Mark Fryer: Beware Cullen's quiet scheme

COMMENT

Funny how some politicians' pronouncements set off a storm of debate while others sink with barely a ripple.

For once, we're not talking about Don Brash.

The pronouncement in question was one of the sink-without-a-ripple variety, from Michael Cullen.

Earlier this month, the Finance Minister told a Christchurch audience that the Government's work on tax would include a look at the depreciation rules as they apply to rental property.

This might have been expected to send a shiver down the collective spine of the rental property-owning classes.

After all, depreciation is a frequently quoted advantage of property investment. The ability to claim that the value of a property falls by a certain percentage every year has allowed many a landlord to turn a positive cashflow into a tax loss, thus reducing tax on other income.

And, even if Inland Revenue does eventually claw back depreciation when the property is sold, it can be a handy tool for moving tax liability to later years, when an investor might have a little more money, or be on a lower tax rate.

Given those advantages, one might have thought that even the hint of a threat to the current rules might have been ever so slightly controversial. So far though, the silence has been deafening.

That might change next month, when the Government is due to come out with an issues paper on depreciation. Among other questions, that will look at whether present rules accurately reflect the cost of owning an asset.

In the case of property, logic suggests that the present rules may be on shaky ground. As real estate boosters never tire of reminding us, property tends to rise in value, not fall.

Of course investors can take comfort from the fact that the Government would hardly retrospectively change the tax rules applying to existing property investments - can't they?

Perhaps not.

After all, the Government has already demonstrated that it isn't afraid of a little retrospectivity when it comes to attacking the tax benefits enjoyed by mass-marketed tax schemes, for example, or masthead leaseback deals of the type used by the owners of this newspaper.

For investors, the current tax rules might not be safe as houses.