Otago Property Investors Association Inc

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01-06-2018

Tax Working Group's property calculations questioned

The NZPIF made a submission to the Tax Working Group (TWG)who appear to have a directive to recommend a Capital Gain Tax in NZ.

We hope they are impartial, but in their background paper "Future of Tax" the TWG say that "property remains under taxed compared to other investments. For instance, any profits from the sale of a long term property investment generally isn't taxed." This is misleading statement as the IRD has confirmed that similar profits from the sale of shares, farms, businesses and other assets that grow in value are also untaxed.

However of most importance is that the TWG uses a study into Marginal Effective Tax Rates (METR). This study suggested that the METR for property was just 29.4% compared with 47.2% to 55.7% for other assets, leading the TWG to conclude that "Owner occupied and rental housing is undertaxed relative to other assets."

This didn't look right to the NZPIF, so we requested a copy of their workings for the study, so we could see how they came to their conclusion. As the calculations still didn't seem right to us, we commissioned Financial and Economics Consultancy, Morgan Wallace, to review the study.

Morgan Wallace produced a report showing that they had uncovered serious flaws with the TWG's study, leading them to conclude that apart from bank deposits, rental property is actually taxed at a higher rate than other asset classes.

A key flaw in the TWG study is that they assume capital growth for property but not for other capital growth assets. They treat PIE Funds, superannuation and companies like bank deposits, not only assuming they don't increase in value, but that they actually lose value due to the effects of inflation.

Morgan Wallace state that "the TWG paper cannot be accepted at face value. If a capital return component were to be included for PIE, superannuation and company investments, then all three would have lower METR than presented in the TWG research paper."

The TWG also didn't include a key asset class, being direct share investments. Morgan Wallace said that "If this asset class were to be included, it would also have a lower METR than rental property under the TWG Paper framework."

Given that this TWG study is a key piece of information that they will use to make decisions on changes to property tax, it is crucial that they realise the critical flaws it contains. If they continue to incorrectly believe that rental property is under-taxed, it is likely they will recommend measures to correct this.

According to the latest IRD data, rental property owners have paid tax on rental property income of between $1.3 and $1.5 billion dollars in each of the five years to 2016.

Rather than being the tax dodgers we are being portrayed as, rental property owners provide people with homes to live in. They are an essential part of the productive economy who pay their fair share of tax. It would be a significant mistake to make it harder for them to provide rental property at a time when tenants are finding it harder and more expensive to secure accommodation.

The NZPIF have submitted a full report to the TWG, including a copy of the Morgan Wallace report. You can view a copy of this on the NZPIF website.

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