KEY POINTS:
Tax experts are divided over Government threats to toughen tax policy for property investors.
Greg Dwyer, an Auckland economist who was the Treasury's former tax policy director, said landlords got a bad press and he took umbrage at the term "tax break".
Finance Minister Michael Cullen's proposals were a direct tax penalty for landlords, he said. Landlords would be treated differently from others in the economy.
"The term tax break implies a favourable treatment, a departure from the norm ... This is what Dr Cullen wants people to believe but it is simply not true," Dwyer said.
Rather than maintaining a neutral tax regime, the proposal would amount to nothing short of a penalty.
"The Government is examining a move away from the standard approach. Landlords would not be allowed to offset their loss on rental activities against other income. This would amount to the introduction of penal or discriminatory tax treatment rather than the removal of an existing tax break."
Mark Keating, a tax expert at Auckland University Business School, says there are good reasons for the clamour to tax capital gains on rental properties.
"Despite the policy of all Governments since 1984 to expand the revenue base, for political reasons capital gains generally remain untaxed.
"The absence of a capital gains tax means that, except in limited circumstances, profits from the sale of rental properties are free of tax. When compared with virtually all other forms of investment, this lack of tax provides a strong incentive for investors to put their money into rental properties."
But he believes landlords' ability to claim against expenses like mortgage interest, rates, insurance, repairs, maintenance and depreciation skew the field even further: a double-whammy of no capital gains tax plus the ring-fenced tax writeoffs.
This makes our tax system internationally unique, he says, because it amounts to a favourable treatment of losses from rental properties.
Our tax system supports and rewards rental property investment. Most sale proceeds are tax-free, too, so it is little wonder landlords are doing precisely what Reserve Bank Governor Alan Bollard objects to and loading up with debt, he says.
Westpac's chief economist, Brendan O'Donovan, submitted a paper to the commerce select committee which argued for the markets to make adjustments to housing affordability and for no political intervention.
He also showed how debt-servicing ratios had ballooned in the past 21 years. Landlords' returns were shrinking, hit by higher property prices, almost static rent and higher interest rates.
Rental yields which were just over 6 per cent in 1980s had now dropped to around 3 per cent. That was in line with declining yields in Australia, the United States and Britain.
Bernard Hodgetts, the Reserve Bank's acting economics head, said rents had increased at only half the rate of house prices.
"Between the end of 2001 and 2006, the rent index of the CPI increased by only 15.5 per cent, averaging 2.4 per cent growth per annum. House price growth averaged 11 per cent per annum over this period."
Robin Clements, senior economist at UBS NZ, said making rental property less attractive could result in a few landlords selling, but he does not see anything like a catastrophe.
"It could reduce a portion of buyer demand and put less upward pressure on prices. But there's no reason why the market would get flooded or any risk of house prices collapsing."
Instead, money which would have flowed into housing would go into "more productive" sectors of the economy, he predicted.
Tony Alexander, the BNZ's chief economist, submitted to the select committee that tax policy had helped generate the rise of the landlord class.
"By introducing a 39 per cent tax rate, the Government has increased the incentive to pursue investments delivering capital gains as opposed to income."
