Relief in property circles as most tax options ruled out

Photo / Janna Dixon

The vice-president of the Property Investors Federation is relieved that most housing tax options were ruled out in Prime Minister John Key's speech yesterday, but he is wary of what is to come.

Andrew King said Key had erred on the side of caution and been politically astute.

"It's what we expected but it's nice to hear it," King said in reaction to Key's speech to the House shunning most of the Tax Working Group's advice to hammer landlords.

Key ruled out a 0.5 per cent land tax which would net $2.3 billion annually and a capital gains tax and said there would be no introduction of a recommended scheme to tax rental income at the equivalent of a risk-free rate of return, pulling $500 million-$900 million a year.

King said most landlords hoped Key would not implement the Tax Working Group's recommendations which floated these ideas.

As for the May Budget, King said he was not too concerned and predicted only one change to the system.

"I think he's going along the lines of disallowing building depreciation. I can't see him banning Loss Attributing Qualifying Companies because the biggest users of those are forestry businesses. All banning those would do would mean residential investors would own properties in their own names and they would still get the same tax deductions," King said.

Axing building depreciation would bring in about $1.3 billion annually, the working group predicted.

King remains disappointed and angry about the group's report, saying it undermined the $200 billion residential property sector, created widespread misconceptions and skewed information which stirred up anti-landlord sentiment.

He cited a sub-report to the group from Inland Revenue and Treasury which said that in the last 28 years, landlords had paid tax every year except 2007 and 2008 when interest rates were so high that they claimed deductions on mortgage costs.

"The working group's report is misguided. It is not as thorough as it should be," King said.

But John Shewan - group member, landlord and Pricewaterhousecoopers chairman - said some multimillionaire landlords qualified as state beneficiaries because they appeared poor on paper.

He said the $200 billion tied up in residential rental property was four times the capitalisation of the NZX yet resulted in negative tax.

Lee Whiley, an Auckland landlord, is worried about disallowing depreciation and predicted this could halve his annual income from six properties.

Key released little about the Government's tax plans but said landlords would be made to pay their share.

"The Government does believe there is a gap in the current tax system around property investments where income is being derived but, in aggregate, no tax is being paid - in fact the Government is actually losing revenue in this sector," Key said.

"We will therefore be making changes [in the Budget] to the way property is taxed which will result in ... more fairness for taxpayers."