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  1. #1
    Legend
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    Default What change will we see to property taxation?

    The powers that be aren't quite sily enough to introduce a capital gains tax. And disallowing interest, although taked about, flies in the face of common sense and accounting practise anywhere. It amounts to a tax on turnover rather than on profit and that's unworkable. (Only Jim anderton thinks that sort of nonsense can work, for those who remember Jim - he was easily forgettable.)
    So I'm picking the gummint will disallow depreciation as a deductible expense on residential property. That might not be a bad thing compared to any alternative. Land values usually increase so there's a built in compensation.

  2. #2
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    The tax working group report is here:
    http://www.victoria.ac.nz/sacl/cagtr...rt-website.pdf

    Page 44 has suggestions for broadening the tax base. Seemingly something akin to FDR for property - i.e. a deemed nominal risk free return (RFRM) of 6% on property investments.

    Also suggestions re land tax and modifications to depreciation.

  3. #3
    Legend minimoke's Avatar
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    I'm not sure we'll see any in the short - medium term. But its something I'll have to look at more closely.

    Initial thoughts though.

    The governement and city councils are substantial land and residential property holders. Any tax increases are likely to impact on the tax payer to fund central and local governemtn obligations.

    Maori have considerabe land holdings (and getting bigger with treaty settlements). National (and later Labour) are unliky to do anything that impacts on the Special Peoples pockets. If you are looking for evidence look at how forests were handled as part of the ETS negotiations.

    Politicians have considerable personal holdings in property. Even the Greens hold rentals in trust for their MP's superannuation. We might like to think that there is no self interest with our politicians behaviour - but that would be naive and wrong.

    Politicians also rely on their electotate to vote them back in. Most of the electorate either owns property or has a desire to own property - this desire is still fuelled by Governement policy. A government is unlikely to implement change at the risk of loosing votes.

    Anything that impacts the return on rental property has to be closely looked at. Allready, IMO, the return is pretty dubious. The governemnt is unlikely to do anything that will increase the costs of owning a rental for fear of people quitting rentals or not putting any money into them - leading to squalor for renters.

    Capital Gains Tax and deprecition on Rentals are two easy things to look at. But IRD already has the power to look at the depreciation claimed aganst the sale value achieved - though it seems perhaps they don't have the resources to look at this in much detail. But it is, again IMO, clearly a rort.

  4. #4
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    Quote Originally Posted by minimoke View Post

    But IRD already has the power to look at the depreciation claimed aganst the sale value achieved - though it seems perhaps they don't have the resources to look at this in much detail. But it is, again IMO, clearly a rort.
    It's hard to see a rort. All plant and equipment in any other taxable activity is allowed to claim depreciation - why should it not be allowed on buildings?

  5. #5
    Legend minimoke's Avatar
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    Quote Originally Posted by fungus pudding View Post
    It's hard to see a rort. All plant and equipment in any other taxable activity is allowed to claim depreciation - why should it not be allowed on buildings?
    Because there are two main components to the residential rental market. One is land; the other is improvements. Buildings only make up part of the improvements. Depreciation applies to curtains and stoves etc as well. Land has increased in value but not to the extent shown in property valuation increases - particularly pre 2007 peaks. Which means the other part of the increase has had to come from the improvements. So the improvements have actually increased in value rather than depreciated.

    I'm not suggesting that the depreciatiton shouldn't be allowed - its just how it is treated at sale time.

  6. #6
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    The most simplistic change would be to not allow depreciation on rental properties and this may be politically acceptable...
    Death will be reality, Life is just an illusion.

  7. #7
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    Quote Originally Posted by minimoke View Post
    Because there are two main components to the residential rental market. One is land; the other is improvements. Buildings only make up part of the improvements. Depreciation applies to curtains and stoves etc as well. Land has increased in value but not to the extent shown in property valuation increases - particularly pre 2007 peaks. Which means the other part of the increase has had to come from the improvements. So the improvements have actually increased in value rather than depreciated.
    But that's the nominal increase. In real terms it will have depreciated, or moved further below its replacement cost.

  8. #8
    Legend minimoke's Avatar
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    Quote Originally Posted by fungus pudding View Post
    But that's the nominal increase. In real terms it will have depreciated, or moved further below its replacement cost.
    The improvements no doubt move below replacement cost - but it appears property buyers are prepared to pay a premium for those improvements at the time of sale/purchase. In the end it is the owner at the time of replacement that bears the cost of replacement - previous owners have had the depreciation.

    Its probably about time for residential rental owners to look at rentals as a revenue opportunity rather than a tax vehicle. This is wheer I think cjages to teh tax system can be made - but it won't be easy and there will be fall out.

  9. #9
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    Quote Originally Posted by minimoke View Post
    Its probably about time for residential rental owners to look at rentals as a revenue opportunity .
    As a revenue opportunity, majority of residential rentals suck. There is inadequate risk premium built in. Govt flirtation with property may cause, among other things:
    1. Property values to dip short-term, then rise wiping out the Kiwi dream
    2. Private investment to quit residential rentals forcing Govt to supply social housing
    3. Rents to rise exponentially in the short-term leading to inflation = headache for Govt and RBNZ
    4. Damaging the one investment Mrs and Mr Kiwi trust and understand, without contributing to the increase in either trust or knowledge of competitive risk assets

    Revenue paucity is taxing the Govt, and as usual residential rentals have been picked as everybody's favorite fall guy. Raising GST is fairer and the lesser evil. Given our current account and imminent budgetary need, change is certain - even desirable. But where and how? Maybe its time long-term (system ripper) beneficiaries and (low risk) prisoners were gainfully employed in social projects. Let each man and woman carry their fair share of load. Or is it not yet?
    Last edited by beacon; 21-01-2010 at 10:06 AM.

  10. #10
    Legend minimoke's Avatar
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    Quote Originally Posted by beacon View Post
    Govt flirtation with property may cause, among other things:
    1. Property values to dip short-term, then rise wiping out the Kiwi dream
    2. Private investment to quit residential rentals forcing Govt to supply social housing
    3. Rents to rise exponentially in the short-term leading to inflation = headache for Govt and RBNZ
    4. Damaging the one investment Mrs and Mr Kiwi trust and understand, without contributing to the increase in either trust or knowledge of competitive risk assets
    Which is why I don't think we'll see govt fiddling too much.
    1 = lost votes
    2 = This isn't what National is about. They are supposedly about less government - not more
    3 = this is an area that does need addressing - rents do need to rise to make the investments worth while. (but that then mean slook at teh Accomodation Assistance in the various govt benifits - means more tteh govt wil lhave to pay which means more taxes collected.
    4 = Too many investors stung by '87 and '08 to want to go anywhere other than property.

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