Property tax plan - how it stacks up

Photo / Janna Dixon

Residential landlords who are retired could be hit hardest if tax changes proposed this week are adopted.

A tax director for tax consultants Ernst and Young, Aaron Quintal, calculated that a wage and salary earner would be less seriously affected than a superannuitant under the proposed changes.

Mr Quintal found that those retirees who depended on rental investments stood to lose a far higher percentage of their total income.

This week, the Government-appointed tax working group suggested turning residential investors' tax write-offs into tax gains.

Axing the 3 per cent a year depreciation on buildings, creating a new land tax at 0.5 per cent of the value of property excluding farms and cutting the top personal tax rate from 38c to 30c in the dollar are among the tax working group proposals which could hit the $200 billion housing rental sector hard.

Mr Quintal used the example of a rental property worth $360,000 - the Real Estate Institute's latest national median price.

A wage or salary-earning landlord getting $90,000 a year and paying PAYE tax would get the biggest breaks from the changes, he said.

That was because although they could be disadvantaged by many moves in the proposed shakeup, the drawbacks would be offset by a cut in personal tax.

Proportionally, the wage-and-salary earning landlord would suffer much less than the retired person because the amount of money they would lose in the changes would be only a tiny portion of their overall financial status - income and tax deductions.

But even if pensions rose as Prime Minister John Key suggested this week, Mr Quintal said superannuitants would be stung by the tax changes and would not gain as much financially from the tax cuts.

Wage and salary-earners can already claim about $6700 in depreciation and mortgage interest payment deductions.

But Mr Quintal said those landlords' total benefit from depreciation and interest under the proposed changes would be $24,960.

That was because although rental income was $18,200, the landlord was able to depreciate the building by $4800 and claim all interest costs of $20,160.

The retired landlord could claim the same benefits, but would not get the same big gains because they were on a much lower income and therefore a much lower tax rate.

Auckland Property Investors' Association president Sue Tierney said that if all the tax group's suggestions were implemented, retired investors would be severely affected.

It was a common misconception that property investors made large amounts of money, and most could pocket only about 50 per cent of what they received in rent.

"Many of them have worked hard for 20 or 30 years to build up their portfolios. They've scrimped and saved to make sure they aren't relying on a benefit," said Mrs Tierney.

The national tax director for accountancy company BDO, Alan Scott, said landlords had enjoyed tax benefits for too long.

"They've been getting deductions for their losses yet also getting a tax-free capital gain when they sell the property. Some people regard rental property as a tax shelter," he said.

Census figures show that in 2006, one in three households (33.1 per cent) did not own the dwelling they lived in.

- ADDITIONAL REPORTING: KARA SEGEDIN