Mike Butler: Tax reform must benefit everybody, even property investors

Over the past 10 years, I have seen a steady stream of people invest in property to cope with their changing tax circumstances.

Therefore, I would agree with Tax Working Group chairman, Professor Bob Buckle, who wrote (in the Dominion Post, January 16) that raising the top tax rate in 2000 and the bringing in the Working for Families policy undermined the New Zealand tax system.

Raising the top tax rate and breaking the alignment between corporate, trust and the top personal tax rate in 2000 created incentives for people to divert income into lower taxed entities, Professor Buckle wrote.

Any family receiving the Working for Families benefit earning more than $48,000 faces a tax rate of 53 percent or 58 percent on any extra dollar of taxable income. This creates an incentive for recipients to split or shelter income in trusts or other entities to qualify for that benefit.

If those two initiatives increased investment into residential property to minimize tax, then the logical starting point to fix the tax system would be at least to unwind those two policies.

But does the current government have the courage to touch Working for Families and the 39-cent top tax rate, or will it merely make a few further piecemeal changes regarding property investment?

Comments from Prime Minister John Key, Finance Minister Bill English, and an array of others, has put the focus on extending tax on residential property, such as a capital gains tax or land tax, and on closing loopholes.

The working group’s report is much more wide-ranging. It recommends, among other things, that:

1. The company, top personal and trust tax rates should be aligned.

2. New Zealand’s company tax rate must be competitively aligned, especially with that of Australia.

3. The imputation system should be retained.

4. The top personal tax rates of 38 percent and 33 percent should be reduced to position the economy for growth.

5. A comprehensive capital gains tax is the most effective way of broadening the tax base. If not a capital gains tax, returns from investment into residential property could be taxed on a deemed rate of return calculated at a risk-free rate.

6. A land tax had working group member support.

7. Depreciation on buildings should be not allowed if the buildings could be shown to have not depreciated.

8. An increase in the GST rate to 15 percent would have to be accompanied with support for those on low incomes.

9. There should be a comprehensive review of welfare policy and the impact it has on tax.

The composition of the working group gave the impression of a bias against property investors. NZSX head Mark Weldon, who promotes investment in the stock exchange, and economist Gareth Morgan, who promotes investment into managed funds, sat among the 13 tax professionals, academics, representatives from the IRD, Treasury, and even from the Child Poverty Action Group. There was no one representing property investors.

It would be helpful if tax reform benefited everybody, even property investors. If piecemeal changes drastically shrink property investment returns, that, plus unbalanced tenancy law, patchy rent payers, misbehavior, and continual damage, will start an exodus of investors from the sector.

This poses a huge risk for the government. Since private landlords control 340,353 (75.3 percent) of the 451,965 rented dwellings in the nation, the government simply cannot afford to get it wrong.

Mike Butler is a property investor and manager, author of The First Colonist -- The life and times of Samuel Deighton 1821-1900, former contract writer for the New World Encyclopedia, and chief sub-editor of the Hawke’s Bay Herald-Tribune (1986-1999).