A study from the tax working group and comments from an economist have been used recently to claim rental property is under taxed and rental property buyers have an advantage over home buyers. Both the study and the comments are incorrect.

In a background paper to their work, the working group included a study in marginal effective tax rates between different investments or assets. The study showed marginal tax rates on other assets were around 47-56 per cent but rental property was only 29 per cent. The group determined from this that rental property was under taxed compared to other investments.

Surprised by this result, the NZ Property Investors' Federation engaged the financial and economics consultancy, Morgan Wallace, to review how the study came to its conclusion. Morgan Wallace produced a report showing that there were serious flaws with the study. A key concern is that capital growth was assumed for property but not for other assets. This meant all of the return for other assets were taxed, but only the rental portion of rental property returns were taxed.

In other words, they treat PIE funds, superannuation and companies like bank deposits, not only assuming they don't increase in value but that they actually lose value due to the effects of inflation. In addition, the study did not include shares which clearly increase in value over time.

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Given that this study was a key piece of information the working group would use in their decisions on recommended changes to tax laws, it was crucial that they realise the critical problems the study contained. The Property Investors' Federation was grateful to the group for considering our concerns, agreeing with them and confirming that rental property isn't under taxed compared to other assets as their background paper had originally claimed.

Officials for the group said the study's assumptions about the allocation of returns between taxable income and tax-free capital gains were hypothetical and arbitrary. They also said rental property was modelled differently from other assets when it shouldn't have been.

They confirmed that if the study had treated other assets that also had a capital growth component the same way they treated rental property, then rental property would actually have a higher marginal effective tax rate because of local government rates.

At a meeting with the group, they agreed with the Morgan Wallace conclusion that rental property was not under taxed compared to other assets.

A second and separate issue raised recently was that rental property owners have a tax advantage over first home buyers. This was an opinion by Westpac economist Dominick Stephens, who claimed rental property has tax advantages over home buyers and that this has led to a reduction in the rate of home ownership since the early 1990's.

However, claiming expenses as a deduction against taxable income has always been a tax law that exists for all businesses and investments. If an investment or business makes taxable income, then expenses are taken away from the gross income to work out how much tax is payable on the net taxable income.

Rental property owners can claim expenses as a deduction because they receive rental income to deduct the expenses from. Home buyers do not have an income stream to deduct their expenses from. When buying a home they receive the benefit of accommodation rather than taxable rental income.

The two situations are completely different. Just because a rental provider can claim expenses from their rental income does not make buying a property easier for them compared to a home buyer.

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These tax laws have always been in place and therefore had nothing to do with home ownership rates falling since the 1990s. What did change in the early 1990s was the removal of government assistance for first home buyers. This is the more likely reason for a reduction in first home buyers since that time.

Whether the tax working group recommends a capital gains tax or not is up to them. However, Stephens admits that if one was introduced it is unknown if prices would fall or not, and even if they did, it would only be a one off occurrence. His view is backed up by other countries with a capital gain tax that have still had high levels of house price growth.

It is difficult to see why New Zealand would be any different, especially when owner occupied housing would be exempt from such a tax.

Stephens also got it right when he stated that a capital gains tax will increase rental prices, a factor that will make it even harder for tenants to save a home deposit.

* Andrew King is executive officer of the NZ Property Investors Federation.