Rental property tax creates 'wrong incentives' - Treasury

John Whitehead praised the suggestion of swapping tax from incomes to GST. Photo / Sarah Ivey

The Government is continuing to soften up the public for changes to the rental property taxation regime with Treasury Secretary John Whitehead the latest to land a few blows about problems with it.

Treasury released Mr Whitehead's notes for a speech delivered yesterday to the Institute of Managers.

He said the current design of the tax system was creating the wrong incentives.

"By illustration, 1996 was the last year that more people made profits than losses from rental properties and there were 115,000 private rentals, yet the number of private rental properties has very significantly increased since then," Mr Whitehead said.

He wondered why rational people would pour billions of dollars into an unprofitable investment.

"People can claim depreciation against their investment properties - even when most real estate was significantly increasing in value; they can deduct tax losses on property against other income; and if they sell a rental property, the capital gain they make is usually untaxed."

Mr Whitehead praised the suggestion of swapping tax from incomes to GST and the need to more closely align the top income, company and trust rates to minimise tax avoidance.

He praised the Tax Working Group process as having highlighted unfairness in the system and building a constituency for change, and quoted recent polling that said 65 per cent of people thought the current system was unfair and 79 per cent thought it needed reform.

The Government is currently considering across the board tax cuts funded from lifting the GST rate to 15 per cent and changes to the property tax regime.

- NZPA