Questioning the Tax Working Group's property calculations

Questioning the Tax Working Group's property calculations

The Tax Working Group (TWG) appears to be showing an unbalanced approach to rental property investment, by using incorrect calculations and inconsistent assumptions to assess relative tax rates for different asset classes.

In their background paper "Future of Tax" the TWG say that "property remains under taxed compared to other investments. For instance, any profits from the sale of a long term property investment generally isn't taxed." This is misleading as the IRD has confirmed that similar profits from the sale of shares, farms, businesses and other assets that grow in value are also untaxed.

Of most importance is that the TWG uses a study into Marginal Effective Tax Rates (METR) on savings to claim that "Owner occupied and rental housing is undertaxed relative to other assets."

However a just released report by Morgan Wallace, a financial economics consultancy, has 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 treat PIE Funds, superannuation and companies like bank deposits, not only assuming they don't increase in value, but that they actually lose value due to the effects of inflation.

Morgan Wallace state that "the TWG paper cannot therefore be accepted at face value. If a capital return component were to be included for PIE, superannuation and company investments, then all three would have lower METR than presented in the TWG research paper."

The TWG also didn't include a key asset class, being direct share investments. Morgan Wallace said that "If this asset class were to be included, it would also have a lower METR than rental property under the TWG Paper framework."

The NZPIF is worried that, rather than looking into tax changes objectively, it would appear that the TWG has an agenda against rental property. This was the case with the last TWG in 2010 which claimed that rental property took $200m a year out of the tax take when this had only happened once, due to high mortgage interest rates, over a 27 year period.

It will surprise many to learn that according to the latest IRD data, rental property owners have paid tax on rental property income of between $1.3 and $1.5 billion dollars in each of the five years to 2016.

"Rental property owners provide people with homes to live in. They are an essential part of the productive economy who pay their fair share of tax" says NZPIF Executive Officer Andrew King. "Why are we continually looking to make it harder for them to provide rental property at a time when tenants are finding it harder and more expensive to secure accommodation?"

(A full copy of the Morgan Wallace report can be found at https://www.nzpif.org.nz/items/view/59162 )

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