Eight things property investors should know

Ernst & Young tax partner Jo Doolan outlines the Tax Working Group's proposals that will impact on property investors:

1. Aligning the top personal, trust and tax rates at 30 per cent. Will cost $1.6 billion per annum. Removes incentive to use trusts or companies for tax purposes and makes us competitive. Does not address concern for those on lower tax rates.

2. Increase GST from 12.5 per cent to 15 per cent. Extra tax revenue of $1.9 billion per annum. This figure allows for compensation to those on benefits but excludes compensation to those on lower incomes. Flow-on impact on inflation and impact of increasing the cost of living.

3. Capital gains tax based on increased value of assets after adjusting for inflation at 2 per cent. Revenue raised $9 billion per annum.  If owner-occupied housing is excluded, this would drop to $4.5b. Taxpayers would be forced to fund payments on unrealised gains which would create cash flow problems and hardship.

4. Land tax of 0.5 per cent. Revenue raised $2.3 billion per annum. This imposes an annual tax liability that is based on the value of the land owned. New Zealand's land value is estimated at $450b to $480b so this is considered to be an effective way to broaden the tax base but would affect land values.

5. Risk-free rate of return on property. This is either all property or, say, rental housing. If applied only to residential property, the tax raised is estimated at $700 million per annum, and another $150m per annum
from the end of the offset of rental losses against other income.  Instead of taxing gross rents and allowing a deduction for expenses and deprecation, the owner is taxed on a risk-free rate of return based on the net equity they have in the property. For example, an investment property valued at $300,000 with a mortgage of $200,000 and a risk-free rate of return of 6 per cent would result in tax being paid on $6000 if the  individual's marginal rate of tax is 38 per cent - $2280 per year.

6. Removing depreciation loading on new assets of 20 per cent. Would bring in up to $300 million in extra tax revenue and would simply reduce the amount of depreciation taxpayers can claim.

7. Removing depreciation on buildings and not allowing a deduction if buildings are sold at a loss. Would generate up to $1.3 billion of extra tax per annum.

8. Reducing the thin capitalisation threshold for foreign investment. Would raise an extra $200 million per annum. Foreign-owned companies are restricted in the amount of interest they can deduct on interest bearing loans. If the debt-to-equity ratio of 75 per cent is exceeded, the proposal is to increase this to 60 per cent.

- AAP