KEY POINTS:
The way the tax laws treat housing, and in particular rental property investment, is often cited as one of the reasons the boom of recent years has been so strong and housing affordability has become so big an issue.
The tax laws treat the buyer of a rental
property as having gone into business - the landlord business. They are therefore able to deduct costs such as interest payments, maintenance and depreciation incurred in the course of earning taxable income (rent).
Because rents have not increased nearly as fast as house prices and property investments are often highly geared, many landlords have tax losses which they can use to offset other sources of income, such as wages and salaries.
The value of that tax shelter increased in 2000 when the top rate of 39c in the dollar was introduced, contributing, some economists argue, to the strength of the latest period of house price inflation.
Ring-fencing those losses, so that they cannot be used to offset other income, is one of the suggestions for taking some pressure off interest rates and the exchange rate.
The Reserve Bank has also suggested that only real (inflation-adjusted) interest payments should be taxable and deductible.
That would reduce the deductions a heavily geared property investor could make, and it would increase the after-tax returns on bank deposits and the like.
But tax accountant John Shewan disputes the idea that the tax laws favour housing.
"That so-called distortion is greatly exaggerated. These investments are taxed the same way as everything else, it's just that rental yields are very low. People are hoping those losses will be offset by capital gains but right now some are probably ruing the day they bought rental properties."
To restrict loss offsets would put rents up, which would not be helpful for housing affordability, he said.
A capital gains tax on investment properties is sometimes advocated.
It has a theoretical rationale: If you increase your wealth by working you are taxed, but if you increase your wealth just by holding the right asset over the right period you are not. Why should the latter be sacrosanct?
"Conceptually, a capital gains tax is justified. It is just that no one anywhere in the world has been able to design one that does not create significant distortions," Shewan said.
Unless it is imposed on unrealised gains, it tends to have the effect of locking people into assets longer than they might otherwise hold them.
And with all the carve-outs and the provisions for capital losses they don't collect very much.
The McLeod tax review committee recommended a wealth tax, on a deemed return on assets including housing, an idea which drew a volcanic public reaction and was quickly dismissed by the Government.
"I share the Business Roundtable view, as you would expect [he is its chairman], that inflation is a matter of the general money supply, not of housing or fuel prices. Politicians complain about prices but they are just doing their job of rationing," McLeod said.
If the Government wanted to take pressure off house prices it would be better to look at regulatory restrictions on the supply of land, he said.
