First they came for the landlords

26/03/2021

Business NZ asks: will my sector be next?

BusinessNZ has warned a removal of tax deductibility on interest payments for residential property has other sectors worried whether they will be targeted, likening it to the uncertainty created by the 2018 oil and gas ban.

Kirk Hope, chief executive of the influential lobby group, also accused the Government of being “misleading” in the way it is describing the issue as a “loophole”, because in all other sectors of the economy business expenses are tax deductible.

Defenders of this policy change have tried to justify it by saying home owners don’t get a deduction for the interest they pay.

There’s a reason for that, they aren’t businesses and that difference applies across the board.

It’s just like farms or racing stables being able to claim vet bills as legitimate business expenses but no-one can claim a deduction for vet bills for their pets.

Hope said the move had clear and significant implications for property investors, but now people were left wondering whether it affected other parts of the economy and was likely to see investment decisions paused.

“They’ve removed deductibility [of interest payments] from this group of people. Would that happen for a different sector for a different purpose, in terms of businesses being able to deduct particular types of businesses expenses? 

Now the government has opened the door, what else might they shove through it?

“There are certainly going to be some people thinking about how they make investments, and it will have a stalling effect; there’s no doubt about it,” Hope said.

“The last thing we need right now is probably a stalling in business investment because of a decision made around housing.”

Investors would be worried about whether deductibility more generally was being targeted by the Government, given the lack of signalling on the issue.

“If there are other areas they really need to be upfront about that. There’s no doubt they should have signalled it in advance. It’s a really substantial change.”. . 

It’s a change to tax policy, it’s not as the government claims, closing a loophole.

Tax expert Robin Oliver, a former deputy commissioner at the IRD, described the Government’s move on interest payments by landlords as “out there”.

Oliver, who sat on the Government’s tax working group in the last term said he could not think of an example of a sector being unable to deduct an expense which was available to all other sectors of the economy.

It would amount to “a massive tax penalty on renting out property,” he said.

“You’re taxed on income that you don’t actually have, because your profit is your income minus your expenses, but they just ignore the expenses part,” Oliver said.

“You could have almost no profit, maybe a loss, but you still have to fork out thousands of dollars to the IRD. It’s not an income tax, it’s just a penalty.” . . 

It’s a penalty that will push up rents, hitting the poor the hardest and making it harder still for renters to save for a deposit to buy their own homes.

Bryce Wilkinson explains why the policy is shambolic:

Suppose you have an apple orchard. You hire labour to pick and pack your apples. You sell each box of apples for $40. You deduct labour costs of $30 and earn a profit of $10. After paying tax at 33 cents in the dollar, you have $6.70 per box to live on.

Now the Government announces that it is rushing legislation through Parliament to remove what it calls the wage deductibility tax “loophole”. After this Friday, anyone buying your business will pay tax at 33 cents on the dollar on the $40 per box revenue.

This raises the “income tax” on the business from $3.30 to $13.20. Costs now exceed revenue by $3.20 a box. You no longer have a buyer for your business. Worse, in four years, you will be in the same tax situation. Your business will be bust. Your workers will have to find other work or go on welfare. Your former customers will have to do without apples.

The government is pleased you are gone. Orchardists are speculators; they are hoping that the market value of their business will rise. Speculation is bad. Speculators should be driven from the apple market.

Does this sound far-fetched? Not if you are a landlord. This week the Government closed the “interest deductibility loophole” in rental housing for new investors, effective from this Saturday. For existing investors, it is being closed over four years. The Government explained that it wants to remove incentives for speculators, equating them with investors. . . 

He lists what’s wrong with the policy:

First, an income tax should tax income (ie profits), not revenue. Income is what is left of revenue after all business-related expenses have been paid. The apple orchard case illustrates why it is wrong to tax revenue. If there is little or no after-tax profit, there is no business.

In the extreme, if landlords cannot make an after-tax profit, there will be no houses to rent. Those who cannot afford to buy a house are at the mercy of the only remaining landlord – the government. Former East Germans have experienced that situation. . . 

Second, how can it be that landlords are speculators, but owner-occupiers are not? How many recent home buyers paying high prices have not been expecting prices to go even higher? Why discriminate against rental accommodation?

Third, the tax system was already seriously biased against the supply of private rental housing. Owner-occupiers do not pay any tax on the income they receive in the form of forgone rental payments. . . 

Fourth, speculation is a symptom, not a cause. The Reserve Bank has lowered interest rates and flooded the banking system with liquidity to an unprecedented degree. It has jawboned the banks to lend more freely since Covid-19. These actions must have boosted house prices. Imprudent borrowing is the only game in town, with the Government leading by example. . . 

Perhaps the worst aspect is the signal that the Government cares so little for sound income tax principles or prior public debate or scrutiny. If interest deductibility can be wilfully declared a tax loophole, what category of business expense is not a tax loophole?

This tax change will do nothing at all to address the cause of the housing crisis – a shortage of supply that has several causes, not lest of which is the long, slow and expensive consenting process which didn’t even get a mention in this week’s announcements.

It will also worry other businesses. Now the government has made landlords a special class by preventing them deducting interest costs from their income as all other businesses do, there’s very real fears over what other legitimate costs they might declare loopholes.

There is no good time for this sort of anti-investment tax policy and doing it when the country is in recession makes it worse.


$1 in 3 wastefullly spent by govt

19/09/2018

The New Zealand Initiative’s Fit for Purpose? Are Kiwis getting the government they pay for? shows we’re not getting value for money.

Dr Bryce Wilkinson explains:

Taxes in New Zealand have risen four times faster than incomes in the 20th century. Taxes now take more of our income than in almost any country outside Europe. We have become a high tax country.

We, the public, need the government to spend our tax money well.

Government is a dominant provider of many activities, including health and education. Poor performance here would harm current and future New Zealanders.

Government also dictates much resource use through ownership and regulation. It is a major landowner, and there are 50 times more Parliamentary Acts now than in 1908.

It should aim to get the best possible outcomes for New Zealanders from its assets. It should also regulate wisely and administer those regulations well.

The report’s focus on value for money is not ideological. Who would not want to see government doing the best possible job for New Zealanders?

This shouldn’t be ideological or partisan, but the left does too often mistakenly equate more spending with better spending.

How well is government spending our tax money?
The quality of much government spending is poor. The Productivity Commission’s inquiry into public sector productivity showed why. Public sector agencies are not focused on productivity. Measures are too often lacking or neglected.

A 2013 report published by a Canadian think tank, the Fraser Institute, assessed outcomes compared to spending in 192 countries. South Korea came out on top. Its government was spending 27% of GDP to achieve a performance score of 7.5. In New Zealand, government was spending 38% of GDP for a score of 5.5.

Perhaps, one-third of New Zealand government spending is wasteful. That represents around 13% of GDP, or $20,000 per household, annually.

Every cent not wasted is a cent more to spend on something we need, or to leave in taxpayers’ pockets.

Imagine the positive impact of that money being spent where it has a positive impact instead of being wasted and/or of each household keeping more of what they earn.

A 2009 OECD report similarly assessed spending efficiency in school education. The indicated level of waste in New Zealand spending on education was one dollar in six.

Less waste would mean more money to improve outcomes. Currently, around 17% of 15-year-olds can barely read. The government has likely spent more than $130,000 on each of their schooling. Few would regard this as an acceptable outcome.

Nearly a fifth of children getting through school unable to read and write is appalling. There will be many reasons for this failure and wasting a sixth of the budget will be one of them.

That extra dollar in six spent well could improve pay and conditions for teachers and support staff, provide extra help for pupils who need it and/or do away with at least some activity fees and fundraising.

In health, even official reports acknowledge a lack of focus on productivity. The OECD has also assessed the efficiency of health spending across member countries. A 2010 report indicated that New Zealand could spend 2.5% of GDP less a year for similar outcomes. Of the order of one dollar spent in four looks like waste.

One dollar in four wasted – that’s 25% of health spending that’s not getting spent where it should be.

Such findings from international comparisons are only motivational. They do not show what New Zealand would need to change or whether such changes are plausible. Their value is in inviting us to learn from countries that seem to be doing better.

In some cases, government providers would be more focused on productivity if users had more choice of providers. Government providers can fail to give value for money when users are captive. Users will be more empowered if they have a wide choice of providers and if state funding follows them. The funding of pre-school education has this feature.

Choice tends to improve competitiveness and performance but this government isn’t keen on it.

How well is the government doing as a regulator?
The Crown’s performance as a lawmaker and regulator is flawed. There is widespread dissatisfaction among regulators with the quality of the law they have to administer. The statute book has become too prescriptive and too detailed. Parliament cannot hope to keep it up to date and fit for purpose.

It needs to be easier for lawmakers to resist the pressures to legislate poorly. Greater reliance on simpler laws of a more general nature is desirable. Prescriptive law quickly becomes out of date. Change is unlikely as matters stand.

Bad law leads to added costs and unexpected consequences.

What about our high international rankings?
Many international agencies assess countries’ outcomes for aspects of wellbeing and economic performance. New Zealand enjoys top-tier world rankings in many of these measures.

Does this mean government is doing a great job? Yes, and no.

We rank among the best for many but not all aspects. The report identifies 20–30 government-dominated areas of weakness. Some are no surprise. These include overseas investment and aspects of labour market laws. Infrastructure quality is another weakness.

Labour law changes on the table now are going to make matters worse and the redirecting of fuel taxes from roads to public transport and cycleways will too.

More surprising is the weakness in our legal system. We rank poorly in the ease of enforcing contracts and resolving insolvency and the quality of judicial processes.

There is no excuse for our 54th ranking by the World Bank for the quality of our judicial processes. Gallingly, Australia is ranked first.

The bottom line is there is compelling evidence of much government waste. It is occurring for many reasons, but a major symptom is a lack of focus on efficiency.

Were the state to do a better job, it could use the savings to raise wellbeing by:
• maintaining government outputs, while cutting tax revenues; and/or
• increasing government outputs from unchanged government spending.

Those options are outside the scope of this report. The first task is to achieve the savings.

National managed to get some improvement in some areas during the GFC – requiring the public service to do more with less.

Under Bill English’s social investment regime the government focused on treating causes, acknowledging that sometimes you have to spend more in the short term to get savings later.

It also set measurable targets and reported on progress towards them.

But all parties need to focus on getting better value for taxpayers’ dollars.

It would help if all of them acknowledged that the government isn’t always the bet option for providing services; that governments aren’t good at picking winners and that the quality of their spend is far more important than the quantity.

It would also help if more of us didn’t think of the government as the first or only source of support.


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