Call to scrap 'crazy' tax breaks

BY JAMES WEIR

The Government has a chance to lift the economy in 2010 with big changes on "crazy" tax breaks for investment property, according to NZX chief executive Mark Weldon.

"Tax is the No1 change," Weldon said.

The Government has an unprecedented chance to take action and send signals this year.

"That would make meaningful long-term differences to our wealth, growth and standard of living."

Investment property should be the target, such as dumping loss attributing qualifying companies (LAQCs) which allowed some wealthy people – including some on the Government's own Tax Working Group – to pay no tax at all, Weldon said. Weldon is a member of the Tax Working Group.

"There is no difference between a rental property, a share, bond or bank account, so treat them all the same [for tax]," he said. If they were all treated equally for tax purposes, then money would go where it should, rather than chasing tax breaks.

The present tax system was "fragile" and the tax base should be broadened, he said.

The Government was expected to make some "meaningful" changes in 2010, he said.

But capital gains taxes – taxing a house when it was sold at a profit – showed mixed results around the world.

"You are a lot better off with a low-level land tax. It is administratively efficient."

Such taxes could be imposed at, say, 0.2 per cent of the land value, raising a few hundred dollars a year, which would not upset house values.

Raising such a property tax would allow for personal income tax rates to be brought down and might allow company tax rates to be reduced if Australia dropped their company tax rates further.

Weldon advocates dumping LAQCs. "Get rid of them," he said. "They are a joke."

As a result, the people who paid for government spending were those who were not wealthy enough to structure their own tax affairs to take advantage of things like LAQCs.

"That is crazy. At a certain point, people start paying less tax as they earn more money."

By equalising the tax rates across all investments, companies should be able to borrow more at cheaper interest rates within New Zealand rather than having to borrow overseas through banks. "There is only good about that," he said.

Other commentators expected the Government to clamp down on the $2 billion-a-year tax deduction on the housing market through LAQCs.

ANZ Bank chief economist Cameron Bagrie said recently he thought LAQCs would be dropped in 2010.

AXA chief economist Bevan Graham also agreed all investment should be put on a level playing field, so investment was about returns from productive business, not tax.

LAQCs and tax breaks on property should be dropped as part of wider tax changes and he expected action on some of the recommendations from various working groups.

"There is no choice. We are going to have to do stuff differently," Graham said. The stark choice was cutting government spending or broadening the tax base. "The options are narrowing down for a government preparing its second Budget."

Weldon doubted that dropping LAQCs or imposing a land tax would cause a collapse in property prices and subsequent economic problems as a result. For example, local authorities councils around New Zealand had put up rates sharply in recent years and house prices had not fallen.

If listed companies were the same size as the value of all rental properties in New Zealand, shareholders in listed companies would theoretically pay about $11b in tax.

In stark contrast, investors in rental properties actually got back $150 million from the government from tax breaks.

"You look at that imbalance – you are taxing the productive sector and not the unproductive sector," he said. Weldon questioned the concept of allowing depreciation on rental properties which was supposed to be for things that wore out. There was no depreciation on shares or bonds, which are supposed to go up in value.

"It is just an asset class. The fact that [rental property] is physical is irrelevant," he said.

The tax breaks on investment property drove money away from both listed and unlisted companies. But given the choice between putting money into a small start-up company or a rental property, the choice was clear.

"The tax system tells you, if you get a much bigger tax deduction [for property] let's go for it. And that's what accountants and advisers tell people to do," he said. "It is rational behaviour, but the extent of it is irrational because portfolios get out of whack."

Greater investment in property combined with a limited stock of homes meant interest rates tended to rise, which hurt companies. High interest rates tended to keep the exchange rate up, too, also hurting exporters.

"So we have to deal with the misallocation [of capital], the rorts, and the macro-economic impacts," he said.

Investment property at a "minimum" needed to be taxed, though not the primary residence.

The Tax Working Group's next report will come out this month.

Meanwhile, Weldon said New Zealand firms were in good shape, after the global financial crisis. A year ago, New Zealand listed companies faced as much "risk, volatility and uncertainty as you can recall", he said.

"Twelve months on, we are in an extremely good spot and the capital market and companies are in a much better spot than the major Western economies."

The United States economy was still sick and Europe and Britain were struggling.

"We have done pretty well," he said.

The capital market had been a positive force for the economy, with $6b in capital raised in the year. Not all of that was for company expansion, but it mattered because it helped firms to restructure and regroup and emerge healthy with strong balance sheets.

"We are very pleased about that," Weldon said.

CALL TO MONITOR UNLISTED FIRMS

Unlisted companies should have to put out more information to investors regularly, NZX chief executive Mark Weldon says.

The unlisted lacked regulation and a regulator to oversee the market. People had "no idea" about what was going on in most unlisted companies, he said.

Investors in any company "absolutely needed information", not just when the company was raising the cash. It needed to be easy information to get and presented in a timely way.

The Capital Market Development Taskforce recommendation is to merge the Securities Commission and the Companies Office and NZX Discipline to create a single regulator to span both market and corporate activity.

"No-one blinked on that  it makes huge sense for the market."

Companies raising from "friends and family" was a purely private market and should be left alone. Exemptions from financial reporting rules needed to be defined, because the rules now were "fuzzy".

Companies raising from the public, such as unlisted finance companies, could be followed by property or farm investment syndicates.

"That's where scoundrels lie."

Just exactly when companies needed to move to continuous disclosure should be considered in a re-write of the Securities Act next year.

- © Fairfax NZ News