Property Investment in New Zealand: Tax changes in the too hard basket?

Posted: 16 Feb 2010

New Zealand property investors may have heaved a sigh of relief last week when the Government released its plan to reform the countries tax system

A recent report from the Tax Working Group had placed the heat on property investors, suggesting that they had enjoyed favourable taxation treatment for many years, Whilst the Group’s report also referred to offsetting recommended income tax reductions by an increase in GST, the major thrust of its report was focused on collecting more revenue from property investment, and a proposed land tax. In response, the Government’s announced plan appears to take the heat away from property investors, and owner occupiers – no land tax is now on the agenda. The focus appears to move back to increasing GST to offset against a suggested reduction in income tax, particularly for higher income earners. However, property investor’s relief may be somewhat premature. New Zealand enjoys an investment regime that carries no capital gains tax, an advantage for investors highlighted by the Group in its report. The Government was quick to assure investors that there was no intention to change that. However, the Prime Minister allowed wriggle room here by referring to rejecting a comprehensive capital gains tax, whatever that may mean.

The Group’s report had also referred to the extremely low tax take from property investors, many of whom used negative returns to build tax shelters, a strategy which the Group regarded as inequitable to other income tax payers. Picking up on the Group’s recommendations, the Government appears to have rejected a Risk Free Rate of Return (RFRM) tax on property income. However, senior Government politicians have since floated ring fencing of property tax losses as a possible solution. Removing property depreciation allowances does appear to be on the cards but the claw back on allowances at the time of sale would surely limit the additional revenue earning capability of this move. The uncertainty that currently abounds in the property investment market is not diminished by the Prime minister’s statement – We will therefore be making changes to the way property is taxed, which will result in increased government revenue and more fairness for taxpayers.

What the market now needs is certainty as soon as practicable. It is acknowledged that the Government must balance the rights and interests of all taxpaying groups. However, property investors play a critical part in housing the nation, and in helping to set affordable rents. Give them a decision and let them get on with the job.

Graham Crews