Government's 'landlord tax' may have already broken David Parker's new proposed tax principles

STUFF
Revenue Minister David Parker has said he will introduce a bill which would set out principles of fairness in the tax system.

Revenue Minister David Parker on Tuesday declared New Zealand had mostly settled tax principles however some tax experts say the Government’s contentious changes to interest deductibility for rental properties last year would have broken at least one of them.

PwC tax partner Geof Nightingale ​said he supports Parker’s moves to bring principles of fairness in the tax system into law, as well as research into whether wealthy New Zealanders are paying their fair share of tax.

But interest deductibility changes – the so-called “landlord tax” which stops property investors writing off their interest costs against the tax on their rental income – would likely go against the “horizontal equity” principle.

This is a broad principle which, Parker said on Tuesday, means that people in the equivalent economic circumstances should be treated in the same way. The law property investor law change came into force last month.

READ MORE:
* What are Revenue Minister David Parker's new tax principles really all about?
* Revenue minister has 'virtually no idea what rate of tax is paid by the very wealthy'
* Tax on all housing needed to fix 'distortion of social fabric'

Revenue Minister David Parker announced outlined fairer tax principles for New Zealand in Wellington on Tuesday.
ROBERT KITCHIN/Stuff
Revenue Minister David Parker announced outlined fairer tax principles for New Zealand in Wellington on Tuesday.

“He is thinking about the tax principles as applying to the big gaps he sees but some of the things they are doing at the moment would also come up short under those principles,” Nightingale, who was on the Government’s Tax Working Group, said.

Parker announced that the Government has started work on a new Tax Principles Act. That is based on what he says are mostly settled principles for tax design, including horizontal equity, vertical equity where taxes increase for income earned, administrative efficiency and the minimisation of tax-induced distortions to investment and the economy.

Parker said the Government will would consult on other principles.

Nightingale said the brightline test, which the Government has extended, and which sees a person selling a second residential property within 10 years paying income tax on any gains, may also break the principle.

“How is it horizontal equity if I own a property for 9 years and 364 days and get taxed, and own a property for 10 years and one day and don’t get taxed?” he said.

Geof Nightingale says New Zealanders haven’t given the Government the mandate to make changes to the way capital gains are taxed.
Not-For-Syndication
Geof Nightingale says New Zealanders haven’t given the Government the mandate to make changes to the way capital gains are taxed.

Former Inland Revenue deputy commissioner Robin Oliver, ​who now runs his own tax advisory service, said most political parties would agree on broad principles but would never agree on how to implement them.

“You have to trade off on one, you trade fairness - or different aspects of fairness - against efficiency,” he explained.

“It could be fairer to increase company tax rate from 28% to 39% because a lot of rich people have their income in companies - no one disputes that. But of course that would mean less investment, less productivity, and lower wages.”

He said attempts to cool the housing market through removing interest tax deductions also brought the same questions over what was fair.

“If you are sitting there saying the aim of the policy, should it achieve it, is affordable housing, well that’s fair, but it obviously could be seen as unfair to people who own rental properties because they can’t get an interest deduction whereas other people can,” he said.

According to Nightingale, a key issue is that the Government doesn't have a mandate to make changes to the way taxes are designed, particularly in regard to capital gains: the increase in the value of a capital asset – such as a house – which the owner gains when they sell it.

The wealthy, who had money in property, weren't avoiding paying tax but instead were paying at a lower rate “by design” and it was the right move for Parker to raise a public discussion over whether the tax system was designed fairly, he said.

“I don’t think politicians have put enough effort into communicating how the tax system could work better because it's been seen as a political graveyard,” he said.

“We don’t have laws that tax a large range of capital gains. What’s happening is that the very wealthy have most of the assets and therefore make most of the capital gains, and those aren’t taxed. The question David Parker is raising, is [whether] that design [is] right.”