Thursday, May 20, 2010
Mike Butler: The Budget and property investors
The fact that depreciation is recovered by the Inland Revenue Department on the sale of a building has largely dropped out of the debate on the issue. The absence of depreciation can increase annual tax substantially. A pre-and post Budget comparison shows the difference.
For instance, a sole trader investor who owns 10 multi-tenancy residential rentals in his or her own name with a before-tax income of $120,241, claiming depreciation of $24,147, before Budget 2010, had a taxable income of $96,274, and tax to pay of $26,134.
After Budget 2010, without depreciation and using the new income tax scale in which income up to $14,000 will be taxed at 10.5 percent, down from the current 12.5 percent; tax on income from $14,001 to $48,000 will be 17.5 percent, down from 21 percent; income from $48,001 to $70,000 will be taxed at 30 percent, down from the current 33 percent; and the top tax rate, on income over $70,000 will be cut to 33 percent from 38 percent; that investor would pay $30,597 in tax, an extra $4463.
The GST increase to 15 percent would add a further $2917 to the $145,874 total expenses. In other words, that sole trader investor would be immediately worse off by $7380, assuming his buildings were deemed to have a useful life of 50 years or more.
In other changes relating to property, the government is removing the 20 percent accelerated depreciation loading for new plant and equipment purchased after Budget day. Property investors will be prevented from using rental losses to inflate Working for Families eligibility and payments, from April.
Inland Revenue will get funding over the next four years to target property speculators who have been avoiding paying tax on their trading gains. There will also be changes to tax rules for qualifying companies and loss attributing qualifying companies, so shareholders cannot deduct loses at their marginal tax rate and pay tax on profits at the lower company rate. That comes into effect next April.
It could have been worse, if the John Key led National government had opted for a capital gains tax or a land tax. The targeting of LAQCs was a long-time coming. I have always avoided negative gearing since the negatively-geared one just needs to lose the day job to find oneself bankrupt. However, there will be a number of investors with little equity who could go over the edge as a result of this change, meaning they would most probably seek to cut their losses and sell.
Yes, many investors own and run rental properties to make money, a fact that seemed to surprise Sean Plunket when he interviewed Andrew King, who is vice president of the New Zealand Property Investors’ Federation, on Morning Report today. The sector has been inaccurately depicted as an opportunity for wealthy people to avoid tax.
Finance Minister Bill English commented this week that New Zealand cannot become rich by people selling houses to each other. What English does not seem to appreciate is that while workers are processing the food that is grown on the land, that is and has always been the backbone of the New Zealand economy, they do need to live somewhere.
The property sector is a part of the economy. Ask the builder, plumbers, electricians, cleaners, painters, gardeners, architects, and councils, all of whom exist off the back of the property sector.
An enlightened government would seek to foster partnerships with property investors, not use them as scapegoats to deflect attention away from bloated government, and policies to please special interest groups.
Some of English’s tax changes for property are largely a knee-jerk reaction based on faulty advice on a poorly understood sector.
at 5:41 PM