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.