Bernard Hickey: Robust tax proposals are difficult for Key to ignore

The golden age of property investment may be over. Photo / Herald on Sunday

There was an "aha" moment in the tax reform debate last year when it dawned on policymakers New Zealand had a problem.

Inland Revenue and Treasury unearthed a factoid that set the Tax Working Group's agenda.

It found there was $213 billion invested in residential rental property that generated losses for tax purposes of more than $500 million in 2008.

This reduced tax revenues by about $200 million. Too much was being invested in property because our tax system was broken.

Without reform the economy would be handicapped by a leaching of capital and talent to countries with lower taxes.

That was when the group decided to get serious about taxing property investors.

It makes no sense to invest four times the value of the stock market in property when it seems the aim is to make a loss to avoid paying the top personal tax rate.

The top 10 per cent of PAYE taxpayers pay 76 per cent of the taxes because of the effects of Working for Families. No wonder a quarter of New Zealand's graduates are overseas while those who remain structure their affairs to avoid paying 38 per cent tax.

This week's recommendations for tax reforms should be welcomed. They will be difficult for John Key and Bill English to ignore in the May Budget. The working group was careful to ensure its recommendations were revenue neutral and didn't force Key into breaking election promises.

The report will be harder to dismiss as politically impossible in the way the 2025 taskforce report was.

Many recommendations are politically possible.

They would see new taxes for property investors and tax cuts for the upper middle classes. The GST increase was not supported wholeheartedly by the working group and will not happen.

Labour will find it difficult to hammer both those tax changes too hard. Property investors are likely to complain. We will see how keen Key is to challenge his core supporter base.

The years from 2002 to 2007 when they could invest in an asset that wasn't taxed, arrange family trusts and make out like bandits as property prices rose may be seen as a golden age.

There may not be many tears for them. They have made capital gains and property taxes will not take those away.

Tightening noose

Possible reforms:

* Denying depreciation as a taxable expense on property would raise $1.3 billion.
* Denying 20 per cent depreciation loading on new plant and equipment would raise $600 million.
* Introducing a Risk Free Rate of Return method tax on equity in property would raise $760 million.
* Land tax of per cent with a $50,000/ha tax-free level would raise $1 billion.
* Cutting income tax rates and the 33 per cent trust rate to 30 per cent would cost $1.6 billion.