by frog
Even Royals have to pay tax these days. So why do property investors seem to think they are in a class above everybody else as far as their tax liability goes?
Yesterday the Weekend Herald ran a sycophantic piece penned by its property reporter Anne Gibson after she interviewed property investor Pat Baker.
Baker owns $10 million worth of residential property. It brings in about $700,000 in rental income a year. But she bleats:
“My husband and I worked hard,” she says.
“We never had highly-paid jobs but we did have good opportunities to improve our situation. We saved and invested in something tangible which everyone needs.
“Now I am a 73-year-old widow. I manage very well. I am not a poor old-age pensioner because I took steps when I was younger to invest and accumulate wealth.
“But now property investors are maligned in the media. That’s not fair.
Hang on a minute Pat! Lots of us work hard. But we pay our fair share of tax on what we earn. Why do you think, as a property investor whose income is derived from residential rents and capital gains, you should get favours from the tax system that none of the rest of us get?
All you are being asked, at least by the Greens (the Government seems to only want to reduce your tax privileges as a property investor, rather than abolish them), is to pay your fair share.
As for the journalistic quality of Anne Gibson’s Weekend Herald story, in which she failed to even ask Baker how much tax she actually paid on her $10 million in assets and annual rental income of $700,000 (my bet is zilch), you can’t go past Danyl at the Dim Post:
There have been complaints that I don’t write enough satire, but I do publish the occasional parody piece in the Herald under the (obvious) pseudonym of Anne Gibson.
Published in Economy, Work, & Welfare | Featured by frog on Sun, March 7th, 2010
Tags: Anne Gibson, capital gains tax, journalism, LAQC, New Zealand Herald, Pat Baker, property investment, rental income, tax, The Dim-Post
on the trolls and those who are unable to keep on topic
I wonder if the same standards will apply to tax rorters at the other end of the income scale!
Like or Dislike:
17 
6 (+11)
There are landlords in Wellington with anything up to 20 properties rented out to students, who are busily rorting the student loan scheme to get their ‘savings’ augmented by ‘other people’s money’ – and not just OPM, but the student loan debt of their own grandchildren’s generation.
Has there ever been a greedier, less compassionate generation than the Baby Boomers?
Like or Dislike:
12 
1 (+11)
Toad says:
When a couple of beneficiaries did that, Paula Bennett was very quick to release their personal circumstances to the media.
Good job too Toad ;it was a wake up call ( and embarrassing for many working people)!
“Has there ever been a greedier, less compassionate generation than the Baby Boomers? ”
do you have any data to back that assertion up?
Like or Dislike:
5 
7 (-2)
Baby boomers are those born from 1945, they only reach retirement age in 2010-2011. Anyone aged 73 is not a baby boomer.
Like or Dislike:
6 
3 (+3)
In terms of transparency, did the Green party superannuation fund pay capital gains tax on its property assets when it disposed of those assets recently?
There was arguably no legal reason to do so in their defense, but again morally they may have decided to? I am curious?
Like or Dislike:
3 
1 (+2)
What tax has been rorted toad.
As far as we can tell from the article, no tax has been avoided or evaded.
Where is the rort and what tax law has been broken?
Seeing the IRD has not invetigated this business woman or the Greens housing arrangement I bet there was none.
You may not like the current tax laws, that fine and ralley against them, but dont call a legal taxation transaction a rort. It is not and your faux indignation at calling it a rort is silly in the extreme.
You want a rort go and see the latest Auckland supercity proposals.
Not much from the Greens leadership on that proposal (guess Russel is busy paddling up a creek somewhere).
Like or Dislike:
6 
1 (+5)
@Gerrit: Just because it is legal doesn’t mean it isn’t a rort. Bill English didn’t do anyhting illegal in claiming the accommodation allowance perk for living in his own home. Rodney Hide didn’t do anything illegal in claiming his travel perk to take his girfriend on two overseas holidays. But they were still rorts, becasue the system advantaged them in an unfair way, as does the tax system with property investors.
As for the supercity rort, I think Russel, as a Wellington-based MP, has left that largely in the capable hands of Auckland-based MP David Clendon, who has had plenty to say on the issue.
Like or Dislike:
6 
2 (+4)
There are landlords in Wellington with anything up to 20 properties rented out to students, who are busily rorting the student loan scheme to get their ’savings’ augmented by ‘other people’s money’ – and not just OPM, but the student loan debt of their own grandchildren’s generation.
Sorry could you just explain what you mean there?
Like or Dislike:
1 
2 (-1)
Ahh the left…wanting to suck on the wealth created by others…..you parasites.
Like or Dislike:
3 
11 (-8)
Toad –
If the asset is purchased with the purpose of deriving an income then it is not taxable, however if the asset is purchased with the intention or purpose of resale – i.e. to draw a capital gain of the property (even in the long term) – then that is assessable and therefore taxable income. We do have capital gains tax in NZ, however most people claim they buy property in order to “derive an income” from rent. This is not necessarily the moral contention to make but it does stop most people from paying capital gains tax. But yes, we do have capital gains tax. I was wondering if the Green party super fund went down the moral track, or tax expedient track.
Ref. part CB1-6
http://www.legislation.govt.nz/act/public/2007/0097/latest/DLM1512301.html?search=ts_act_tax_resel&p=1&sr=1
Like or Dislike:
1 
0 (+1)
Yes, Charles, the law you cite is all about form rather than substance – it is what you claim you purchased the property for, rather than the reality of what you purchase it for, that determines whether capital gain is taxable. And IRD don’t audit other than the most blatant cases that come to their attention because of the complexity of proving the purpose was capital gain rather than income from rent.
@James – I suspect you’re part of the “all taxation is theft” brigade, so won’t bother to respond other than to ask why property investors should be treated more favourably than others?
Like or Dislike:
3 
2 (+1)
I would like to ask everyone a simple question – let us say you implement your ideal system and rents increase, what would you do to help those who rent their homes? After all, renters are generally our poorer members of society.
Like or Dislike:
1 
2 (-1)
hi Johnston. The corolary of rents increasing is that house prices will go down… Or so I have heard. I remember reading one Herald article where they predicted that if landlords could no longer claim depreciation house prices might drop by up to 35%.
If this was the case then I would buy tmw. I suspect a lot of others in my situation who are currently renting because we can’t afford to buy would also buy.
For those who would still be on too low an income to buy you’re right – they would need help. Check out Green policies around encouraging affordable housing. http://www.greens.org.nz/policysummary/housing-policy-summary
Like or Dislike:
1 
0 (+1)
Except that there was absolutely nothing in the posted document that suggested assistance for those who are unable to buy but would face higher rents.
Like or Dislike:
0 
0 (0)
Man’s basic needs are food, shelter and clothing.
Assistance to cover these three things is not difficult.
The reason people have to rent is that they want more than the basics, even if they have to go without the basics.
The depreciation arguement is a red herring.
Claim depreciation reduces tax in the short term only.
When a property is sold all depreciation claimed becomes taxable income in the year of sale. Assuming of course that the capital gain is sufficient to cover the total depreciation claimed.
For some most payers, their tax bill is often high enough to push them into being provisional taxpayers for two years.
Like or Dislike:
2 
0 (+2)
@john-ston 10:59 AM
The assistance already exists – it is called accommodation supplement, and pays 70% of additional accommodation costs that tenants may incur (up to regionally defined limits). If that is not sufficient, there is Temporary Additional Support, which can further meet the shortfall in a tenant’s income in relation to his or her expenses.
However, if reduced housing purchase prices permit a significant number of people like LucyJH who are renting to buy their own home, then surely any increase in residential rents will be short-term since demand for residential rentals will drop as former tenants move into their own homes.
Like or Dislike:
3 
2 (+1)
You are a mug if you have money and don’t use it to play the property investment market – there are big bucks to be made BECAUSE of tax rules wich establish an investment bias.
Thus we have an over inflated property market with huge political power to retain the status quo (even the green party were investing in property till recently).
However the status quo creates extreme economic dysfunction. Tax paying householders forced to purchase during a property boom pay an inflated price to someone who can afford to mop up mortgagee sales during a recession, and who does not have to pay tax on this capital gain.
Meanwhile the banks are making a killing., and its the banks and the property investors that win, and the country and wage earners lose.
The money that just went to the banks and the property investor due to tax laws that privilege these people should have gone elsewhere. Likewise the investment of the bank and property investor should have also gone elsewhere – somewhere more productive.
It is untaxed capital gains from land and property that are also driving NZ’s dairy boom and destroying our clean-green image and waterways. For much of the time the dairy payout is uneconomic, and the investment is only in the operation due to the value of the capital gain.
Roger Douglas got rid of skinny-sheep subsidies because of the way this policy distorted NZ’s economy and suppressed the investment in and development of more productive economic activity.
Its time we got rid of this distortion too! Why do we want this level of investment in land and property?
Like or Dislike:
8 
0 (+8)
About the only thing he got right, McTap.
We see this issue with residential care too. In former days rest homes were owned by charitable or quazi-charitable organisations to provide care to their residents and maybe make a small surplus as an aside.
Today they are more often owned by property investors whose primary purpose is to make a capital gain, and who don’t give a stuff about the welfare of the
inmatesresidents.Like or Dislike:
6 
3 (+3)
Fark – yep this is a monstrous parasitic beast with many hyphae!
Like or Dislike:
2 
0 (+2)
Given the size of the dairy and retirement industries, these are much more than hyphae, rather greasy fat muscular limbs choking our country.
Like or Dislike:
1 
0 (+1)
Toad why do you make the false claim that buildings appreciate in value. Land appreciates in value the buildings sitting on the land depreciate unless the owner pays for and performs maintenance.
Like or Dislike:
1 
1 (0)
jh, I remember your claim that they received more on benefits than those in jobs. And that you could never prove your claim.
=======
For example
Bennett revealed that Natasha Fuller was receiving $715 a week and Jennifer Johnston $554 a week.
715 x 52 = 37180 pa .
Like or Dislike:
2 
0 (+2)
“Has there ever been a greedier, less compassionate generation than the Baby Boomers?”
as the old Quacker said (when told the people in the previous place of residence were no good) “thee will find them here too”…..
Like or Dislike:
0 
0 (0)
Baker owns $10 million worth of residential property.
“My husband and I worked hard,” she says.
======
yes but she and her husband didn’t earn $10 million.
nobody makes land but by occupying it they exclude others. If they leased the land and owned the buildings weeeelll (a different story).
Like or Dislike:
1 
1 (0)
Fail, jh @11.57 AM:
The benefit figure Bennett released for Natasha Fuller was $715 a week. Unlike Bennett I don’t know all of her circumstances.
But if she were working 40 hours a week at the minimum wage she would be getting (assuming she has a student loan, which I seem to recall) $396.09 in wages and $274.00 in Working for Families (for her 3 children, if I recall their ages correctly).
That’s a total so far of $670.09 weekly. I don’t know how much of her benefit is accommodation supplement and disability allowance (she has a disability herself, as does one of her children, I recall), but it is certain to be more than the $45.00 weekly difference between her benefit and the wages and WFF payments she would be getting if working.
However much it is, it would be payable to her if she were in employment at the minimum wage as well, bringing her total in the hand above (and probably significantly above) what she gets on benefit.
Like or Dislike:
2 
3 (-1)
@turnip28:
Fair cop. I should have been more careful with my terminology – the property as a whole appreciates, you are correct that the building itself doesn’t if it is not maintained.
Like or Dislike:
2 
2 (0)
“The assistance already exists – it is called accommodation supplement, and pays 70% of additional accommodation costs that tenants may incur (up to regionally defined limits). If that is not sufficient, there is Temporary Additional Support, which can further meet the shortfall in a tenant’s income in relation to his or her expenses.”
Toad, the Accommodation Supplement is pretty stingy. In Auckland, for instance, your household would need to earn a maximum of $61,048 before you lose eligibility for it (I assumed a couple with no children). At that sort of income level, you are going to suffer with an increase in rents. Further to that, at that sort of income level, you would not be able to afford a house even if house prices decreased by the small decrease that might be generated bu such a policy shift (to afford the median house requires a household income of about $110,000 at the present).
“However, if reduced housing purchase prices permit a significant number of people like LucyJH who are renting to buy their own home, then surely any increase in residential rents will be short-term since demand for residential rentals will drop as former tenants move into their own homes.”
Where do you think those additional houses would be coming from? They would be coming from ex-rental properties, so therefore all you would get is an increase in rents and a decrease in the number of rentals that exist.
If you want the increase in rentals to be temporary, then the overall supply of housing is going to have to increase, and that can only happen in one way.
“Its time we got rid of this distortion too! Why do we want this level of investment in land and property?”
I agree that we need to get rid of the distortion, but we need to be careful about how we do it. I would personally rather use other methods to decrease the price of housing overall, and then once that has happened eliminate the distortions – you would be getting rid of the distortions without driving tens of thousands of New Zealanders to poverty.
I would point out though that this would not result in people suddenly shifting their investment profile to other forms of investment. For one thing, the memories of the 1987 crash are still too raw in the minds of most residential property investors and we also need to remember that leverage is more likely to be used in residential investment, thus amplifying returns to levels that would never be achieved in other forms of investment.
Like or Dislike:
0 
0 (0)
John-ston – as you point out there is already a bias towards property investment; we need to get rid of the distortion; and we need to be careful about how we do it.
Claiming that a CGT in itself would drive up rent and also drive people into poverty is a classic straw-man argument. Such affects would be dependent on the rate at which the CGT was applied. You got a better argument?
Who can save us from an economic distortion that benefits the elites?
Like or Dislike:
2 
0 (+2)
“Who can save us from an economic distortion that benefits the elites?”
I bet this beast has Roger Douglas (the great skinny sheep slayer) firmly in its grip too!
Like or Dislike:
1 
0 (+1)
“Claiming that a CGT in itself would drive up rent and also drive people into poverty is a classic straw-man argument. Such affects would be dependent on the rate at which the CGT was applied. You got a better argument?”
I wouldn’t be too worried about a Capital Gains Tax; it would probably have a small impact on rents, as a Capital Gains Tax is only levied at sale and there are ways of enjoying capital gains without having to sell with respect of property.
The other proposals, including the removal of the depreciation allowance are the more disturbing ones though – the landlords would be needing to somehow regain those lost revenues, and the only way they would be able to do it is by increasing rents.
Like or Dislike:
1 
0 (+1)
@ John-ston: “Where do you think those additional houses would be coming from? They would be coming from ex-rental properties, so therefore all you would get is an increase in rents and a decrease in the number of rentals that exist.”
People shifting from renters to homeowners would provide a corresponding decrease in demand for rentals. i.e simply shifting the market from renting to buying.
Yes more accommodation is required as the population grows, and the proportion of lower occupancy dwellings increase, but a CGT simply changes the dynamics between renting and buying, not overall demand for accommodation.
Like or Dislike:
1 
0 (+1)
Toad syas:
Fail, jh @11.57 AM:
The benefit figure Bennett released for Natasha Fuller was $715 a week. Unlike Bennett I don’t know all of her circumstances.
But if she were working 40 hours a week at the minimum wage she would be getting (assuming she has a student loan, which I seem to recall) $396.09 in wages and $274.00 in Working for Families (for her 3 children, if I recall their ages correctly).
That’s a total so far of $670.09 weekly. I don’t know how much of her benefit is accommodation supplement and disability allowance (she has a disability herself, as does one of her children, I recall), but it is certain to be more than the $45.00 weekly difference between her benefit and the wages and WFF payments she would be getting if working.
However much it is, it would be payable to her if she were in employment at the minimum wage as well, bringing her total in the hand above (and probably significantly above) what she gets on benefit.
====
so your saying she is not making as much as she would if she worked and got wff*. Of course she doesn’t have to work (the daily grind) on one of the options.
It doesn’t alter the fact that many working people earn less than that (for the daily grind — calloused hands on the plough and so on).
* a Green Party initiative?
Like or Dislike:
1 
0 (+1)
jh – Working for Families is not a Green Party initiative. The Greens criticised it at the time it was rammed through Parliament under urgency (yes, Labour did that too on occasion, although far less than National) both for the discriminatory nature of the In Work Tax Credit and for the fact that it gentrifies the poverty trap.
Like or Dislike:
2 
2 (0)
Ahh the left…wanting to suck on the wealth created by others…..you parasites.
====
Asset inflation isn’t wealth creation: if a house costing 200,000 appreciates to 400,000 it is still the same house.
Like or Dislike:
4 
0 (+4)
Toad, if all we had to do was decide who needed help and give them money life would be sweet but human nature is human nature and of all parties you wouldn’t expect a green party to favour incentives for having children (unless we are dying out ).
Like or Dislike:
0 
0 (0)
“Asset inflation isn’t wealth creation: if a house costing 200,000 appreciates to 400,000 it is still the same house.”
Yes it is wealth creation…wealth can increase without anything new being physical made.If I value something you have and you want the money I am willing to spend to buy it from you then we are both wealthier than before although nothing new has come into being.If Pat bought a house for $200,000 and its value on the market is now $400,000 then shes wealthier than before….and good on her for doing so.She should be praised for being prudent and self reliant…not bagged by sour pussed lefties who hate someone getting ahead of the herd by their own efforts.
Like or Dislike:
0 
2 (-2)
Yes it is wealth creation…wealth can increase without anything new being physical made.If I value something you have and you want the money I am willing to spend to buy it from you then we are both wealthier than before although nothing new has come into being.
….
From a personal perspective that may be true but in the context of the economy it has just created (and therefore devalued) more money (I think).
Like or Dislike:
3 
0 (+3)
” What the rising asset values effectively create is a corresponding rise in claims on the economy at the expense of those who do not own such assets *. But this is wealth redistribution, not wealth creation. More importantly, this kind of wealth creation involves no gain in current incomes and productive capacity. To the extent that it actually boosts consumption at the expense of investment and the foreign trade balance, the net result from a macro perspective is overall impoverishment.”
* 1st home buyers and tenants
http://www.safehaven.com/article-784.htm
“For generations of economists, it used to be a truism that “wealth creation” implies capital formation in terms of generating income-creating tangible assets. The emphasis was on capital formation and the associated income creation. To indiscriminately put this label of “wealth creation” on rising asset prices in the absence of any income creation is plainly a novel usurpation of this concept. It is in essence wealth creation through a stroke of the pen.”
http://www.financialsense.com/editorials/daily/2005/0422.html
It is tragic that Mr Richebacher and fellow Austrian Hans Sennholz did not live to see the crisis they predicted unfold yet had they lived, can we doubt they would be surprised that nothing seems to have been learnt by policy makers who are offering as a solution the very same means that got us into this mess in the first place?
http://hayekcenter.org/?p=1414
Like or Dislike:
2 
0 (+2)
But she didn’t create one solitary job, or produce any good or service, by doing so James.
Her profit is ultimately someone else’s loss – maybe even the loss of people not yet born. Speculators are leaches who give nothing to the economy, but think they deserve special treatment as far as tax is concerned.
If she makes $200K on a property investment, she should pay the relevant rate of tax on $200K when she realises the profit. Just as the rest of us, who work for wages or salaries or as self-employed contractors have to pay on our earnings.
Like or Dislike:
4 
1 (+3)
“People shifting from renters to homeowners would provide a corresponding decrease in demand for rentals. i.e simply shifting the market from renting to buying.
Yes more accommodation is required as the population grows, and the proportion of lower occupancy dwellings increase, but a CGT simply changes the dynamics between renting and buying, not overall demand for accommodation.”
While there might be a decrease in the demand for rentals, there would also be a decrease in supply – essentially, we would maintain the status quo that came about after the implementation of whatever scheme gets implemented.
Also, like I said, a Capital Gains Tax isn’t the big concern; it would be the other changes. At the moment, a typical renter gets about a 4% yield on their property from rents – the typical return desired is closer to the 7% mark and that is presently achieved by items such as tax deductions. Take those away, and to get those yields, house prices would either have to decrease by nearly 50%, or rents would have to increase – it is probable that both would happen (although the decrease in house prices would probably be relatively small).
Like or Dislike:
2 
0 (+2)
Tell Bill English john-ston – fast!
He’ll have more respect for you than a greenie like me.
Like or Dislike:
2 
1 (+1)
What about if some right wing capitalists bag her for not paying tax on a large money making buinsess?
If someone working a 40 hour week is conttributing more financially to the country in tax that someone running a $10 million property business, then there is something seriously wrong with our system.
And it needs to be changed.
Like or Dislike:
7 
1 (+6)
Like or Dislike:
4 
1 (+3)
It’s rediculous that we have $200 billion worth of rental housing businesses, who when combined, pay less tax than a paper boy.
It’s not so much about bagging these people (unless they tell us how they deserve it cause they’ve worked so hard) – it’s just about making sure the free ride comes to an end.
And that needs to be done very carefully over a period of time – many years.
People who have invested in rental housing to take advantage of (legal) tax benefits, need to be given lots of advance warning over what will happen, and when it will happen.
The last thing we want is a massive housingcrash, bankruptcies and mortgagee sales, rent spikes etc.
If changes can be brought in slowly then rental house prices may sit static for a few years enabling people to get out as the wish, and others to buy to own or rent as inflation slowly starts to make homes more affordable.
The great thing is that this is finaly being widely talked about, and most people finally realise a highly priced housing market is a big drain on the economy and people’s living standards.
Like or Dislike:
5 
0 (+5)
That’s an average value of less than $190,000. I can find the odd apartment for less than that in the Hamilton real estate listings, but no houses.
Slum landlord to boot, I suspect.
Like or Dislike:
5 
2 (+3)
Like or Dislike:
6 
0 (+6)
John-ston & jh:
Your responses to LucyH assume that the housing market is fixed, ie: has no variable input – and yet, there are new houses being built continuously, especially in Auckland.
If the value of new housing stock drops (unlikely), those who want to own a home will build; otherwise, drops in residential housing prices will encourage first-home buyers to pick up residential properties. Rental properties tend to be clustered in suburbs close to the poorer part of town, or in the case of University towns, nearer the university. Mrs Baker’s portfolio, as described by Toad, is a case in point.
The speculative part of owning properties rented to students is the assumption that in due course, such property can be on-sold to another investor who wishes to milk the student cash-cow.
Why did I say that the investment by property speculators in the student accomodation market was powered by “OPM”?
Because students pay for accommodation via their student loan, or an accomodation allowance, if they qualify for student allowance; this comes, not out of thin air, but from Government coffers – ie: the taxes of ordinary working people.
In the long-term, the student gets a job and pays back the loan debt, including the cost of any money borrowed to cover accomodation costs. In the short-term, the taxpayer is footing the bill, and via student rents, enriching the landlords.
These are computations well-known to those who have had anything to do with student welfare or student associations over the past 15 or so years, ever since student loans came in and rents on flats close to the campuses rose sky-high immediately.
I remember renting out a flat below our house in 1992-7 – the real estate agent who sold us the house insisted we should get $200 per week for the flat, which was two-bedrooms.
As it had a rotten hole in one bedroom wall, and mouldy carpet and some dodgy looking floorboards, we didn’t take his advice, but rented only one of the rooms at a reduced rate while we fixed up several glaring flaws in the building’s maintenance.
We were in a very small minority of landlords who considered that maintaining the house to reasonable standards was a good idea.
Like or Dislike:
0 
0 (0)
“My husband and I worked hard,” she says. “We never had highly-paid jobs but we did have good opportunities to improve our situation. We saved and invested in something tangible which everyone needs.
I wonder what those opportunities were? Legacies perhaps? Lotto wins? Try buying a house and saving $10M on the average income these days!
Like or Dislike:
1 
0 (+1)
“We saved and invested in something tangible which everyone needs.”
invested in owning something that everyone needs access to? or invested in providing something that everyone needs? The former, I’d say. Which is all very well, but it hardly gives you the right to expect a lower tax rate than someone recieving a similar income from producing something.
Like or Dislike:
1 
0 (+1)