Communications Line of 10 May 2007

Property investment: a middle class tax cut?

The continuing strength of the property market is a constant vexation to Dr Bollard at the Reserve Bank who believes that high property values make people feel wealthy and therefore they borrow more and live beyond their means. So he keeps raising interest rates to discourage this. And Dr Cullen has also been looking for ways to take the heat out of the market, including a proposal to put a levy on mortgage payments. In effect this was a tax on borrowing. With the budget coming up next week, Dr Cullen is right to look at a tax solution, but he should cut personal taxes, a move he ruled out yet again yesterday.

One of the forces keeping up the demand for property is the desire of the middle classes to avoid tax. Seeing Dr Cullen won't reduce the top tax rate from 39 cents in the dollar for incomes over $60 000 a year, and given also that he won't lift the threshold at which this rate applies, enterprising people are looking for alternatives. The property market look safe and the system is relatively easy to work. One of the fundamental principles of New Zealand's tax system is that expenses incurred in the pursuit of income are tax deductible, so the outgoings on a rental property are deductible against the income.

Now here's the rub. Lots of high income earners, or households with two reasonable incomes are buying property to rent and they don't mind if they make a loss because the loss is deductible against their other income. Indeed that is why they are doing it. It is about "farming a tax break" (as David Lange once said in relation to farmers who kept sheep back because the system of supplementary minimum prices and the sheep retention scheme made it more attractive to keep sheep than to sell them.

So we have people investing in property, not because of they have made a rational decision about their preferred ratio of risk to return, nor because they are seeking a long term income stream, nor because they place property above equities and debentures as a source of income. On the contrary, they actually want a loss on the property because then they pay less income tax. In principle investing to lose money is barmy, but given the current tax rates, it's very rational behaviour for household with high incomes.

Remember that when the Labour led government raised the top marginal rate on personal income tax from 33 cents to 39 cents back in 2000, it was a "temporary measure" which affected only 5% of income earners. Eight years on, the tax is like the prefab class room at an overcrowded school: always about to go but it never leaves. According to the Treasury's Key Facts, 12% of taxpayers now earn more than $60 000 a year. That's 363 000 people.

Hiking interest rates - as Dr Bollard has done several times now - will only increase the extent of the loss on a property investment and thereby cut the government's tax take further. But making a bigger loss means paying even less tax so that will not deter those who have entered the property market to reduce their tax. Perversely higher interest rates may even encourage more investment.

Ironically one of the groups of people who arguably also benefit in this "irrational" situation is tenants. Many middle class investors are in property for tax purposes and are not seeking a commercial return on their investment. That means they are prepared to accept rents that are lower than a proper commercial return. Given that there are large numbers of investors, this represents downward pressure on rents. Tenants benefit. Lots of willing investors (more than would be the case if property were treated solely as a commercial investment) keeps up demand, and prices stay high. The market remains buoyant. Real estate salespeople win. (As Fred Dagg once remarked: if you are not a real estate agent in this town at this particular point in time, you are being a fool to yourself and a burden to others.) The solution is with Dr Cullen. Cut the top rates of tax so that middle class property investors quit the property market and it will then find a new - and lower level - of prices and sales.

The villain, the victim, the law and the ambush

Kevin Milne, once defined the perfect Fair Go story as "a ruthless conman who builds a young couple's dream home upside down in the Remarkables." Clear victim, clear villain and a scenic location; what more could television want? Minus the Remarkables that's what we got with the story of Shaun Cosgrave, the Harcourt's real estate agent who sold the Ottaways a house, but didn't tell them about the apartments about to be built next door. When the Ottaways found out, they sold up and lost money. Cosgrave got fined for unethical conduct by the Real Estate Institute, but when he won an award from Harcourt’s for his sales record, the opportunity for bad publicity just too tempting to miss.

I think the way the story came out had the hallmarks of an orchestrated ambush. I detect the hand of a PR professional. The wronged couple, the Ottaways, were articulate and well rehearsed, and always on message. We wouldn't have bought the property if we'd known about the development next door. Mr Cosgrave never told us, and we lost money selling up after the apartments were built. And then there's the Minister, Clayton Cosgrove, an eager beaver keen to say that this sort of behaviour by real estate agents justified the government's get tough policy to protect innocent citizens from exploitation and rip offs.

But hang about. Why was it apparently impossible for the Ottaways to sue Mr Cosgrave or the vendor? The media never told us. One phone call to a property lawyer got the answer. The agent doesn't act for the Ottaways so there is no contract, and hence no breach for which he could be sued. The agent doesn't owe the Ottaways any duty of care, so action in tort is out. All right, he didn't tell them about the development, but silence is not misrepresentation. Deliberate misrepresentation (or lying) might be grounds for an action, but not even the Ottaways claim they were lied to. And surely they could have found out for themselves what was going on. Prudent purchasers (or their lawyer) would check out the neighbourhood. Just asking other residents in the street would be a start.

If the legal avenues didn't offer any relief to the Ottaways, what could they do instead? Publicly embarrassing Mr Cosgrave was one way (perhaps the only way) forward. So Minister Cosgrove says repeatedly how he hoped that when Mr Cosgrave was sipping his wine after winning the award he might consider writing out a cheque to compensate the Ottaways for their loss. I am certainly not seeking to defend Mr Cosgrave, but I was intrigued how media exposure, the ‘name and shame' technique, can be used to pressure someone to do something they are not legally obliged to do?

Lie with integrity

While Mr Cosgrave will not find this any comfort at all, I received a note recently from an old school mate about his experiences in real estate. Part of the note read" I spent a year or so in the real estate industry without conspicuous success. I'm not too good a stretcher of the truth when it comes to selling things. The company I worked for had a training programme called 'lying with integrity'. Work that one out!"

Dogs; not solitary but certainly nasty, brutish and short.

Have you ever heard anyone ever say, "I'll make dinner darling. You take the kids over to the park and play ball with Benji the pitbull?" I haven't and there is a very good reason why. There is no such thing as a family friendly pitbull or rottweiler. These are attack dogs, not pets.

In respectable middle class suburbs the residents have burglar alarms. In scruffy working class suburbs the residents have savage dogs. The desire for security is the same; the means are different. It's argued that weak men also have big savage dogs to intimidate the world because they can't do it themselves. But when the dogs kill and maim people, (and other dogs too) they have to go.

Personally I'd ban the importation, breeding, sale and ownership of such animals, and I think the public sentiment supports a stronger stand. It may be true that it is the owners, not the dogs that are at fault. We can't control irresponsible owners, although compulsory registration, microchipping and other measures were supposed to control the dogs. But we can stop bad owners having savage dogs, by making sure there are no savage breeds in New Zealand. Ordinary citizens will then be free from the menace of out of control canines.

Hurricanes saved the worst for last.

How appropriate that the Hurricanes who started the season being beaten by the Reds, the team that finished last, should be beaten in their last match by the Warratahs, the team that finished second last.

The final whistle was the best sound in last Saturday's match. The critics, amateur and professional, will learnedly debate the causes of failure. For me it is enough to say that for virtually the whole season, the team played badly and therefore deserved to lose most of their matches. It is also saddening but unsurprising to see the Hurricanes' once loyal and adoring fans start to desert them towards the end. In competitive, professional sport there is no substitute for performance and no amount of spin can disguise that. Fans will leave in order to support winners. The Black Caps have learned that, and so will the All Blacks if they fail in October.

Greenpeace goes after Genesis

In the battle of the power companies to be the cleanest, smartest, greenest, and is recognised as the best in looking after your needs and the country's needs Contact and Meridian have found an unlikely ally in Greenpeace. You'll have noticed that Contact has been promoting itself on TV and in print, while state owned Meridian is out there too claiming to be carbon neutral. Genesis, also stated owned, has launched its own television commercials, proclaiming that it has the widest range of generations sources and is therefore the most dependable. Greenpeace takes as different view (well they would, wouldn't they.) And they've mocked the Genesis TVC with their own version. View at http://www.youtube.com/watch?v=i12qJ-Nejgk

When is a smack inconsequential?

Now that the aggro over the smacking bill is dying down and the commentators have stopped talking about a historic deal between government and opposition, it is time to ask the question, what will now be the law on smacking.

Hitting children was illegal unless a parent could prove that the force used was reasonable. It was the same as killing people. That's illegal unless you can prove self defence or similar. Under the deal by National and Labour, the defence of reasonable force will be gone. It would now seem that it will be illegal to hit kids full stop. However, the police now have an explicit statutory discretion not to prosecute if, in their view, the force used was inconsequential.

There are two important changes here. The first is that the level of force allowable is less than would have been allowed under the test of ‘reasonable'. But the law also seems to contemplate that there will be some level of allowable force - force that is less than inconsequential. So that says hitting kids could still be ok - at least in theory. But in practice? And that's where the second change is important. The discretion is given to the police to determine what is inconsequential. Inconsequential is not a defence, and can't be used in that context.

Wellington criminal barrister Noel Sainsbury points out that if a person is charged with assault on a child, the police need only to prove the facts of the case (the parent intentionally used force against the child), and the parent will have to be convicted, because there is now no defence available. Where it is clear that a parent has smacked a child, then whether that parent gets a conviction is in effect removed from the court and transferred to the police because they have the discretion about whether to prosecute or not. His conclusion is that parents can still be "criminalised' by the legislation.

On the one hand, it will still be legal to use force - as long as it is inconsequential - but on the other hand, if a parent is charged then a conviction (given the facts are proven) will almost certainly be entered. As the objective of the compromise was to ensure that hitting kids was outlawed, but parents were not criminalized, one has to ask whether that outcome has been achieved. Given that there are doubts about that, all the talk about whether John Key or Helen Clark ‘won' and which was the greater statesman seems quite irrelevant. The media seem to have missed the real point about the state of the law in favour of a discussion about which politicians scored more points. Who cares about that, if the law is now an even bigger mess than it was before?

Interesting Accountants, donations, Timor and IP

An interesting accountant? Impossible? Well I have found not just one, but two, and the first of an occasional series of profiles appeared in the Chartered Accountants Journal in April. Richard Francis is a business advisor who is making a difference. See http://www.johnbishop.co.nz/writer/articles/art230407.shtml

I argued in the last issue that political donations, like charitable donations, should not be restricted. This piece was published in the DominionPost http://www.johnbishop.co.nz/writer/articles/art10507.shtml

The arc of instability running from Timor Leste to Papua New Guinea, the Solomons, Fiji and Tonga is getting a lot of attention from our government. Tens of millions of dollars are being spent to foster order, and security. See http://www.johnbishop.co.nz/writer/articles/art160307.shtml

Patent attorneys used to be to the legal profession what internal auditors were to accounting, and actuaries to the insurance industry, but now Intellectual Property is exciting and even sexy. Lawyers have become brand advisors and business strategists. See http://www.johnbishop.co.nz/writer/articles/art230307.shtml

I swear this is genuine

A printed sign on the entrance to Radio NZ House in Wellington. It read

IEC TC 108 HBSDT Meeting

Plenary session is being held at James Cook Hotel.

It presumably had meaning to those for whom it was meant.

Signoff from a computer nerd

The information in this transmission is intended to be totally worthless and devoid of any benefit to anyone with the exception of, possibly, the intended recipient. If you received this communication in error or if you accidentally read it when it wasn't addressed to you, then please immediately delete all of your saved game files and email addresses and then energetically beat yourself about the head and shoulders with a recent technology publication of your choice. All other more intelligent actions taken in response to this information are prohibited, so there.

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Déjà vu?

"Time was on the side of the enemy, and we were in a position of not being able to win, not being able to get out...only being able to lash out. And so the war went on, tearing at this country; a sense of numbness seemed to replace an earlier anger. There was, Americans were finding, no light at the end of the tunnel, only greater darkness.

A verdict on the Iraq war? Close, but no. It was written in 1972 in the closing days of the Vietnam War by leading journalist and historian David Halberstam. It's from his landmark work "The Best and the Brightest". Halberstam, a fighter for truth from the earliest days of the civil rights battles in the South wrote for the New York Times. He was killed in a car crash on 23 April aged 73.

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