the case. Renting is cheaper than owning in pure financial terms.

A simple exercise will suffice.

The typical rented property may be worth (say) $350,000 and be rented out for $300 per week or $15,600 p.a. If the tenants decided to purchase the same property at $350,000 with borrowings at 6.5% interest (loss of use of money included) the outgoings would be at least $22,750.00 p.a
Add to this rates, insurance and repairs (currently paid by the landlord) so let’s estimate an extra $5,000 p.a. added to the ÒrentÓ which works out at $27,750.00 or $533 per week.

This subsidy or shortfall is currently carried by the landlord in this typical renting situation — and any depreciation or tax losses help to make up the difference.
ItÕs either that or the rent will have to almost double to make the whole exercise viable. For most renters this would be impossible.

2. Another area the group appears to have failed to understand is that a very large number of private landlords supply the government with rental houses for the use of beneficiaries and the low-paid. Indeed, the government actively promotes a generous scheme which leases long term private residential property from landlords for this very purpose.
If disincentives are to be used to discourage the ownership of private rental property then what will happen to this scheme and the thousands of tenants that have benefited from it to date? The Tax Working Group obviously had not thought that one through either.

3. The Group is critical of property as an investment and are openly biased about the matter. It wants people to invest in businesses instead, either directly or through shares on our lacklustre stock exchange. As I have noted before, what the Group has failed to grasp is that banks are most reluctant to lend to businesses or for alternative investment without adequate security or collateral.

My clients repeatedly tell me that they cannot expand their businesses with the help of a bank loan unless they have collateral in the form of real estate. Even the most diligent business operator finds that obtaining finance without this form of collateral is very tough indeed.

4. The property market and its associated activities provide a huge amount of employment and jobs for a very large range of suppliers and contractors. Vast numbers of painters, carpenters, electricians, plumbers, concrete and steelwork contractors, and many other trades rely absolutely on a vibrant investment market for their livelihood. If serious costs and obstacles are imposed on property investment, one of the first things to be discarded will be maintenance and improvements of properties, resulting in job losses and lay-offs across the board.

Is this what the Working Group wants? I doubt it.

These are but a few of the practical problems that have become obvious when considering the effects of the recommendations. No doubt many other distortions will emerge from this report in the weeks ahead. The Government should make its position clear earlier rather than later so any uncertainty is cleared up without delay.

Olly Newland
www.ollynewland.co.nz

UPDATE: Here’s another point of view worth reading from “Cactus Kate”.

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