is a director in Auckland accountancy firm William Buck Christmas Gouwland.
In the Weekend Herald, Labour's housing spokesman Phil Tywford claimed New Zealand is being deprived of $100 million in tax by people living overseas. He said "overseas speculators" are using negative gearing which allows them to claim tax deductions for expenses such as interest and maintenance, and this results in 35 per cent of overseas investors not paying tax.
Further, Twyford said overseas investors reported tax losses of $300 million on rental properties, which could mean a tax write-off of up to $100 million.
He has overlooked a number of relevant factors. Firstly, negative gearing is not the practice of claiming tax deductions for rental property expenses. Negative gearing is, in fact, the significant borrowing of money by an investor to finance the rental property purchase.
At the beginning of rental ownership, this will cause an investor who borrows a significant portion of the purchase price to make a loss on the investment in the short term. However as the rent received on the property increases over time, and as the mortgage is repaid over time, the property will make a profit.
Negative gearing is not something unique to overseas investors. Most local investors borrow significantly as well when they purchase residential investment property.
Any overseas investor making a loss has to pay for that loss. So the investor is constantly contributing money to pay these expenses. Real money is being lost, which the overseas investor is contributing to the New Zealand economy.
In fact, the overseas investor is probably contributing more to the New Zealand economy than a local investor as they are more likely to hire a property manager to look after the property. They will also have other expenses such as employing a chartered accountant as they are unlikely to be familiar with the New Zealand tax rules.
Tywford comments that on average a local investor pays $818 in tax as opposed to $478 in tax on average for an overseas investor; a difference of $340. Assuming a property manager and chartered accountant are employed, the overseas investor could easily be paying GST in excess of $340 a year.
Of course, because they are overseas investors they will not be consuming services, which their taxes pay for, such as health, welfare and education, which local investors will be enjoying.
Overseas investors will pay income tax on their rental property when it is subject to the two-year bright-line test, just like a local investor would. In fact, overseas investors are penalised in that residential land withholding tax must be deducted from applicable sales, which does not generally apply to local investors.
It is simply untrue that overseas investors who reported losses of $300 million are causing a loss to New Zealand of $100 million in tax. Anyone who makes a loss is not taxed on that loss.
If, instead of making a loss the overseas investors broke even, they would still not pay tax as a profit has not been made. So, irrespective of whether overseas investors lost $300 million or nothing, they would still not be liable for tax, and the New Zealand taxpayer has not missed out. The only one losing out is the overseas investor who is suffering the loss.
Local investors gain more from making a loss as they can offset that loss against their main income, something the overseas investors can't do. Tywford says "But hard-working New Zealanders get up every morning, go to work, and pay their taxes while these investors are pocketing hefty tax breaks to subsidise property speculation".
The reality is - those hard-working New Zealanders are pocketing the tax breaks. The overseas investors pocket nothing.
And, those hard-working New Zealanders can purchase a property on the Gold Coast and make a loss. They can claim that loss against their New Zealand income, something an overseas investor can't, and thereby pocketing the tax break.
New Zealanders returning to New Zealand after being overseas for 10 years are not liable for tax on their overseas income for four years - a tax break overseas investors can only obtain by coming to permanently live in New Zealand.
Finally, overseas investors take a significant currency risk. On the eventual disposal of the rental property the New Zealand currency could have depreciated, resulting in an overall loss for the overseas investor.
So are overseas rental investors really ripping off hard-working New Zealanders? I don't think so.