Budget 2010: Tax breaks cut by more than $1 billion

Landlords who provide housing for about a million New Zealanders face huge changes from the Budget, with a number of tax breaks ending.

But so will some of the rorts.

Depreciation - write-downs in building values - end from next year, lowering commercial and residential landlords' tax breaks by more than $1 billion.

Loss-making companies, used by many landlords to hold their assets, lose their special tax status.

Inland Revenue will also mount a crackdown on tax-avoiding speculators and traders. Asset-rich, cash-poor landlords who make paper losses will no longer quality for state handouts and cutting the top tax rate from 38 per cent to 33 per cent will reduce tax losses wealthy landlords can claim.

Some experts say the changes are catastrophic for the sector, variously estimated to hold $60 billion-$200 billion of property.

Kieran Trass, of price monitoring business SuburbWatch, is a cashed-up landlord who quit six houses in the past three years. He says the changes will be disastrous for home-owners, tenants and landlords.

House prices would fall 5-10 per cent within the year, rents would rise from an average $310-$320 to $340-$350 a week and landlords would flood the market with house sales, he predicts.

"This is bad news. Rental properties will go on the market in the next nine months, before April 1 when depreciation is banned. This is also really bad for owner/occupier businesses who will turn over less due to GST rising to 15 per cent but get fewer write-downs from owning buildings," Mr Trass said.

Others supported the changes.

Real Estate Institute president Peter McDonald said he supported moves to make the tax system fairer and close loopholes that enabled some people and business sectors to rort the system.

Grant Straker, chief executive of software exporter Straker Interactive, was pleased with the Budget saying it levelled the playing field between landlords and exporters.

"Ultimately it will be good for New Zealand.

"Investment has been heavily skewed towards assets and particularly housing and not towards activities," he said.

John Shewan - a Tax Working Group member, PricewaterhouseCoopers chairman and a landlord - feels vindicated.

"Progress is being made, more than I expected. The tax cuts are deeper than I thought," he said.

Landlords would not panic and sell, nor would they be able to push up rents much, he said, siding with official estimates of around 1.5 per cent.

"I believe it was inappropriate scaremongering about rents rising. Nor are people going to be out on the streets. Houses are not going to go away. No one is going to burn them down because of the Budget," he said.

Property Investors Federation vice-president Andrew King expected much worse.

"It's not as bad as it could have been," he said, estimating that if ending depreciation was applied to chattels and buildings, landlords' cash flows would suffer by $35 a week on average. Only ending building depreciation would damage cash flows by around $15-$20 a week on average, he predicted.

Changes to the tax rate on loss-making companies were across-the-board and not just aimed at landlords, he said.

Stephen Murray, general manager of Milestone Homes which specialises in affordable residences, predicted tough times for builders.

"The present level of house building is not enough to meet the growth in population. The country is crying out for more affordable homes. If investors don't build them, who will?

"After months of insecurity, we're grateful to finally have some clarity on the way property investment will be taxed so we can get on with building the homes New Zealand so desperately needs.

"If the Government is serious about boosting productivity and prosperity, curtailing property investment is not the answer. The residential construction industry is one of the few sectors driving economic recovery. It is worth billions every year."

THE CHANGES

*End depreciation claims on rental housing and commercial property.

*Alter tax rules on loss-making companies.

*Ban landlords using losses to get state handouts, such as Working For Families.

*Fund IRD crackdown on tax-avoiding traders/speculators.

*Cut top tax rate, so reduce tax losses rich landlords claim.

THE EFFECT

House prices tipped to fall 5-10 per cent within the year.

Average rents rise from $310-$320 to $340-$350.

STOCKTAKE

1,651,542 homes in New Zealand

$568b estimated total value

$356,000 median NZ house price

550,000 homes are rented

69,000 operated by Housing NZ Corporation

Source: Kieran Trass, of price monitoring business Suburbwatch