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Tax Group Turnaround

NZPIF commissioned a review of the Tax Working Group’s Future of Tax paper and presented it to the group, with pleasing results, writes Andrew King.

By: Andrew King

1 July 2018

Last month I wrote about a study used by the Tax Working Group (TWG) in their background paper Future of Tax. The study was on tax rates for different assets and led the TWG to claim that: “Owner occupied and rental housing is undertaxed relative to other assets.” This didn’t look right, so we commissioned financial and economics consultancy Morgan Wallace to review the study. They produced a report showing that they had uncovered serious flaws with the TWG’s study, leading them to conclude that apart from bank deposits, rental property is actually taxed at a higher rate than other asset classes.

A key flaw in the TWG study is that they assume capital growth for property, but not for other capital growth assets. They assume PIE Funds, superannuation and the likes of bank deposits don’t increase in value, but that they actually lose value due to the effects of inflation.

Given that this study is a key piece of information they will use to make decisions on changes to property tax, it’s crucial they realise the critical flaws it contains.

We submitted the Morgan Wallace report to the TWG who contacted us with a request to meet. NZPIF Treasurer Amanda Watt and I met with the group and I’m pleased to say we were very well received.

‘They admitted if they’d treated other assets with a capital growth component the way they treated rental property, then rental property would have a higher marginal effective tax’

Officials said there were two valid concerns. The first was that their assumptions about the allocation of returns between taxable income and tax-free capital gains were hypothetical and arbitrary. The second was that rental property was modelled differently from other assets.

They admitted that if they 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.

They stated that in retrospect, it would have been “much simpler to illustrate the tax system’s effects on different entities and structures by assuming that the investment is a uniformly risk-free security with consistent capital gains”. This led them to conclude that their study “is probably less well suited to comparing taxes across different real investments”.

We were grateful to the group for taking time to meet us and confirming that rental property isn’t undertaxed compared to other assets.

Meth Success

A second success last month was Professor Gluckman’s report into meth. We hope it will come as a great relief that tenant’s health will not be affected by third hand meth residue. We also expect that the enormous financial risk from meth will be severely reduced.

There is still some work to be completed with the insurance industry, government and scientists to determine how meth manufacture will be confirmed. While Professor Gluckman said that he couldn’t see any point in testing for meth, we may still need to do so to eliminate the risk of manufacture in our rentals. If manufacture has occurred, properties will need to be cleaned down to the existing level of 1.5 micrograms per 100cm2.

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