Property investors warned change is inevitable

Property investors will find it hard to argue they should continue to claim depreciation of buildings that were increasing in value while not paying tax on that increase, Tax Working Group member John Shewan says.

Prime Minister John Key yesterday said the Government expected to increase its tax take by changing rules for property owners.

"We are now getting a point where investment has to stand up on its own merits and where a vehicle used to just simply to eliminate your taxable income that will largely be over as well," he told Radio New Zealand this morning.

Andrew King, vice president of the Property Investors Federation, this morning said any higher costs for landlords would be passed onto tenants.

Mr Shewan, chairman of PricewaterhouseCoopers New Zealand, said the status quo was not sustainable and change was inevitable.

It was clear people were willing to invest in property for very low yields and cash losses year after year because they expected capital gain, he said.

"It's very hard to argue that you should have tax free capital gains but also should be allowed to deduct all expenses including depreciation if the asset doesn't depreciate," he told Radio New Zealand.

Property owners should however be able to claim depreciation when buildings lost value, Mr Shewan said.

"Our recommendation was that depreciation should only be denied where it could be demonstrated the asset, being the building, is not depreciating.

"We wouldn't support abolishing depreciation across the board on buildings. I am a little bit worried how the maths is going to stack up. The $1.3 billion that has been referred to for depreciation would cover all buildings. I don't think that would be appropriate."

Mr Shewan said he was pleased the Government picked up on the working group's recommendations.

"I am very pleased that the Prime Minister has embraced the overall theme of the working group's report which is we need much lower tax rates and a broader base as the basis for growth and productivity, so I think that's very pleasing.

"I was a little disappointed that he cut off two of the major reform options around property; being both land tax and the risk free rate of return method (RFRM) on residential rentals because that leaves a much shorter runway now for achieving the kind of base broadening he aspires to in order to fund the reduction in rates."

Mr Key said yesterday a land tax was a lump sum tax on people who owned land at the time the tax was introduced and it would cause cash flow problems for many landowners, especially those on lower incomes.

This morning he added that some people could end up owing more than their property was worth or pay more for having large sections, even if the land was not used.

An RFRM would also create cash flow problems and would result in higher rents.

The Government also did not favour a capital gains tax -- Mr Key said it would be complex to administer, to comply with and may see people hold property rather than sell.

Mr King said his organisation was "quite relieved" the RFRR had been ruled out.

"That would have had a devastating effect on our industry, so we are pleased about that."

However he was still concerned by depreciation changes.

"Anything that targets rental property by itself will increase rental prices unfortunately."

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Mr Keys comments on "investment has to stand up to its own merit" and "a vehicle used to simply eliminate taxable income as being largely over" are more than interesting and appear to have implications on all property types where business is transacted. Farmers for instance could easily come under this umbrella as many farms barely break even and it is the Capital value increase which keeps the farming operation going. Farmers like housing developers/landlords have used this feed back loop from taxes to keep operating under increasingly higher and higher real estate prices. This has had the effect of no checks and balances being in place and real estate forming a large bubble.

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