Martin Hawes: Taxing times are on the way

Photo / Jason Dorday

Whether it is tax, rules for tenancies, state housing or incentives for home ownership, one of the difficulties with residential property investment is that it has always been a political football.

This football game is now being played with urgency and investors should expect moves against property.

I don't think policy shifts will be directed against owner-occupied houses - New Zealand's home ownership rate has declined over the past decade and no one wants to see it fall further.

However, there is already a groundswell against property speculation and those who own rental property should be wary.

I don't think the Government will impose a capital gains tax - government agencies know this will not permanently suppress property values.

However, the Tax Working Group, Treasury, the Inland Revenue and others in Government have rental property tax in their sights.

One of the Tax Working Group's ideas is a tax based on the Risk Free Rate Method (RFRM).

With this tax the equity that an investor has in a property would be taxed as if it was returning a risk-free rate - say, 4 per cent.

So, someone with a property worth $300,000 and a mortgage of $200,000 has equity of $100,000.

This means that the $100,000 of equity would be deemed to return 4 per cent, so they would pay tax on $4000.

Under this proposal, your rental income would no longer be taxed - but you couldn't claim as tax deductions property costs such as interest, repairs and insurance. This would slow the property market - property investors would find their cashflow worse with no tax refund and with tax to pay each year.

But by itself, it will not do enough to permanently shift New Zealand investment behaviour away from houses. That will take improved capital markets and encouragement of other investments.

A RFRM tax poses difficulties: investors would have to value their properties each year. Who would be used to do these valuations? And there would be a disincentive to repay debt as that would increase equity and therefore tax to pay.

But if not this tax, there will be another. At present, on aggregate, no tax is collected from property investment even though it is a $200 billion industry and there is determination to do something about rising property values.

This is not a time to have all your wealth tied up in residential rentals. With low yields and talk of new taxes, the risk at present is on the downside.

* Martin Hawes is a financial adviser. His disclosure statement can be found at www.martinhawes.com