KEY POINTS:
The Government is considering removing the ability of rental property investors to claim losses against their taxes.
Finance Minister Michael Cullen told Parliament he was considering the move as a part of the Government's wider concerns about monetary policy.
"One option which emerged as having (a) potential positive
impact was the ring fencing of losses from residential property investment. This of course would not be new, it was the law in New Zealand before 1991."
Dr Cullen said the Government had not yet decided to implement the changes and was looking for support from National on the issue.
He claimed senior National MPs had differences over the merits of changes to the tax regime for rental properties, but Dr Cullen said it was worth investigating further.
"Since the repeal of those provisions in 1991 there was very, very substantial growth in losses which substantially outgrew the actual rental income and that clearly pointed to heavy (debt) gearing for the purchase of rental property, contributing probably to heating of the housing market."
National's finance spokesman Bill English said Inland Revenue Department officials had told MPs there was no tax advantage for rental properties over other investment types. In fact it was worse because it attracted a capital gains tax in some instances.
Dr Cullen disagreed, saying the IRD had only been talking about capital gains issues between different asset classes.
Dr Cullen said property had a tax advantage because people could borrow heavily and then claim losses.
"Housing purchasing is one of the very few areas that you can actually borrow 100 per cent of the purchase price with no prospect of actually a return on equity except in terms of the capital gain at the end of the process."
Mr English asked if the Government would legislate to remove the ability of property investors to claim losses against tax and/or banks' lending criteria.
Dr Cullen did not directly reply but said IRD supported ring-fencing of tax losses from rental properties.
NZPA reported last week that Revenue Minister Peter Dunne and IRD officials appeared before the finance select committee and were quizzed about why people had the impression that there was some tax advantage in investments in rental housing.
Deputy Commissioner Robin Oliver was blunt: "The short answer there is none."
Rules about expenses for deducting costs such as interest, upkeep and maintenance, as well as paying tax on income were the same for investments in shares or anything else.
Mr Oliver said the rules were tougher for housing investment than other types.
"In fact under the housing case, the capital gains boundary is brought back a bit. There are tighter rules to what is a capital gain." Mr Oliver said.
Mr Oliver said the concern appeared to be that housing was easier to get and it was easier to get loans from the bank to invest in property.
"The concern is the level of (debt) gearing that is possible in the house market which& is a matter of the willingness of banks."
- NZPA
