A growing amount of evidence is emerging that the Government has been mislead by the Tax Working Group (TWG) over the merits of increasing the taxation for rental property.
Errors have been discovered in the TWG report to Government regarding depreciation claims, the value of rental property in New Zealand and the amount of tax refunds claimed by rental property owners. The very essence of the TWG’s reasons for increasing the taxation of rental property has been shown to be false.
Groups that disagree with the TWG’s figures and conclusions include The Society of Chartered Accountants, Inland Revenue Department, Treasury, Auckland University and the NZ Property Investors’ Federation (NZPIF).
Finance Minister Bill English confirmed in Parliament last week that Treasury had found errors in the TWG figures regarding depreciation of rental property.
The Victoria University-led TWG reported in January that up to $1.3 billion in tax could be raised; however English said “As (the Treasury) has done more work, their estimates of revenue have tended to come down." English said that the amount of tax Treasury predicted could be gathered was "significantly less than the TWG suggested".
Auckland University’s Retirement Policy and Research Centre (RPRC) has challenged the TWG’s assertion that New Zealanders have NZ$200 billion invested in residential rental properties, arguing the actual number is less than half that. The RPRC’s briefing paper suggests rental property was more likely to be worth NZ$60 to NZ$100 billion.
RPRC co-director Michael Littlewood said “The TWG took what was effectively only a passing comment on a possible level of rental property investment and has turned that into a reason for changing the tax system. New Zealand needs better quality information than was offered by the TWG on this apparently crucial point.”
The NZ Property Investors Federation (NZPIF) also point out that as rental property is mostly bought with borrowed funds, the amount actually invested is considerably less than $100 billion. The NZPIF estimate that the actual investment in rental property is more like $40 billion.
With a market capitalisation of $55 billion, New Zealanders actually invest more in the NZ share market than rental property. Even more money, $61 billion, is invested in the Managed Funds industry in New Zealand. These figures make a mockery of the TWG’s claims that New Zealand is over invested in rental property.
The NZPIF agrees with Auckland University that the difficulties with the $200 billion number need to be considered in any potential changes the government is contemplating in relation to the tax treatment of residential property investments.
Government have been told by the TWG that rental property is systematically under-taxed. However this is at odds with the IRD, whose Deputy Commissioner, Robin Oliver, told a Parliamentary Select Committee that rental property does not have a tax advantage over other investments. Oliver said “Rules about expenses for deducting costs such as interest, upkeep and maintenance, as well as paying tax on income were the same for investments in shares or anything else.”
This view has also been backed up by the NZ Society of Chartered Accounts. The Societies Tax Director, Craig Macalister, has questioned tax changes targeted at property investments when the rules are in fact consistent with those applying to other investment classes.
Probably the most damaging claim made by the TWG is the impression that Rental Property Owners make losses of around $500 million a year, resulting in paying no tax and in fact taking $150 million a year in tax refunds. This is a centre point in the recommendation to increase taxes on rental property. However the NZPIF has discovered that the TWG’s own research shows this claim to be deceptive.
The following graph is taken from the TWG’s own report, with the “Total net rental” line used to verify the loss of $500m made in 2008. The TWG have chosen to focus on this loss rather than the fact that tax was paid on rental property income for the vast majority of the studies 28 years.
The reason for recent losses is transient, explained by increasing mortgage interest rates from 2005 until their peak in 2008. Mortgage interest payments are the largest expense for most rental property owners. Government have not been given the complete facts.
Raising taxes on rental property based on there being a hole in the tax system with rental property owners taking money from the tax system is clearly wrong. The TWG have clearly misinformed Government in order to make their desire for higher taxation of rental property appear reasonable.