Government changes to the way Property Investment is taxed

The Government's threatened changes to the way residential property investment is taxed has scared off buyers.  We put our house on the market in February (nearly 3 months ago).  The main lookers have been DINKs (double-income-no-kids) couples looking for a house for themselves, or parents looking on behalf of their grown children. The market has since had a flood of properties come on, less buyers out looking and a very real rise in mortgagee sales. So just what is it the Government are planning to do that has scared people off investing in residential property?

Here's an excerpt from the National Party's www:

"we will not be developing any proposals for a land tax, a comprehensive capital gains tax, or a risk-free return method (RFRM) for taxing residential investment properties. These decisions were taken after detailed consideration of the pros and cons.

Since there is only a certain amount of land, and it can't be moved overseas, a land tax appeals to economists as an efficient way to raise revenue. However, a land tax is effectively a lump-sum tax on people who own land at the time the tax is introduced, would only fall on people who hold their wealth in one particular form, and would create cash flow problems for many landowners, especially those with lower incomes.

An RFRM is another tax that, while having some conceptual appeal, would also create cash flow problems for taxpayers. A property owner could have a very sizeable tax bill each year under an RFRM, but little or no ability to pay it, except by putting up rents.

A comprehensive capital gains tax extends the tax net and is highly progressive. However in the Government's view it would make the tax system more complex to administer and comply with, and may encourage taxpayers to hold on to assets longer simply to avoid tax.

These new taxes are therefore off the table.

However the Government does believe there is a gap in the current tax system around property investments where income is being derived but, in aggregate, no tax is being paid - in fact the Government is actually losing revenue in this sector. We will therefore be making changes to the way property is taxed, which will result in increased Government revenue and more fairness for taxpayers. These changes will be announced in the Budget.

The Government is also carefully considering a modest increase in the rate of GST, to no more than 15 percent."

So the capital gains tax is not going to happen, the land tax is not going to happen, but something is going to happen. It is this uncertainty that is keeping buyers at bay. (There's lots of sharks about though - people with cash who can swoop in and pick up bargains as some vendors get more and more desparate to sell).

The way that depreciation on a rental property is worked out is likely to change.

The May 2010 Budget also promises to deliver an income tax cut across the board, but particularly for higher income earners. Including the ACC Levy income earned over $70,001 is now taxed at a whopping 40 cents in the dollar!  This is the new post 1 April 2010 personal income tax breakdown:

Up to $14,000 = 14.5 cents per $1
14,001 - 48,000 = 23 cents per $1
48,001 - 70,000 = 35 cents per $1
70,001 + = 40 cents per $1

This isn't as high as Germany, but in New Zealand is it fair? Companies are taxed at 33c in the $1 and they get to write off the expenses incurred to earn that $1. Money invested in mutual funds and some overseas share funds etc is taxed at 30 cents in the $1.

Goods and Services Tax is going to go up from 12 cents to 15 cents. Prime Minister Key, on his Party's www, says people will have more take home cash, and it will be their choice to save it, or pay off their mortgage and thus not incur GST on it, or they can consume. Lower income earners will pay proportionately more GST because they have to use more of their income to live, that is, they have to 'consume'.  Businesses and sole traders registered for GST get to claim at least some of it back.

As a vendor trying to sell in this stagnent property market, we just want the uncertainty cleared up so people can get on with making their investment decisions. It's fair enough that they have to wait - you can not calculate potential cashflow in this environment.