OnPoint by Keith Ng

Let's not beat around the bush here. The Property Investors Federation is full of shit. Completely and utterly full of shit.

(Dear Lawyers, I do not mean literally “filled with faecal matter” as a statement of fact. I mean “full of shit” figuratively, which I am confident will be considered honest opinion – as in “honestly, it is my sincere opinion that they are just figuratively full of shit” – under defamation laws.)

Yesterday, 11 March 2010, TVNZ reported:

The Property Investors Federation estimates that, on average, landlords could miss out on $1,750 a year by not claiming depreciation. This works out to be approximately $34 a week. It is believed most of that will be passed on to tenants.”

On 20 January 2010, the Federation said in a press release (emphasis added):

Many rental property owners have purchased their property on the basis that they can claim depreciation as an expenses but that they will have to pay this back should they sell at some time in the future. Depreciation claims by rental property owners help them to keep the cost of renting lower, especially in the first few years of ownership. If the ability to make depreciation claims are withdrawn from rental property then many owners will be forced to sell their property as they will no longer be able to finance them.”

So, two months ago, deprecation wasn't real money because they have to pay it back. But now, they forget about the fact that they would have had to pay it back, treat it all as a cost and say that tenants will be paying for it.

Full. Of. Shit.

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This is the public service part. This stuff really, truly belongs with the tax nerds, but I guess this is why property investors have manage to rort the system for so long. It's no fun, but hopefully this actually explains what the issues are behind the “debate”.

How depreciation changes will affect rent needs to be broken down into two parts: a) How much it'll actually cost landlords, and b) How much of this cost will be passed to renters.

Here's how depreciation works:

* You take the value of your house (just the building, not the land). Let's say, for ease of calculation, the building is worth $100,000.

* Each year, it depreciates by a set amount. So, if the depreciation rate is 3%, then you have a depreciation of $3,000.

* Your house's is now worth $97,000 on paper, but you can claim this $3,000 “loss” as an expense so you pay less tax. Let's say, $1,000 less tax.

But here's the kicker:

* If you sell your house $100,000, but it's book value is $97,000, then the IRD sees that the depreciation wasn't real, and makes you pay back the $1,000. This is called depreciation recovery or clawback.

In theory, depreciation isn't free money. Either it's real, in which case the property owner actually lost value, or it's not, in which case the owner has to pay it back (but gets to keep the money for a while, like an interest-free loan).

Losing $3,000 of deprecation may just mean “losing $1,000 of tax credits that I'd have to pay back in 10 years anyway”. So to take the face value $1,000 and say that “this is how much landlords will have to hike rents to not have to sell their children” is misleading.

(In practice, you don't sell the building and the land separately, and you don't get taxed on capital gains on the land, so you can put all the depreciation on the building and call it a loss, and put all the gains on the land and not pay any tax on it. But it takes a bit of creative accounting and there are limits, so it's not a rort-buffet.)

The more important point is that landlords aren't feudal lords. If their costs go up (or their profits go down), they can't just say “well, screw that, let the tenant pay for it”. People have choices. If landlords choose to hike their rents, people can choose to live with their parents, move in with flatmates, leave the country, or buy a house. Fewer people in the rental market will push rents back down again – even for people who can't move in with parents/flatmates/leave etc.

Put it this way. If landlords could really make their tenants pay the full cost of the changes, would they really be bitching about it so much?

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Of course, this means Trevor Mallard's own back-of-a-napkin adventures were even more full of shit.

My calculation is that the average residential rental property will inolve [sic] a loss of about $45 to the landlord v current depreciation arrangements.

(Average house price 416k but I’ve used median 360k. 2% depreciation = $7,200. 33c tax rate = $2,400 say $45 per week)”

As he acknowledges in his update, he included land values, so he massively overstates the cost, and he didn't even consider clawback. The curious thing is how his clearly, completely and massively wrong estimate ended up being in the same ballpark as the Property Investors Federation's completely unsubstantiated figure...

Oh. Right.

Full. Of. Shit.

Dear DomPost. Your headline today, in very large letters, said "$4b in tax cuts coming".

People might read that, and think that there are $4b in tax cuts coming.

Except that it's $4b in tax cuts, funding by $4b in tax hikes.

Lemme do the maths for you.

$4b - $4b = $0

$0. That's what "revenue neutral" means.

Has half a decade of mindless calls for "taaax cuuut... taaax cuuuutss..." rotten your brain so much that you're starting to see tax cuts everywhere you look? Does your cat look like a tax cut to you?

John Key's promise to compensate low-income NZers for changes to GST is one he's unlikely to keep.

[RETRACTED! Actually, as Neil Russ points out to NZPA, the changes to depreciation rules are enough to fund the rates alignment by itself. Which means that, in theory, all the money raised by raising GST could be used to fund a tax cut on the bottom threshold.

Which begs a much more interesting question: Will he?]

TWG estimates upping GST to 15% will be worth $2.89b. 35% of this will be borne by the bottom 50% (by income) of the population.

This means that the bottom 50% of the population will have to pay $1b more in GST.

That's the goal post for Key's promise.

Key has ruled out changes to Working for Families. But tax cuts have a smaller impact on people with low income, so to deliver $1b via the tax system, it'd require a much bigger tax cut across the board.

To offset the impact of the GST increase to the bottom 50%, he'd have to slash the bottom tax rate in half (to around 6.7%, to be precise), or introduce a $6000 tax-free threshold.

But either of those measures would extend to the top 50% as well, and it would cost a lot more than $1b. In fact, it would eat up most of the revenue from the GST hike and leave little to fund the reduction of the top tax rates - which was the point of the whole exercise.

Sure, it *could* happen. But a much more likely scenario is that the compensation will fall far short of the actual impact of the GST.

If you want to verify the $1b for bottom 50% figure, see table 2 (page 2) and figure 5 (page 7) the GST paper prepared by the TWG.

[Update: Yes, the GST paper discusses compensation options, specifically, CPI adjustments for many benefits that will automatically kick in if GST goes up. However, that won't do anything for people not on benefits, which is quite unfair. (Haven't really thought through EMTR and such yet, but that depends on whether abatement thresholds and such are CPI-pegged too. Meh. I'm sticking with "unfair" for now.)]

... that setting $1.3 billion on fire would be harmful to the economy and the environment.

The last "king hit" from the Property Council is a report they commissioned NZIER to write, which talked about all the ways in which the tax changes are bad.

The first footnote of this report states:

Our analysis looks at these policy suggestions in isolation and not in the context of potentially offsetting policies.”

As in, it looks at how taking $1.3b out of the economy would be a bad thing, then assumes we throw the $1.3b into a very very large barrel, dose it in petrol and set it on fire (cost of petrol also excluded).

Yes, this would be harmful to the economy. I wholeheartedly agree.

Thank you Property Council, thank you.

The vicious lynch mob gathers angrily. They menacingly surround the industrious elderly folksy old folks, who were frugally baking nutritious cookies for the respectful local children in their bespoke bungalow in a well-to-do suburb with stunning views of the luminescent harbour.

“Argh,” the vile leader of the listless mob shouts melodiously with venomous vitriol, “we’re gonna make you pay… pay taxes! Argh!”

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“As the vitriol builds against property investors it's becoming increasingly clear that there will be many innocent bystanders injured by the mooted changes to tax law.”

Let’s just clarify some points here:
• “Hang ‘em all!” (Vitriol.)
• “Put the capitalist pig-dogs against the wall!” (Vitriol.)
• “Make them pay 0.5% on unimproved land value and remove exemptions on depreciation!” (Not vitriol.)

The property investment industry has been putting up a noble fight since the Tax Working Group report came out. They’re not fighting for themselves, they’re fighting for the hardworking elderly folk who’ve scrimped and saved all their lives, and who will struggle to get by if these punitive measures enacted against them.

David Chaplin cited chairman of the AMP NZ Office Trust Craig Stobo’s concerns in his column last week, describing him as “no particular friend of tax-deducting landlords and in his past life as head of BT NZ funds management he no doubt railed against the residential property sector.”

“The burden of these proposed taxes is therefore going to be borne by investors who have taken steps to provide for their future, and the businesses which are providing jobs for the current generation of workers - neither of which have much ability to absorb new costs in the current economic environment.”

Chaplin glossed over the fact that “AMP NZ Office Trust (ANZO) is New Zealand’s largest listed investor in commercial office property and owns arguably the country’s best office property portfolio.”

It is an utter misrepresentation of what Stobo’s interests are. Far from being a fund manager in some kind of “funds” vs “property” dichotomy who’s reluctantly against the tax changes for reasons of principle, he is the head of a massive property investor with a very direct and very large commercial interest to fight the changes.

And the quotes that he takes from Stobo are meaningless PR drivel anyway. When I go to the dairy to buy some milk, I don’t call it “taking steps to secure my future health and wellbeing”. Currency is a store of value for use in the future, so by definition, everyone who invests – and for that matter, everyone who works for money – are “taking steps to provide for their future”.

His investors are special only because they benefited from – or foolishly bought into – the price bubble created by tax exemptions. It doesn’t make them bad people, but it does make them bad investors. They’re not being punished for it, they’re just not getting bailed out.

And then, there’s the money line from Stobo – from the same playbook that the property industry has been reading off since the TWG report. Focus on the old people. It’s all about grandma. Never use the words “my” or “profit”.

“Listed property is an investment which is particularly popular with older investors, who are already finding it tough in this economic environment and depend on regular income from their investments,”

So, because some of his investors are old people, therefore we should not tax him. Hmmm. Drop the tax changes, or the old people gets it?

If this is true – that many old people are dependent on income from property funds – then it leads to a much bigger question. Why are they dependent on one asset class in the first place? Weren’t there people – anyone? – who warned them that all eggs in one basket was a bad idea?

A single change – e.g. Tax – affects every asset in the portfolio. Capital gains tax or any of its alternatives would have hit the profitability and value of property investments. Did the media, financial advisors and funds themselves responsibly acknowledge this risk? Because if the consequences of this tax change is really as catastrophic as you fellas suggest – and this tax change has been foreshadowed for so long – then how much fault falls on your shoulders?