Finance Minister Grant Robertson. Photo / Mark Mitchell
OPINION:
Finance Minister Grant Robertson emphatically ruled out changes to the bright-line test during the election campaign and in anyone's book the tax changes announced last month constitute a major broken promise.
These changes have been rushed out for political expediency despite IRD strongly advising against them. Buried on page 53 in fine print of the Regulatory Impact Statement published on the IRD website it says "Inland Revenue recommended against both extending the bright-line test and denying interest deductibility".
In a well-functioning democracy, a re-distribution of wealth of that magnitude should not be rushed out the door in a desperate attempt to be seen to be doing something to fix the housing shortage.
These tax changes should've been part of the policies Labour campaigned on so that a legitimate and transparent debate could take place.
The excuse? The facts have changed. That simply does not wash. The facts are going to constantly change in the world we live in and Robertson should've borne that in mind before deceiving voters by making false promises.
Since the CGT fail, Labour have made a series of attempts to inflict financial pain on landlords across the residential and the commercial property sectors in New Zealand.
First there was the attempt in 2020 for the Government to intervene in private commercial arrangements to force commercial property landlords to give rent relief as a result of covid. Government intervention in private contracts is almost unheard of and top official advice at the time pointed out the risks to New Zealand's international reputation for not respecting the sanctity of private commercial contracts. Once again Labour ignored that advice.
This year the Herald uncovered evidence from an Official Information Act request that Robertson twice ignored advice from Treasury to include landlords in the Business Finance Guarantee Scheme.
In doing so, bizarrely and perhaps revealing Robertson's true feelings towards property investors, Robertson put property developers and investors in the same category as weapons dealers, whale meat processors and the illicit drug traders as the only other sectors unable to access the preferential loan scheme.
And now we have a new $1b a year tax impost on property investors announced by Robertson without any consultation or public debate and once again, against the advice of Treasury and IRD.
A pattern is emerging of a Labour government with a major chip on its shoulder against property investors in New Zealand.
One could be excused for reaching the conclusion these sustained attacks on property investors are driven by socialist wealth redistribution ideology rather than genuine, well-intentioned, well thought out and properly considered reforms.
Property investors are business people. They operate in a market where demand from tenants exceeds the supply of houses.
Most landlords will increase rents because of the tax changes.
Renters who are struggling to save for a house will have less in the bank at the end of each week to put towards a deposit on a house.
In addition the tax on sale under the bright-line test is the easiest to avoid by simply selling in 10 years instead of 9 years and 364 days (or less).
The tax will therefore only be paid by those investors who are forced to sell because of unfortunate circumstances where they must sell and cannot wait for the 10-year clock to tick over.
Let's examine some common situations for hard-working New Zealanders who will now be hit with large tax bills because of these changes.
Aroha is a 28-year-old single mother with two preschool children. She has saved for her first house with the help of her whānau. She takes in two boarders to rent out some of her house to help pay her mortgage and to help look after the children when she is at work.
The IRD requires Aroha to measure the proportion of her house use by the boarders. She finds that the boarders are using more than half her home as she has to measure cupboard space, shared toilets, and garage space. Aroha will face a large tax bill from the IRD if she sells at a gain to upgrade to a bigger house.
Example 2: Ken and Shirley move out of their house to do a major renovation, which takes longer than 12 months.
They move back into the house and five years later move to Auckland to be closer to family. A buyer offers them a great price and they sell at a gain after the renovations and plan their exciting move to Auckland.
Their dreams however are shattered by news that the IRD will be taxing them tens of thousands of dollars. Because the house was not lived in for 12 months or more while they rented, some of their capital gain is taxed.
The possibility of Inflation appears to be back on the radar for the global economy, which is why we have seen a spike in the 10-year bond rate in some countries, including New Zealand since last year.
If inflation moves to, say, 3 per cent on average and a residential investor sells a property after 9.9 years, his real gain is only 65 per cent of his gain that would be taxed under the bright-line test. That's because 35 per cent of the purchasing power of money has been eaten by inflation over that period.
So a $100,000 gain is actually only a real gain of $65,000.
Tax of $39,000 would be paid on that gain, which represents a real tax rate of 60 per cent not 39 per cent.
Property investors who borrow pay interest. Interest payments are a cost of doing business like any other cost. That is not a "loophole". It has been part of tax law for more than 100 years.
If Robertson is going to prevent these expenses being deducted each year, surely they should be allowed to be deducted if there's a sale at a gain inside 10 years.
These tax changes not only constitute a brazen breach of promises made by Labour during the last election campaign, they have been rushed out without being properly considered or debated and against the advice of the IRD.
If this does not constitute an abuse of power then I'm not sure what does. Trust between the voting public and a Prime Minister is an essential ingredient to a party to remain in power and can easily be lost. Broken promises of this scale do not occur without political consequences and Jacinda Ardern should be well aware of that given the public reaction to these rushed tax changes.
- Troy Bowker is executive chairman of Caniwi Capital, a privately owned investment firm involved in private equity, commercial property and farming
Demand for bonds may well stay strong, but there's a catch.