'Will my sector be next?' - BusinessNZ slams Government's move on interest deductibility

Prime Minister Jacinda Ardern and her colleagues announce the Goverment's move on housing affordability on Tuesday morning in the Beehive. Photo / Mark Mitchell.

BusinessNZ has warned a removal of tax deductibility on interest payments for residential property has other sectors worried whether they will be targeted, likening it to the uncertainty created by the 2018 oil and gas ban.

Kirk Hope, chief executive of the influential lobby group, also accused the Government of being "misleading" in the way it is describing the issue as a "loophole", because in all other sectors of the economy business expenses are tax deductible.

On Tuesday the Government announced a range of measures aimed at improving home affordability for first-time buyers, ranging from extra funding to help councils make land available for development, to a doubling of the bright-line test from five to 10 years.

While most elements of the package were expected, the package included surprise news that Cabinet had agreed to remove the ability for property investors to offset their interest expenses against their rental income when they are calculating their tax.

Hope said the move had clear and significant implications for property investors, but now people were left wondering whether it affected other parts of the economy and was likely to see investment decisions paused.

"They've removed deductibility [of interest payments] from this group of people. Would that happen for a different sector for a different purpose, in terms of businesses being able to deduct particular types of businesses expenses?

Kirk Hope, chief executive of BusinessNZ, said the move on interest deductibility had other sectors wondering if it was going to be part of a wider move on business expenses. Photo / Michael Craig

"There are certainly going to be some people thinking about how they make investments, and it will have a stalling effect; there's no doubt about it," Hope said.

"The last thing we need right now is probably a stalling in business investment because of a decision made around housing."

Investors would be worried about whether deductibility more generally was being targeted by the Government, given the lack of signalling on the issue.

"If there are other areas they really need to be upfront about that. There's no doubt they should have signalled it in advance. It's a really substantial change."

After the Government made its decision, Treasury released documents showing officials had given virtually no advice on the question of interest deductibility, other than to urge the Government not to make the move until analysis had been conducted, blaming the tight timeframe.

It was unclear whether Finance Minister Grant Roberson had received other advice on the implications of the move.

Tax expert Robin Oliver said removing the tax deductibility of interest payments on loans was "out there" and the way it was announced raised New Zealand's sovereign risk. Photo / Mark Mitchell.

Asked if Robertson had received any advice aside from Treasury, his office would only say: "We sought Treasury's advice in the last part of last year, which we have received and considered. These are big decisions, particularly around interest deductibility - which is why we are consulting on that."

Hope said the decision had similarities to the Government's 2018 "oil and gas ban", where the Government abruptly decided to halt the offering of new exploration permits with virtually no consultation with the industry or advice from officials.

"It's certainly of the same type, therefore, it has the same implications. It makes people question 'is our sector going to be next?'," Hope said.

"Making the determination that this is the right policy decision to make and deciding to do the work later is probably not the right way to make public policy that is sustainable."

Tax expert Robin Oliver, a former deputy commissioner at the IRD, described the Government's move on interest payments by landlords as "out there".

Oliver, who sat on the Government's tax working group in the last term said he could not think of an example of a sector being unable to deduct an expense which was available to all other sectors of the economy.

It would amount to "a massive tax penalty on renting out property," he said.

"You're taxed on income that you don't actually have, because your profit is your income minus your expenses, but they just ignore the expenses part," Oliver said.

"You could have almost no profit, maybe a loss, but you still have to fork out thousands of dollars to the IRD. It's not an income tax, it's just a penalty."

Oliver claimed a sharp drop in the Kiwi dollar since the announcement likely reflected international investors fretting about the risk of putting money in New Zealand. "You invest in a country where ministers stand up and suddenly deny your businesses expenses [you'll say] 'I better go somewhere else."

Economist Cameron Bagrie said it was unacceptable for the Government to make such a significant decision without proper advice. Photo / Stuart Munro

Cameron Bagrie, managing director of Bagrie Economics, said the fall in the dollar probably reflected the expectation that interest rate increases were now "completely off the table" for the foreseeable future.

But in an environment where Government intervention was inevitably going to increase it was shocking that no advice had been provided on the move.

"If the Government chooses to ignore that advice, fine. That is a political call, but I find it just unacceptable that there's no advice ... on a major initiative such as that. It sets a very dangerous precedent."